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ECON 2010 Lecture Notes - Lecture 36: Farmer Jack, Marginal Cost, Marginal Product

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CU-Boulder
Department
Economics
Course
ECON 2010
Professor
Christian Hennigan

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ECON 2010 Lecture Notes - Lecture 35: Farmer Jack, Market Power, Perfect Competition

36

ECON 2010 Lecture Notes - Lecture 36: Farmer Jack, Marginal Cost, Marginal Product

40

ECON 2010 Lecture Notes - Lecture 40: Price Floor, Market Power, Signalling Theory

Document Summary

18 the markets for the factors of production. Input demand & output supply: marginal cost (mc, cost of producing an additional unit of output, mc = change in tc / change in q, where tc = total cost, suppose w = , mpl = 500 bushels. Labor supply: trade-off between work and leisure, the more time you spend working, the less time you have for leisure, wage, the opportunity cost of leisure. As the wage goes up, people work more. Things that shift the labor supply curve: changes in tastes or attitudes regarding the labor-leisure trade-off, the slope of the curve depends on this, changes in alternative opportunities. Immigration: movement of workers from region to region, or country to country. Linkages among the factors of production: factors of production are used together. Summary: the economy"s income distribution is determined in the markets for the factors of production.

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Related Questions

a) What is the Fixed Cost of production (recall that it does not vary with output)

b) Calculate and graph (on the next page) Average Variable Cost, Average Fixed Cost, Average

Total Cost, and Marginal Cost.

Q VC TC

10 500 3000

20 800 3300

30 1350 3850

40 2300 4800

50 3750 6250

60 6000 8500

70 9450 11950

c) Explain why Average Variable Cost and Marginal Cost can fall initially,

but eventually rise.

d) If Fixed costs were to fall, how will that affect AFC, AVC, ATC, and

MC? Explain the intuition.

e) Explain the difference between the short-run and the long-run. How

does this concept relate to the data presented here?

f) Given a price of $145, how much of Good X will the perfectly competitive firm produce? How

much profit will the firm earn?

g) In the long run, if the market for X was made up of firms with the same cost structure,

what do you roughly expect the Perfect Competition market clearing price and per-firm

quantity to be? How much profit will they earn?

h) Given the following demand schedule, how much X would a monopoly produce, given the cost

table above? What price will they charge? How much profit will the firm earn?

Monopoly Demand:

P Q

$300 0

$270 10

$240 20

$210 30

$180 40

$150 50

$120 60

$90 70

(1)
 
Which of the following employment situations would most closely approximate a monopsony?
 
  a steel mill in Yokahama, Japan.
  a fast food restaurant in a big city.
  a farmer hiring seasonal workers.
  a large factory in a small town.

 

 

 
(2)
 
If a monopsonist hires labor, it will choose to hire that quantity at which ___________ and pay a wage rate that is _______________.
 
  MR = MC; equal to the MRP curve.
  the supply curve intersect the MRP; less than MFC
  MRP = MFC; less than MRP
  the supply curve intersect the MRP; equal to MRP

 

 

 
(3)
 
Suppose a firm employs both labor and capital. If the ratio of marginal product to price of labor is 50/$10 and the ratio of marginal product of capital to price of capital is 60/$12, the firm should
 
  maintain the current combination capital and labor.
  buy more labor and less capital because labor is cheaper.
  buy more capital and less labor because capital is cheaper.
  buy more capital because it is more productive than labor.

 

 

 
(4)
 
Derived demand for labor means that when a firm hires labor, it has to derive its demand
 
  mathematically.
  based on the labor supply.
  from the demand for the product that the labor produces.
  based on the minimum wage.

 

 

 
(5)
 
For a firm in perfect competition, the value of the marginal product is
 
  the value of an additional unit of output measured in terms of additional cost.
  the total value of the total output output divided by the total output.
  additional revenue minus additional cost as a result of an increase in output.
  the price of the product multiplied by the additional output resulting from an additional unit employed.

 

 

 
(6)
 
A firm that is perfectly competitive will hire labor as long as which of the following is true?
 
  VMP < W.
  VMP > W.
  MC > MR.
  VMP < MRP.

 

 

 
(7)
 
The VMP curve slopes downward at some point because
 
  congestion in the work place lowers marginal product.
  teamwork in the work place increases marginal product.
  the firm hires less labor as the wage rate rises.
  labor supplies less amounts of labor as the wage rate falls.

 

 

 
(8)
 
Which of the following would not be considered capital in a business?
 
  The employees
  The factory
  A machine
  Tools

 

 

 
(9)
 
The increase in the value of a firm’s capital as it increases in age and use is depreciation.
 
  true
  false

 

 

 
(10)
 
On a labor market graph, a firm’s demand for labor is
 
  the wage rate.
  the marginal revenue product curve.
  the marginal product curve.
  indeterminant.

