Cost OVERVIEW. WSG6 7/7/03 4:36 PM Page 79. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Cost OVERVIEW. WSG6 7/7/03 4:36 PM Page 79. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved."

Transcription

1 WSG6 7/7/03 4:36 PM Page 79 6 Cost OVERVIEW The previous chapter reviewed the theoretical implications of the technological process whereby factors of production are efficiently transformed into goods and services for sale in the market. The production function defines the maximum rate of output per unit of time obtainable from a given set of productive inputs. The production function, however, was presented as a purely technological relationship devoid of any behavioral assertions underlying motives of management. The purpose of this chapter is to bridge the gap between production as a purely technological relationship and the cost of producing a level of output to achieve a well-defined organizational objective. The cost function of a profit-maximizing firm shows the minimum cost of producing various output levels given market-determined factor prices, and the firm s budget constraint. Although largely the domain of accountants, the concept of cost to an economist carries a somewhat different connotation. Economists are concerned with any and all costs that are relevant to the managerial decision-making process. Relevant costs not only include direct, explicit, or out-of-pocket costs associated with the day-to-day operations of a firm, but also implicit (indirect) costs. The relevant cost concept is economic cost, which includes all opportunity costs, including explicit and implicit costs. Implicit costs may be made explicit, such as when the computer programmer pays himself or herself a salary equivalent to the foregone salary. In this case, implicit opportunity costs have been made explicit. Managerial Economics: Theory and Practice 79 Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.

2 WSG6 7/7/03 4:36 PM Page Cost An analysis of the firm s short-run cost function follows directly from an analysis of the firm s short-run production function. Assuming constant factor prices, increasing marginal cost is a direct consequence of the law of diminishing returns, which in turn affects the pattern of behavior of the firm s average total cost and average variable cost. Short-run production functions assume that at least one factor of production is held fixed. The cost associated with these fixed inputs is called total fixed cost. Long-run production functions assume that all inputs are variable, which implies that there are no fixed costs. Moreover, the law of diminishing returns is no longer operable. The long-run cost concept of economies of scale follows directly from the long-run production concept of increasing returns to scale. Economies of scale occur when long-run average total costs fall as the firm increases its capacity, and is related to the production concept of increasing returns to scale. Diseconomies of scale occur when long-run average total cost increases, as when the firm increases its capacity, and is related to the long-run production concept of decreasing returns to scale. It can be argued that the firm s optimal scale of operation occurs when long-run average total cost is minimized, i.e., when the firm experiences constant returns to scale. Other important cost concepts are the learning curve effect, cost complementarities and economies of scope. The learning curve effect is the reduction in per unit cost resulting from increased worker productivity due to increased worker experience. Economies of scope refers to the reduction in per unit cost resulting from the joint production of two or more goods or services, such as the production of automobiles and trucks, or beef and leather, by the same producer. Cost complementarities exist when the marginal cost of producing one good is reduced by increasing the production of another good. MULTIPLE CHOICE QUESTIONS 6.1 Accounting profit is greater than economic profit because: A. Total economic costs include total explicit cost but does not include total implicit cost. B. Total economic costs include both total explicit and total implicit cost. C. Total economic profit does not include a normal rate of return. D. Total accounting profit includes a normal rate of return.

3 WSG6 7/7/03 4:36 PM Page 81 Multiple Choice Questions Costs that are not recoverable once incurred are called: A. Out-of-pocket expenses. B. Direct costs. C. Opportunity costs. D. Depreciation. E. Sunk costs. 6.3 Total fixed costs include: A. Only implicit costs because they do not change as output changes. B. Only implicit costs because they do not change as output changes. C. The costs of factors of production that do not vary with changes in output. D. The costs of plant and equipment. E. The costs of factors of production that last less than one year. 6.4 The change in total cost resulting from the implementation of a specific management decision is called: A. Managerial cost. B. Incremental cost. C. Marginal cost. D. Sunk cost. 6.5 In the short run: A. All costs are fixed. B. All costs are variable. C. All costs are incremental. D. Some costs are fixed and some costs are variable. 6.6 Tilly s Cellies manufactures designer cellular telephones. Tilly s total cost equation is TC = 5, Q Q 2, where Q represents the number of cellular telephones produced. The average total cost of producing 10 cellular telephones is: A. $48. B. $101. C. $752. D. $ Average total cost (ATC) falls when ATC is marginal cost (MC): A. greater than B. less than C. equal to D. Cannot be answered without knowledge of factor prices and the production function.

4 WSG6 7/7/03 4:36 PM Page Cost 6.8 Suppose that a firm s TFC is $15,000.If ATC = $5 and AVC = $4, then the total output of the firm is: A. 1,000 units. B. 5,000 units. C. 10,000 units. D. 15,000 units. 6.9 MC = AVC at an output level where: I. ATC is minimized. II. Where the MC curve intersects the AVC curve. III. Where AVC is minimized. IV. AVC is equal to the price of the product. Which of the following is correct? A. I only. B. II only. C. III only. D. I and IV only. E. II and III only Incremental cost is similar to: A. Marginal cost. B. Variable cost. C. Sunk cost. D. Operating cost The MC curve intersects the ATC curve: A. At an output level greater than where the MC cost curve intersects the AVC curve. B. At the same output level where the MC curve intersects the AVC curve. C. At a lower output level than where the MC cost curve intersects the AVC curve. D. Where MC = AFC If ATC falls when output increases then: I. MC must be less than ATC. II. MC must be less than AVC. III. TC must be increasing at a decreasing rate. Which of the following is correct? A. I only. B. II only. C. III only. D. I and III only.

