Study guide, final exam, Econ 2010, Spring 2017

When there are decreasing returns to scale–1–.  When there are increasing returns to scale –2–

Look at the graph:

AC

p

0                Q0              Q1            Q2
The range of increasing returns to scale is?  –3– The range of decreasing returns to scale is?
–4– The range of constant returns to scale is? –5–

Intuitively, across plants there will be what kind of returns to scale? –6– Why? –7–

In order for a plant to make a profit, it must be producing an output such that what?  Look at the graph above.  This firm is competitive, and market price is p.  Then the range of profitable outputs would be –10–

Very often we assume that the average cost curve for a plant is U-shaped, at least in the short run.  Why might a plant have an average cost curve with that shape, in the short run?

because in the short run, output is fixed
because in the short run, all the inputs that the firm can employ in production are fixed
because, for example, the number of assembly lines in the plant would be fixed
because the time a unit is in a stage of production will be fixed

When is there a “natural monopoly”?  Why is that?

Marginal cost is  –14–.  Say when a plant is producing 1,000 units per week, its MC is \$250.  Then effectively \$250 is the cost of –15–.

Say market price is \$50, market demand at that price is 35,000 and market supply at that price is 30,000.  Then according to the law –16– what will happen to market price? –17–

If a market is competitive and market price is above equilibrium price, then –18–.  If a market is competitive and we observe price rising, then we would suspect that –19–

When is a competitive market in equilibrium?

Equilibrium price and market price are the same thing (always equal)?

true 2. false   3. in some competitive markets yes, in some no  4. none of these answers

When there are decreasing returns to scale, the law of supply holds.  This law states that –22–

A fourth law of  economics is the law of equal returns.  This law says that –23–.  Why is that?

Say revenues in an industry are \$150 million annually; production costs in the industry are \$125 million annually.  What is the rate of return in this industry?

If the government were to set a ceiling on the price of a good below the equilibrium price of the good, then despite the law, we would in all likelihood find agents buying and selling the good
–26– because at the ceiling price –27–

\$

z

y
x                                                                               (1 + r) AC

MD                                        r = the going ROR

quantity

In the market depicted above, where would price end up if there’s free entry?  Why is that?

What is an isoquant?

What is a production function?

The firm selling its product in a competitive market figures that it would sell –31– at a price above market price but –32– at  the market price.  So with this mind set, what quantity of its product would a competitive firm want to sell?  –33–

Say there are DRS.  If market supply falls ceteris paribus, what would happen to price?

Say there are DRS.  If market demand falls ceteris paribus, what would happen to price?

OK, now say there are CRS in the production of a good, and market demand for that good falls ceteris paribus.  What would happen to price?

What are some of the variables that would cause the market supply of a good to increase or decrease?

market supply is fixed 2. input prices and technology   3. incomes   4. none of these

What are some of the variables that would cause the market demand for a good to increase or decrease?

consumer preferences 2. incomes                            3. the prices of other goods
possibly all of these   5. none of these answers

Many economists are opposed to minimum wage laws.  Their opposition is based on the fact that if effective, a minimum wage would cause –39–.   This is because to be effective (keep the wage higher than it would otherwise be), the minimum wage must be –40–.

When there are IRS why would it be a good idea to allow a monopoly to form?   In that case, could we get all the potential benefit from monopoly by allowing it to form?
Why?

Say the market is competitive, market price is \$75, a firm in the market is producing 100 units, and its MC is \$60.  Which statement is true:

it would make a profit of \$15 on the production and sale of unit #101
it would make a profit of \$15 from the production of 100 units
the cost of producing one unit is on average \$15 and so it will make a profit of \$60 per unit

if it produces 100 units

Marginal cost is always positive because in order to increase production, the efficiently managed firm –45–

One problem that every economy solves for society is known as the –46– problem.  This is the problem of determining –47–.

The other problem that every economy solves for society is known as the –48– problem.  This the problem of determining –49–

What determines what’s feasible for the economy?

What’s the difference between normative and positive economics?

One axiom, or if you prefer, principle of microeconomic analysis is that an individual is willing to substitute.  What does that mean?

The graph below is a graph of a consumer’s demand schedule for good 1.  What are x and y?

x

D

y
The demand schedule above indicates that the consumer’s demand for good 1 obeys the law of
–54–   That is, as the price –55–
The idea of “normal profit”  is related to the idea that there is a  —- .  Say this is 10% and an entrepreneur is thinking about producing a new product.  Her anticipated product costs are \$2 million.  What would normal profit for this venture be?

Say own price elasticity of demand for some good is ─ 2.5.  Then you know that —-

Suppose wages go up.  What would happen to the prices of goods sold in competitive markets?     Why?

A transfer line is balanced when —-.

Suppose there are 120 stations in a transfer line, and that a unit is in each station for 2 minutes.  How many units will be produced per 8 hour (480 minutes) shift?  We watch a unit as it goes through all the stages of production.  How long are we watching?

What does input substitutability mean?  Being able to —- without having —- change.

If a firm is a profit maximizer it will produce whatever it decides to produce at —-  Why?

Economists state that three things determine the quantity of a good that a consumer demands.  What are they?  Two are prices and incomes and the third is —-

Once upon a time, four automobile manufacturers produced over 90% of the cars sold in the U.S. (General Motors, Ford, Chrysler, and American Motors).  What kind of market was the U.S. car market then?

What does “fair ROR regulation” refer to?

Suppose the going ROR is 5%.  Suppose that a firm has \$100 million in its accounts.  It has to decide what to do with this money.  What is the opportunity cost of using that money to expand or add to its existing production facilities?

A firm could use the marginal productivities of inputs to determine if a cheaper input combination could be used to produce a give output.  Is this true or false?

Say the marginal productivity of labor is 5 and that the marginal productivity of capital is 20.  What would happen to the firm’s output if it uses two fewer workers but one more unit of capital ceteris paribus?   Answer:  it’s output would —-

Suppose the ROR in the steel industry is .12.  Suppose Nucor, a steel manufacturer increases its use of inputs to produce steel by \$200 million.  What would you expect to happen to its profits from manufacturing steel?

Suppose the cost of producing 1000 units of some good per day is \$400,000 per day and the cost of producing 2000 units of that good per day is \$600,000 per day.  What does this data suggest?  Answer: there are  1.  CRS     2. DRS      3.  IRS

Where would this market end up if we have fair ROR regulation? –74–Would the social benefit from this regulation exceed the social cost? –75–  What would the social benefit from this regulation be? –76—

pm
p                                                     AC

MD
quantity