 

 

 
(11)
 
Why may a household’s labor supply curve bend backwards at some wage rate?
 
  The household substitutes labor for leisure.
  The household substitutes leisure for labor.
  Employers demand fewer employees at higher wage rates.
  Households want to supply more labor as the wage rate decreases to maintain incomes.

 

 

 
(12)
 
The substitution effect is usually stronger than the income effect, thus creating an upward sloping labor supply curve.
 
  true
  false

 

 

 
(13)
 
An inelastic demand for labor means that an increase in the wage rate causes a less than proportionate decrease in the quantity of labor demanded.
 
  true
  false

 

 

 
(14)
 
Marginal revenue product is
 
  marginal revenue divided by marginal product.
  marginal revenue times marginal product.
  marginal product minus marginal revenue.
  marginal product plus marginal revenue.

 

 

 
(15)
 
A firm obeys the least-cost rule by equating the ratios of ___________________ to the ________________ price.
 
  marginal product; product
  marginal product; factor
  marginal cost; product
  marginal revenue; product

 

 

 
(16)
 
Suppose the MP of the last unit of capital hired equals 12 and the MP of the last unit of labor hired equals 16.If the price of capital is $8 per unit and the price of labor is $8 per unit, then the firm
 
  is maximizing its costs with this combination of factors.
  is maximizing its profits with this combination of factors.
  should hire more labor and less capital in order to minimize its costs.
  should hire more capital and less labor in order to minimize its costs.

 

 

 
(17)
 
For a firm to minimize its costs with more than one factor of production, for every factor, the ratio of the
 
  marginal product to factor price must be equal.
  marginal revenue product to factor price must be equal.
  marginal revenue product to output must be equal.
  marginal cost to factor price must be equal.

 

 

 
(18)
 
A monopsony is a firm that, in a specific market, is the only
 
  seller of a product.
  buyer of a product.
  seller of a factor of production.
  buyer of a factor of production.

 

 

 
(19)
 
Which of the following businesses would most closely approximate a monopsonist?
 
  A steel mill in Pittsburgh
  A fast food franchise in a large city
  A large manufacturer in a rural county
  A rancher who hires ranch help

 

 

 
(20)
 
A firm has the opportunity to buy a machine that costs $2500. It has found the present value of the income generated by the machine to be $2487. It should purchase the machine.
 
  true
  false

 

 

 
(21)
 
An increase in the market rate of interest causes
 
  a leftward shift in the demand for capital curve.
  a rightward shift in the demand for capital curve.
  a movement up the demand for capital curve.
  a movement down the demand for capital curve.

 

 

 
(22)
 
The characteristic of capital that makes it different from labor is its
 
  high cost.
  durability.
  rotunda.
  relatively low cost compared to labor.

 

 

 
(23)
 
The present value of $1000 one year in the future at a 10 percent interest rate is approximately
 
  $870.
  $909.
  $1000.
  $1909.

 

 

 
     