5 WSG6 7/7/03 4:36 PM Page 83 Multiple Choice Questions Suppose that a firm s total cost is given by the equation TC = Q - 5Q 2 + 2Q 3, where Q represents total output. If Q = 10, then average fixed cost is: A. $10. B. $165. C. $175. D. $1, Suppose that a firm s total cost is given by the equation TC = Q - 5Q 2 + 2Q 3, where Q represents total output. If Q = 10, then average variable cost is: A. $10. B. $165. C. $175. D. $1, A firm s short-run average total cost is given by the equation ATC = Q + Q 2, where Q represents units of output. Short-run average total cost is minimized when output equals: A. 7 units. B. 14 units. C. 21 units. D. 28 units Suppose that a firm s production function is Q = f(l, K), where L is the variable input and K is the fixed input. An fall in the rental price of labor will cause the firm s marginal cost curve to: A. Shift to the right. B. Shift to the left. C. Shift up. D. Shift down Suppose that the marginal cost function is a linear function of output. This implies that: A. The AVC function is linear. B. The ATC function is linear. C. The MC curve intersects the AVC curve at its minimum point. D. The AVC curve is U shaped Assume that a firm s production function is Q = f(l, K) where L is variable and K is fixed. I. When the MP L starts to rise, then MC starts to fall. II. When MC starts to rise, then ATC starts to rise. III. When MC starts to rise, then AVC starts to rise. IV. When MP L starts to fall, then MC starts to rise.

6 WSG6 7/7/03 4:36 PM Page Cost Which of the following statements is correct? A. I only. B. II only. C. I and IV only. D. II and III only Suppose that a firm s total cost is given by the equation TC = Q + 0.5Q 2, where Q represents total output. This firm s production function exhibits: I. Increasing marginal product. II. Constant marginal product. III. Diminishing marginal product. Which of the following is correct? A. I only. B. II only. C. III only. D. I and II only. E. I, II, and III Which of the following suggests a linear short-run total cost curve? A. MC = AFC for all output levels. B. MC = ATC for all output levels. C. MC = AVC for all output levels. D. MC = ATC + AVC for all output levels Assume that a firm s production function is Q = f(l, K), where L and K represent labor and capital input respectively. Increasing marginal product of capital implies: A. dmc/dq > 0. B. datc/dq > 0. C. dmc/dq < 0. D. datc/dq < 0. E. Both C and D Suppose that a firm s total cost is given by the equation TC = Q - 44Q 2 + 2Q 3, where Q represents total output. AVC is minimized at what output level? A. 6.5 units. B. 11 units. C. 15 units. D units.

7 WSG6 7/7/03 4:36 PM Page 85 Multiple Choice Questions The learning curve effect indicates that: A. Labor productivity improves with an improvement in labor skills from on-the-job experience. B. The firm is experiencing economies of scale. C. The firm is experiencing diseconomies of scale. D. Labor productivity increases with the adoption of improved production technology, organizational and managerial techniques The experience curve effect indicates that: A. Labor productivity improves with an improvement in labor skills from on-the-job experience. B. The firm is experiencing economies of scale. C. The firm is experiencing diseconomies of scale. D. Labor productivity increases with the adoption of improved production technology, organizational and managerial techniques Diseconomies of scale is most closely associated with: A. Increasing returns to scale. B. Decreasing returns to scale. C. Constant returns to scale. D. Decreasing returns to scale. E. The experience curve effect The long-run ATC curve is downward sloping because: A. The law of diminishing marginal product. B. Economies of scope. C. Economies of scale. D. Diseconomies of scale The long-run ATC curve us upward sloping because: A. The law of diminishing marginal product. B. Economies of scope. C. Economies of scale. D. Diseconomies of scale Suppose that a firm s production function is Q = f(l, K), where L is the variable input and K is the fixed input. The long-run average total cost curve: I. Is the envelope of the short-run average-total-cost curves. II. Represents optimal levels output for alternative values of K. III. Is tangent to the minimum point on the short-run marginal cost curves.

8 WSG6 7/7/03 4:36 PM Page Cost Which of the following is correct? A. I only. B. II only. C. I and II only. D. II and III only Long-run ATC equals short-run ATC when: A. Long-run MC equals short-run MC. B. Long-run MC equals long-run ATC. C. Short-run MC is minimized. D. Short-run AVC equals long-run AVC. E. Long-run ATC equals long-run AFC Suppose that the firm s production function is Q = 200L 0.25 K 0.5, where K is capital and L is labor. This firm experiences: A. The law of diminishing marginal product. B. Economies of scope. C. Economies of scale. D. Diseconomies of scale. E. Both A and D are correct The minimum efficient scale of production: A. Is the output level corresponding to minimum long-run ATC. B. Is the output level corresponding to minimum long-run MC. C. Is the output level where long-run MC equals short-run ATC. D. Is the output level where short-run MC equals long-run ATC Economies of scale may result because: A. Of increased specialization in the application of factors of production. B. Some types of machinery are more efficient for large production runs. C. Large companies may be able to extract more favorable financing terms from its creditors than small companies. D. All of the above Economies of scope represents: A. Cost savings when firms specialize in the production of a single product. B. Cost savings arising from specialization of the factors of production. C. Cost savings arising from the joint production of two or more goods. D. Cost savings from economies of scale.

9 WSG6 7/7/03 4:36 PM Page 87 Shorter Problems Which of the following is most likely to result in economies of scope? A. The production of soft drinks and soda bottles. B. The production of cars and trucks. C. The production of computer hardware and computer software. D. Producing the same brand of wine from two different vineyards Cost complementarities exist when: A. The marginal cost of producing one good is reduced by increasing the production of another good. B. The total cost of producing two or more goods is lower when using the same production facilities. C. Average total cost of production falls using separate production facilities. D. Labor productivity increases with the adoption of more efficient capital. SHORTER PROBLEMS 6.1 A firm s total cost equation is: TC = Q - 2.5Q 2 + (1/3)Q 3 where Q represents units of output. Suppose that the firm produces 15 units of output. Calculate total fixed cost (TFC), total variable cost (TVC), average total cost (ATC), average fixed cost (AFC), average variable cost (AVC), and marginal cost (MC). 6.2 Suppose that a firm s total variable cost equation is: TVC = 180Q - 22Q 2 + Q 3 where Q represents units of output. Below what price should the firm shut down its operations? 6.3 A firm s average total cost equation is: ATC = 100Q Q where Q represents units of output. A. Determine the TC equation. B. Estimate MC when Q = 20.

10 WSG6 7/7/03 4:36 PM Page Cost 6.4 A firm s total cost equation is: TC = Q + 3.5Q 2 where Q represents units of output. A. Determine the output level that minimizes average total cost (ATC). B. Verify that marginal cost (MC) equals ATC at the output level that minimizes ATC. 6.5 A firm s long-run total cost (LRTC) equation is given by the expression LRTC = 7,396Q - 15Q 2 + (3/2)Q 3 A. What is the firm s long-run average-cost equation? B. What is the firm s minimum efficient scale (MES) of production? 6.6 The long-run average total cost (LRATC) equation of a perfectlycompetitive firm is: LRATC = Q Q 2 where Q represents units of output. A. Determine the minimum efficient scale of production. B. Calculate total cost at the minimum efficient scale of production. C. If the total level of output in the industry is 150,000 units, then how many firms can profitably operate in this industry? 6.7 Suppose that the per-unit labor cost of producing a single unit of output is $1,525. A. If the learning factor is 0.75 and the factor of proportionality is 2.5, estimate the per-unit labor cost of producing 50 units of output. B. If the wage rate is constant at $10.50 per hour, how many labor hours are required to produce the first unit of output? How many labor hours are required per unit of output when 50 units are produced? 6.8 Suppose that the total cost (TC) and demand equations for a monopolist is given by the equations: TC = Q 2 P = Q Determine the profit-maximizing price and output level.

11 WSG6 7/7/03 4:36 PM Page 89 Longer Problems 89 LONGER PROBLEMS 6.1 Loki Products, LLC., produces a line of home smoke alarms. Loki s total cost equation is: TC = 1, Q 2 A. Determine the output level that minimizes average total cost (ATC). B. At the output level that minimizes ATC, calculate ATC, TC, and MC. C. Verify that at the output level that minimizes ATC that the MC curve intersects the ATC curve from below. D. Determine the output level that minimizes average variable cost (AVC). E. At the output level that minimizes AVC, calculate AVC, TC, and MC. 6.2 The operations research department of Thunder Pomegranates, Inc. has estimated the following average variable cost equation for the firm s new brand of weed whackers: AVC = Q + Q 2 where Q represents the number of weed whackers produced. Suppose that Thunder is operating in the short run, and that capital is the fixed input. A. If Thunder employs 50 units of capital at $20 per unit, what is Thunder s total cost (TC) equation? B. Calculate the output level at which MC = AVC. C. Determine the output level that minimizes MC. 6.3 The total cost equation for a firm producing two products is TC(Q 1,Q 2 ) = Q Q Q 1 Q 2 A. Do cost complementarities exist for this firm? B. Under what circumstances do economies of scope exist for this firm? C. Suppose that Q 1 = Q 2 = 15. Do cost economies of scope exist? D. Suppose that Q 1 = Q 2 = 25. Do cost economies of scope exist? E. Suppose that the firm is currently producing 15 units of Q 1 and 25 units of Q 2. What is the firm s total cost of production? F. Suppose that the firm divests itself of the division selling Q 1 to a competitor. How much will it cost to continue producing 25 units of Q 2? What is the total cost of producing both Q 1 and Q 2 if the firm producing Q 1 produces 15 units?

12 WSG6 7/7/03 4:36 PM Page Cost 6.1 B. 6.2 E. 6.3 C. 6.4 B. 6.5 D. 6.6 C. 6.7 B. 6.8 D. 6.9 E A A A A B A D A C C C E B A D B C D C A E A D C B A. ANSWERS TO MULTIPLE CHOICE QUESTIONS