Question 1 (1 point) Question 1 Unsaved In a competitive market the equilibrium price is determined: Question 1 options: at the intersection of the firm’s demand and the market supply curves. at the intersection of the market demand and supply curves. at the intersection of the firm’s demand and marginal cost curves. so as to cover the costs of the potential firms. so as to cover the costs of the firms currently in the industry. Save Question 2 (1 point) Question 2 Unsaved If the perfectly competitive market demand for gym shoes is given by QD = 100 – P and the market supply is given by QS = 10 + 2P, then the equilibrium price and quantity will be: Question 2 options: P = 50 and Q = 50. P = 40 and Q = 90. P = 40 and Q = 60. P = 30 and Q = 70. P = 25 and Q = 75. Save Question 3 (1 point) Question 3 Unsaved A constant-cost industry is one in which: Question 3 options: input prices do not change over time. technology does not change over time. input prices and technology do not change as firms enter or exit the industry. input prices and technology do not change over time. firms have reached the maturity phase of the industry’s life cycle. Save Question 4 (1 point) Question 4 Unsaved At the profit-maximizing level of output for the monopolist: Question 4 options: total revenue is equal to total cost. total costs are minimized. total revenue is maximized. marginal revenue is equal to marginal cost. average revenue is equal to average cost. Save Question 5 (1 point) Question 5 Unsaved Craig’s Red Sea Restaurant is the only restaurant in Columbia, South Carolina, that sells Ethiopian food. The demand for Ethiopian food is given by Q = 25 – P. Craig’s costs are given by TC = 25 + Q + 5Q2. Its maximum monopoly profit is: Question 5 options: –$1. $21. $22. $24. $26. Save Question 6 (1 point) Question 6 Unsaved So long as price exceeds average variable cost, in the model of monopolistic competition, a firm maximizes profits by producing where: Question 6 options: the difference between marginal revenue and marginal cost is maximized. marginal cost equals marginal revenue. marginal revenue equals price. the difference between price and marginal cost is maximized. price equals marginal cost. Save Question 7 (1 point) Question 7 Unsaved If a firm in a monopolistically competitive industry is profit maximizing, it should choose its level of advertising such that the marginal revenue of an additional dollar of advertising: Question 7 options: is equal to the elasticity of its demand curve minus 1. is exactly $1. increases revenues by $1. is equal to 1 plus the elasticity of its demand curve. is equal to the elasticity of its demand curve. Save Question 8 (1 point) Question 8 Unsaved Firms advertise in order to: Question 8 options: build brand loyalty. appeal to the price-sensitive consumers. increase the demand elasticities of their loyal customers. shift the market supply curve to the left. shift the market demand curve to the left. Save Question 9 (1 point) Question 9 Unsaved Firms offer promotions in order to: Question 9 options: build brand loyalty. appeal to the price-sensitive consumers. increase the demand elasticities of their loyal customers. shift the market supply curve to the left. shift the market demand curve to the left. Save Question 10 (1 point) Question 10 Unsaved If the demand increases for the product of a decreasing-cost industry: Question 10 options: short-run price goes up, but long-run price falls. long-run output goes up, but long-run price may go up or down. short-run output goes up, but long-run output may go up or down. long-run output goes up, but short-run price remains constant. long-run price goes up, but short-run price may go up or down. Save Question 11 (1 point) Question 11 Unsaved If the demand increases for the product of an increasing-cost industry: Question 11 options: short-run price goes up, but long-run price falls. long-run output goes up, but long-run price may go up or down. short-run output goes up, but long-run output may go up or down. long-run output goes up, but short-run price remains constant. short-run price goes up, and long-run price goes up. Save Question 12 (1 point) Question 12 Unsaved When Pan United Airlines gives a $400 fare discount to persons with student IDs, they are practicing: Question 12 options: first-degree price discrimination. second-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 13 (1 point) Question 13 Unsaved When a utility charges homeowners less than big industrial users, it is practicing: Question 13 options: first-degree price discrimination. fourth-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 14 (1 point) Question 14 Unsaved Cereal manufacturers’ use of coupons can be partially explained by: Question 14 options: first-degree price discrimination. second-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 15 (1 point) Question 15 Unsaved If a firm supplies separable markets with price elasticities h1 and h2, it should set prices P1 and P2 so that: Question 15 options: P1h1 = P2h2. P1 /h1 = P2 /h2. P1(1 + 1/h1) = P2 (1 + 1/h2). P1/(1 – 1 /h1) = P2 / (1 – 1/h2). P1 = 1 – 1/h1 and P2 = 1 – 1/h2. Save Question 16 (1 point) Question 16 Unsaved If a firm supplies separable markets with price elasticities h1 = –3 and h2 = –2, it should set prices P1 and P2 so that: Question 16 options: P1 = P2. 3P1 = 2P2. 2P1 = 3P2. 2/3P1 = 1/2P2. 2P1 = 2/3P2. Save Question 17 (1 point) Question 17 Unsaved Women are often charged more than men for haircuts performed by the same haircutter. This is not considered price discrimination because: Question 17 options: women receive more consumer surplus from haircuts than men receive. haircutters claim to spend more time on women’s hair, raising the cost of the haircut to the firm. firms make up the extra cost to consumers by giving women free samples of products. men receive more consumer surplus from haircuts than women receive. women have a lower price elasticity of demand for haircuts. Save Question 18 (1 point) Question 18 Unsaved If price is above the average variable cost but below the average total cost of a representative firm in a competitive industry: Question 18 options: there will be entry to the industry over time. there will be exit from the industry over time. the firms in the industry are just earning a normal rate of return. the firms in the industry are earning a supranormal rate of return. the industry is in long-run equilibrium. Save Question 19 (1 point) Question 19 Unsaved Joe’s T-shirts has costs given by TC = $100 + 3Q, where Q is the number of shirts. If Joe charges $5 each, the percentage markup for 100 shirts is: Question 19 options: 20%. 25%. 33%. 50%. 67%. Save Question 20 (1 point) Question 20 Unsaved In the model of monopolistic competition, there can be short-run: Question 20 options: losses or profits, but there must be profits in long-run equilibrium. profits, but there must be losses in long-run equilibrium. losses or profits, but there must be losses in long-run equilibrium. losses or profits, but there must be neither profits nor losses in long-run equilibrium. losses, but there must be profits in long-run equilibrium.