13 WSG6 7/7/03 4:36 PM Page 91 Solutions to Shorter Problems 91 SOLUTIONS TO SHORTER PROBLEMS 6.1 TFC = $300 TVC = 25Q - 2.5Q 2 + (1/3)Q 3 = 25(15) - 2.5(15) 2 + (1/3)(15) 3 = $ ATC = TC/Q = [ Q - 2.5Q 2 + (1/3)Q 3 ]/Q = 300Q Q + (1/3)Q 2 = 300(15) (15) + (1/3)(15) 2 = $82.50 AFC = TFC/Q = 300/15 = $20 AVC = TVC/Q = [25Q - 2.5Q 2 + (1/3)Q 3 ]/Q = Q + (1/3)Q 2 = (15) + (1/3)(15) 2 = $62.50 MC = dtc/dq = 25-5Q + Q 2 = 25-5(15) + (15) 2 = $ AVC = TVC/Q = Q + Q 2 davc/dq = Q = 0, i.e., the first-order condition for AVC minimization. d 2 AVC/dQ 2 = 2 > 0, i.e., the second-order condition for AVC minimization is satisfied. Solving the first-order condition for Q we obtain: Q* = 11 Since the firm operates at the point where P = MC, we substitute this result into the marginal cost equation to obtain P = MC = dtvc/dq = Q + 3Q 2 = (11) + 3(121) = $59 Thus, if the price falls below $59 per unit then the firm will shut down. 6.3 A. TC = ATC Q = (100Q Q)Q = Q Q 2 B. datc/dq = Q = (20) = $ A. ATC = TC/Q = 504Q Q datc/dq = -504Q = 0, i.e., the first-order condition for ATC minimization. Solving the first-order condition for Q we obtain 3.5Q 2 = 504 Q 2 = 144 Q* = 12 d 2 ATC/dQ = 1,008Q -3 = 1,009(12) -3 > 0, i.e., the second-order condition for ATC minimization is satisfied. B. ATC* = 504(12) (12) = $119 MC = dmc/dq = Q = (12) = $119

14 WSG6 7/7/03 4:36 PM Page Cost 6.5 A. LRATC = LRTC/Q = (7,396Q - 15Q 2 + (3/2)Q 3 )/Q = 7,396-15Q + (3/2)Q 2 B. dlratc/dq = Q = 0, i.e., the first-order condition for LRTC minimization. Solving the first-order condition we obtain Q* = 5 units d 2 LRATC/dQ 2 = 3 > 0, i.e., the second-order condition for LRTC minimization is satisfied. Thus, the minimum efficient scale of production is 5 units. 6.6 A. dlratc/dq = Q = Q = 3 Q = 1,500 B. LRATC = (1,500) (1,500) 2 = $7,177 TC = LRATC Q = 7,177(1,500) = $10,765,500 C. Number of firms in the industry = 150,000/1,500 = A. Per-unit labor cost = jq b = 1,525(50) ln0.75/ln2.5 = 1,525(50) = 1,525(0.293) = $ per unit B. The first unit of output will require $1,525/$10.50 = labor hours. 50 units of output will require $446.47/$10.50 = labor hours per unit of output. 6.8 TR = PQ = (500-25Q)Q = 500Q - 25Q 2 p=tr - TC = (500Q - 25Q 2 ) - ( Q 2 ) = Q - 50Q 2 dp/dq = Q = 0, i.e., the first-order condition for p maximization. d 2 p/dq 2 =-100 < 0, i.e., the second-order condition for p maximization is satisfied. Solving the first-order condition for Q we obtain Q* = 5 P* = (5) = $375

15 WSG6 7/7/03 4:36 PM Page 93 Solutions to Longer Problems 93 SOLUTIONS TO LONGER PROBLEMS 6.1 A. ATC = TC/Q = (1, Q 2 )/Q = 1,296Q Q datc/dq = -1,296Q = 0, i.e., the first-order condition for minimizing ATC. Solving the first-order condition we obtain Q 2 = 144 Q* = 12 d 2 ATC/dQ 2 = 2(1,296)Q -3 = 2(1,296)(12) -3 = 1.5 > 0, i.e., the second-order condition for minimizing ATC is satisfied. B. ATC = 1,296(12) (12) = $216 TC = 1, (12) 2 = $2,592 MC = dtc/dq = 18Q = 18(12) = $216 C. For MC to intersect ATC from below, then it must be the case that at Q* = 12, then the slope of the marginal cost curve must be positive. Taking the first derivative of the marginal cost equation with respect to Q we obtain dmc/dq = 18 > 0 D. TVC = 9Q 2 AVC = TVC/Q = 9Q davc/dq = 9 The AVC curve is linear and has no mathematical minimum. On the other hand, if we require that output be nonnegative (Q 0), then AVC is minimized where Q = 0. E. AVC = 9(0) = $0 TC = 1, (0) 2 = $1,291 = TFC MC = 18(0) = AVC 6.2 A. TC = TFC + TVC TFC = P K K 0 = $20(50) = $1,000 TVC = AVC Q = ( Q + Q 2 )Q = 200Q - 2.5Q 2 + Q 3 TC = 1, Q - 2.5Q 2 + Q 3 MC = dtc/dq = 200-5Q + 3Q 2 B. MC = AVC 200-5Q + 3Q 2 = Q + Q 2 2Q 2-2.5Q = 0 Q(2Q - 2.5) = 0 Q* = 1.25 units C. dmc/dq = Q = 0, i.e., the first-order condition for MC minimization. Solving the first-order condition for Q we obtain 6Q = 5 Q* = units d 2 MC/dQ 2 = 6 > 0, i.e., the second-order condition for MC minimization is satisfied.

16 WSG6 7/7/03 4:36 PM Page Cost 6.3 A. In the case of multiproduct cost functions, cost complementarities exist if the cross-second partial derivative of the multiproduct cost function is negative, i.e., MC 1 (Q 1,Q 2 )/ Q 2 = 2 TC/ Q 1 Q 2 < 0 MC 2 (Q 1,Q 2 )/ Q 1 = 2 TC/ Q 2 Q 1 < 0 MC 1 = TC/ Q 1 = 4Q 1 + Q 2 MC 1 / Q 2 = 2 TC/ Q 1 Q 2 = 1 > 0 MC 2 = TC/ Q 2 = 5Q 2 + Q 1 MC 2 / Q 1 = 2 TC/ Q 2 Q 1 = 1 > 0 Since the cross-second partial derivatives are positive, then cost complementarities do not exist. B. For economies of scope to exist, then TC(Q 1, 0) + TC(0, Q 2 ) > TC(Q 1,Q 2 ) TC(Q 1,Q 2 ) = Q Q 22 + Q 1 Q 2 TC(Q 1, 0) = Q 1 2 TC(0, Q 2 ) = Q 2 2 TC(Q 1, 0) + TC(0, Q 2 ) = ( Q 12 ) + ( Q 22 ) = 1, Q Q 2 2 1, Q Q 22 > Q Q 22 + Q 1 Q > Q 1 Q 2 For economies of scope to exist, then Q 1 Q 2 must be less than 500. C. Since 15(15) = 225 < 500, then economies of scope exist. D. Since 25(25) = 625 > 500, then economies of scope do not exist. E. TC(Q 1,Q 2 ) = Q Q 22 + Q 1 Q 2 = (15) (25) 2 + (15)(25) = , = $2, F. TC(0, Q 2 ) = (0) (25) 2 + (0)(25) = ,562.5 = $2, TC(Q 1, 0) = (15) (0) 2 + (15)(0) = = $950 The cost of producing Q 1 and Q 2 jointly is $2, The cost of producing Q 1 and Q 2 separately is $2, $950 = $3, Since TC(Q 1,Q 2 ) < TC(Q 1,0) + TC(0, Q 2 ) then economies of scope exit at these output levels.

Market Structure: Perfect Competition and Monopoly

Market Structure: Perfect Competition and Monopoly WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit

More information

Market Structure: Monopolistic Competition

Market Structure: Monopolistic Competition WSG9 7/7/03 4:34 PM Page 131 9 Market Structure: Monopolistic Competition OVERVIEW Although the conditions necessary for the existence of perfect competitive and monopoly are unlikely to be found in the

More information

Profit and Revenue Maximization

Profit and Revenue Maximization WSG7 7/7/03 4:36 PM Page 95 7 Profit and Revenue Maximization OVERVIEW The purpose of this chapter is to develop a general framework for finding optimal solutions to managerial decision-making problems.

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 10 - Output and Costs - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The short run is a period of time in which A)

More information

Cosumnes River College Principles of Microeconomics Problem Set 6 Due Tuesday, March 24, 2015

Cosumnes River College Principles of Microeconomics Problem Set 6 Due Tuesday, March 24, 2015 Name: Solutions Cosumnes River College Principles of Microeconomics Problem Set 6 Due Tuesday, March 24, 2015 Spring 2015 Prof. Dowell Instructions: Write the answers clearly and concisely on these sheets

More information

Unit 5.3: Perfect Competition

Unit 5.3: Perfect Competition Unit 5.3: Perfect Competition Michael Malcolm June 18, 2011 1 Market Structures Economists usually talk about four market structures. From most competitive to least competitive, they are: perfect competition,

More information

OUTPUT AND COSTS. Chapter. Decision Time Frames

OUTPUT AND COSTS. Chapter. Decision Time Frames Chapter 10 OUTPUT AND COSTS Decision Time Frames Topic: Short Run 1) The short run is a period of time in which A) the quantities of some resources the firm uses are fixed. B) the amount of output is fixed.

More information

Econ 101: Principles of Microeconomics

Econ 101: Principles of Microeconomics Econ 101: Principles of Microeconomics Chapter 12 - Behind the Supply Curve - Inputs and Costs Fall 2010 Herriges (ISU) Ch. 12 Behind the Supply Curve Fall 2010 1 / 30 Outline 1 The Production Function

More information

CHAPTER SEVEN THE THEORY AND ESTIMATION OF COST

CHAPTER SEVEN THE THEORY AND ESTIMATION OF COST CHAPTER SEVEN THE THEORY AND ESTIMATION OF COST The production decision has to be based not only on the capacity to produce (the production function) but also on the costs of production (the cost function).

More information

Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review

Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review 1. Implicit costs are: A) equal to total fixed costs. B) comprised entirely of variable costs. C) "payments" for self-employed

More information

Review of Production and Cost Concepts

Review of Production and Cost Concepts Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology RECITATION NOTES #3 Review of Production and Cost Concepts Thursday - September 23, 2004 OUTLINE OF TODAY S RECITATION 1.

More information

PART 1: MULTIPLE CHOICE

PART 1: MULTIPLE CHOICE ECN 201, Winter 1999 NAME: Prof. Bruce Blonigen SS#: MIDTERM 2 - Version A Tuesday, February 23 **************************************************************************** Directions: This test is comprised

More information

Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to:

Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Learning Objectives After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to: Discuss three characteristics of perfectly competitive

More information

Chapter 5 The Production Process and Costs

Chapter 5 The Production Process and Costs Managerial Economics & Business Strategy Chapter 5 The Production Process and Costs McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Overview I. Production Analysis

More information

Technology, Production, and Costs

Technology, Production, and Costs Chapter 10 Technology, Production, and Costs 10.1 Technology: An Economic Definition 10.1 LEARNING OBJECTIVE Learning Objective 1 Define technology and give examples of technological change. A firm s technology

More information

Pre-Test Chapter 20 ed17

Pre-Test Chapter 20 ed17 Pre-Test Chapter 20 ed17 Multiple Choice Questions 1. In the above diagram it is assumed that: A. some costs are fixed and other costs are variable. B. all costs are variable. C. the law of diminishing

More information

Price Theory Lecture 4: Production & Cost

Price Theory Lecture 4: Production & Cost Price Theory Lecture 4: Production & Cost Now that we ve explained the demand side of the market, our goal is to develop a greater understanding of the supply side. Ultimately, we want to use a theory

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics, Quiz #5 Fall 2007 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) Perfect competition

More information

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 9 Chapter 6 WRITE [4] Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a

More information

Short-Run Production and Costs

Short-Run Production and Costs Short-Run Production and Costs The purpose of this section is to discuss the underlying work of firms in the short-run the production of goods and services. Why is understanding production important to

More information

I. Output Decisions by Firms

I. Output Decisions by Firms University of Pacific-Economics 53 Lecture Notes #8B I. Output Decisions by Firms Now that we have examined firm costs in great detail, we can now turn to the question of how firms decide how much output

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Practice for Perfect Competition Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is a defining characteristic of a

More information

Learning Objectives. Essential Concepts

Learning Objectives. Essential Concepts Learning Objectives After reading Chapter 8 and working the problems for Chapter 8 in the textbook and in this Student Workbook, you should be able to: Essential Concepts Understand the information given

More information

11 PERFECT COMPETITION. Chapter. Competition

11 PERFECT COMPETITION. Chapter. Competition Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat

More information

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY REVIEW QUESTIONS 1. Why would a firm that incurs losses choose to produce rather than shut down? Losses occur when revenues do not cover total costs.

More information

Productioin OVERVIEW. WSG5 7/7/03 4:35 PM Page 63. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.

Productioin OVERVIEW. WSG5 7/7/03 4:35 PM Page 63. Copyright 2003 by Academic Press. All rights of reproduction in any form reserved. WSG5 7/7/03 4:35 PM Page 63 5 Productioin OVERVIEW This chapter reviews the general problem of transforming productive resources in goods and services for sale in the market. A production function is the

More information

Micro Chapter 8 Study Guide Questions 13e

Micro Chapter 8 Study Guide Questions 13e Micro Chapter 8 Study Guide Questions 13e Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The law of diminishing returns indicates why a. beyond some point,

More information

Problems on Perfect Competition & Monopoly

Problems on Perfect Competition & Monopoly Problems on Perfect Competition & Monopoly 1. True and False questions. Indicate whether each of the following statements is true or false and why. (a) In long-run equilibrium, every firm in a perfectly

More information

Microeconomics Topic 6: Be able to explain and calculate average and marginal cost to make production decisions.

Microeconomics Topic 6: Be able to explain and calculate average and marginal cost to make production decisions. Microeconomics Topic 6: Be able to explain and calculate average and marginal cost to make production decisions. Reference: Gregory Mankiw s Principles of Microeconomics, 2 nd edition, Chapter 13. Long-Run

More information

Unit 3 Practice Exam Answer the questions on a separate sheet of paperplease do not write on this practice test.

Unit 3 Practice Exam Answer the questions on a separate sheet of paperplease do not write on this practice test. Unit 3 Practice Exam Answer the questions on a separate sheet of paperplease do not write on this practice test. 1. Which of the following items is most likely to be an implicit cost of production? a.

More information

COST & BREAKEVEN ANALYSIS

COST & BREAKEVEN ANALYSIS COST & BREAKEVEN ANALYSIS http://www.tutorialspoint.com/managerial_economics/cost_and_breakeven_analysis.htm Copyright tutorialspoint.com In managerial economics another area which is of great importance

More information

Unit 2.3 - Theory of the Firm Unit Overview

Unit 2.3 - Theory of the Firm Unit Overview Unit 2.3.1 - Introduction to Market Structures and Cost Theory Intro to Market Structures Pure competition Monopolistic competition Oligopoly Monopoly Cost theory Types of costs: fixed costs, variable

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Firms that survive in the long run are usually those that A) remain small. B) strive for the largest

More information

CHAPTER 7 THE COST OF PRODUCTION

CHAPTER 7 THE COST OF PRODUCTION CHAPTER 7 THE COST OF PRODUCTION EXERCISES 1. Assume a computer firm s marginal costs of production are constant at $1,000 per computer. However, the fixed costs of production are equal to $10,000. a.

More information

and Efficiency Chapter Introduction Profit Maximization and the Competitive Firm

and Efficiency Chapter Introduction Profit Maximization and the Competitive Firm Chapter 9 Perfect Competition and Efficiency Introduction Microeconomics assumes that consumers, in demanding goods, attempt to maximize their satisfaction. Furthermore, we assume that, in supplying goods,

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MPP 801 Perfect Competition K. Wainwright Study Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Refer to Figure 9-1. If the price a perfectly

More information

EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs:

EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs: EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs: Economic Cost: the monetary value of all inputs used in a particular activity or enterprise over a given period.

More information

c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run?

c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run? Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm

More information

Chapter 10. Perfect Competition

Chapter 10. Perfect Competition Chapter 10 Perfect Competition Chapter Outline Goal of Profit Maximization Four Conditions for Perfect Competition Short run Condition For Profit Maximization Short run Competitive Industry Supply, Competitive

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

ECON 600 Lecture 3: Profit Maximization Π = TR TC

ECON 600 Lecture 3: Profit Maximization Π = TR TC ECON 600 Lecture 3: Profit Maximization I. The Concept of Profit Maximization Profit is defined as total revenue minus total cost. Π = TR TC (We use Π to stand for profit because we use P for something

More information

Monopoly. Recall that in the previous chapter on perfect competition we also defined monopoly as follows:

Monopoly. Recall that in the previous chapter on perfect competition we also defined monopoly as follows: I. What is a monopoly market? Monopoly Recall that in the previous chapter on perfect competition we also defined monopoly as follows: 1. Lots of buyers only one seller 2. Single firm is the market. 3.

More information

Test 2 8 November 2006

Test 2 8 November 2006 Eco 301 Name Test 2 8 November 2006 100 points. Please write all answers in ink. You may use pencil and a straight edge to draw graphs. Allocate your time efficiently. 1. A fast-food restaurant currently

More information

Chapter 7: The Costs of Production QUESTIONS FOR REVIEW

Chapter 7: The Costs of Production QUESTIONS FOR REVIEW HW #7: Solutions QUESTIONS FOR REVIEW 8. Assume the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing?

More information

Practice Questions Week 6 Day 1

Practice Questions Week 6 Day 1 Practice Questions Week 6 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Economists assume that the goal of the firm is to a. maximize total revenue

More information

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets I. Perfect Competition Overview Characteristics and profit outlook. Effect

More information

Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013

Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013 Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on

More information

Economics 10: Problem Set 3 (With Answers)

Economics 10: Problem Set 3 (With Answers) Economics 1: Problem Set 3 (With Answers) 1. Assume you own a bookstore that has the following cost and revenue information for last year: - gross revenue from sales $1, - cost of inventory 4, - wages

More information

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC.

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC. 1 I S L 8 0 5 U Y G U L A M A L I İ K T İ S A T _ U Y G U L A M A ( 4 ) _ 9 K a s ı m 2 0 1 2 CEVAPLAR 1. Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market

More information

Fixed Cost. Marginal Cost. Fixed Cost. Marginal Cost

Fixed Cost. Marginal Cost. Fixed Cost. Marginal Cost 1. Complete the following table (round each answer to the nearest whole number): Output Total Variable Fixed Marginal Average Avg. Var. Avg. Fixed 0 30 1 35 60 3 110 4 00 5 30 6 600 Output Total Variable

More information

Market Structure: Duopoly and Oligopoly

Market Structure: Duopoly and Oligopoly WSG10 7/7/03 4:24 PM Page 145 10 Market Structure: Duopoly and Oligopoly OVERVIEW An oligopoly is an industry comprising a few firms. A duopoly, which is a special case of oligopoly, is an industry consisting

More information

UNIT 6. Pricing under different market structures. Perfect Competition

UNIT 6. Pricing under different market structures. Perfect Competition UNIT 6 ricing under different market structures erfect Competition Market Structure erfect Competition ure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale, the

More information

Chapter 13 Perfect Competition and the Supply Curve

Chapter 13 Perfect Competition and the Supply Curve Goldwasser AP Microeconomics Chapter 13 Perfect Competition and the Supply Curve BEFORE YOU READ THE CHAPTER Summary This chapter develops the model of perfect competition and then uses this model to discuss

More information

Practice Questions Week 8 Day 1

Practice Questions Week 8 Day 1 Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants

More information

Number of Workers Number of Chairs 1 10 2 18 3 24 4 28 5 30 6 28 7 25

Number of Workers Number of Chairs 1 10 2 18 3 24 4 28 5 30 6 28 7 25 Intermediate Microeconomics Economics 435/735 Fall 0 Answers for Practice Problem Set, Chapters 6-8 Chapter 6. Suppose a chair manufacturer is producing in the short run (with its existing plant and euipment).

More information

Q = ak L + bk L. 2. The properties of a short-run cubic production function ( Q = AL + BL )

Q = ak L + bk L. 2. The properties of a short-run cubic production function ( Q = AL + BL ) Learning Objectives After reading Chapter 10 and working the problems for Chapter 10 in the textbook and in this Student Workbook, you should be able to: Specify and estimate a short-run production function

More information

1. An economic institution that combines factors of production into outputs for consumers is a(n): A) industry. B) plant. C) firm. D) multinational.

1. An economic institution that combines factors of production into outputs for consumers is a(n): A) industry. B) plant. C) firm. D) multinational. Miami Dade College ECO 2023 Principles of Microeconomics Summer B 2014 Practice Test #3 1. An economic institution that combines factors of production into outputs for consumers is a(n): A) industry. B)

More information

COST THEORY. I What costs matter? A Opportunity Costs

COST THEORY. I What costs matter? A Opportunity Costs COST THEORY Cost theory is related to production theory, they are often used together. However, the question is how much to produce, as opposed to which inputs to use. That is, assume that we use production

More information

Firms in Perfectly Competitive Markets

Firms in Perfectly Competitive Markets Chapter 11 Firms in Perfectly Competitive Markets Chapter Outline 11.1 LEARNING OBJECTIVE 11.1 Perfectly Competitive Markets Learning Objective 1 Define a perfectly competitive market, and explain why

More information

25 : Perfect Competition

25 : Perfect Competition 25 : Perfect Competition 1 Session Outline Features of Perfect Competition Demand and Revenue of a firm Short run Equilibrium Market supply and firm s supply analysis Perfect competition market is a most

More information

CE2451 Engineering Economics & Cost Analysis. Objectives of this course

CE2451 Engineering Economics & Cost Analysis. Objectives of this course CE2451 Engineering Economics & Cost Analysis Dr. M. Selvakumar Associate Professor Department of Civil Engineering Sri Venkateswara College of Engineering Objectives of this course The main objective of

More information

Answers to Text Questions and Problems Chapter 8

Answers to Text Questions and Problems Chapter 8 Answers to Text Questions and Problems Chapter 8 Answers to Review Questions 1. The pure monopolist, the oligopolist, and the monopolistically competitive firm all face downward-sloping demand curves.

More information

Name: Class: Date: Multiple Choice Identify the letter of the choice that best completes the statement or answers the question.

Name: Class: Date: Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. Name: Class: Date:. Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. A price floor on corn would have the effect of a. creating excess supply

More information

Perfect Competition. Chapter 12

Perfect Competition. Chapter 12 CHAPTER CHECKLIST Perfect Competition Chapter 12 1. Explain a perfectly competitive firm s profit maximizing choices and derive its supply curve. 2. Explain how output, price, and profit are determined

More information

Chapter 11 Perfect Competition

Chapter 11 Perfect Competition These notes provided by Laura Lamb are intended to complement class lectures. The notes are based on chapter 11 of Microeconomics and Behaviour 2 nd Canadian Edition by Frank and Parker (2004). Chapter

More information

Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9

Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 print name on the line above as your signature INSTRUCTIONS: 1. This Exam #2 must be completed within the allocated time (i.e., between

More information

Chapter 8: Theory of Cost

Chapter 8: Theory of Cost Chapter 8: Theory of Input s Classification Minimization Shifts in Curves Explicit and Implicit s Fixed and Variable s Profit Long Run Short Run Input Price Change New Technologies Positive Feedback Normal

More information

The Revenue of a Competitive In perfect competition, average revenue equals the price of the good. Total revenue Average Revenue = = The Revenue of a

The Revenue of a Competitive In perfect competition, average revenue equals the price of the good. Total revenue Average Revenue = = The Revenue of a In this chapter, look for the answers to these questions: What is a perfectly competitive market? What is marginal revenue? How is it related to total and average revenue? How does a competitive firm determine

More information

Firm behaviour. Profit Maximization in Competitive Markets Finding the Supply Function. Firm behaviour. Firm behaviour

Firm behaviour. Profit Maximization in Competitive Markets Finding the Supply Function. Firm behaviour. Firm behaviour rofit Maximization in Competitive Markets Finding the Supply Function Herbert Stocker herbert.stocker@uibk.ac.at Institute of International Studies University of Ramkhamhaeng & Department of Economics

More information

Chapter 7. Costs. C = FC + VC Marginal cost MC = C/ q Note that FC will not change, so marginal cost also means marginal variable cost.

Chapter 7. Costs. C = FC + VC Marginal cost MC = C/ q Note that FC will not change, so marginal cost also means marginal variable cost. Chapter 7. Costs Short-run costs Long-run costs Lowering costs in the long-run 0. Economic cost and accounting cost Opportunity cost : the highest value of other alternative activities forgone. To determine

More information

21 : Theory of Cost 1

21 : Theory of Cost 1 21 : Theory of Cost 1 Recap from last Session Production cost Types of Cost: Accounting/Economic Analysis Cost Output Relationship Short run cost Analysis Session Outline The Long-Run Cost-Output Relations

More information

Lecture 8: Market Structure and Competitive Strategy. Managerial Economics September 11, 2014

Lecture 8: Market Structure and Competitive Strategy. Managerial Economics September 11, 2014 Lecture 8: Market Structure and Competitive Strategy Managerial Economics September 11, 2014 Focus of This Lecture Examine optimal price and output decisions of managers operating in environments with

More information

AP Microeconomics Review

AP Microeconomics Review AP Microeconomics Review 1. Firm in Perfect Competition (Long-Run Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry 3. Natural Monopoly with Fair-Return

More information

SHORT-RUN PRODUCTION

SHORT-RUN PRODUCTION TRUE OR FALSE STATEMENTS SHORT-RUN PRODUCTION 1. According to the law of diminishing returns, additional units of the labour input increase the total output at a constantly slower rate. 2. In the short-run

More information

Firm Supply: Market Structure & Perfect Competition

Firm Supply: Market Structure & Perfect Competition Firm Supply: Market Structure & Perfect Competition Firm Supply How does a firm decide how much to supply at a given price? This depends upon the firm s goals; technology; market environment; and competitors

More information

11 PERFECT COMPETITION. Chapt er. Key Concepts. What is Perfect Competition?

11 PERFECT COMPETITION. Chapt er. Key Concepts. What is Perfect Competition? Chapt er 11 PERFECT COMPETITION Key Concepts What is Perfect Competition? Perfect competition is an industry with many firms, each selling an identical good; many buyers; no restrictions on entry into

More information

, to its new position, ATC 2

, to its new position, ATC 2 S171-S184_Krugman2e_PS_Ch12.qxp 9/16/08 9:22 PM Page S-171 Behind the Supply Curve: Inputs and Costs chapter: 12 1. Changes in the prices of key commodities can have a significant impact on a company s

More information

The Cost of Production

The Cost of Production The Cost of Production 1. Opportunity Costs 2. Economic Costs versus Accounting Costs 3. All Sorts of Different Kinds of Costs 4. Cost in the Short Run 5. Cost in the Long Run 6. Cost Minimization 7. The

More information

Integrating the Input Market and the Output Market when Teaching Introductory Economics

Integrating the Input Market and the Output Market when Teaching Introductory Economics 1 Integrating the Input Market and the Output Market when Teaching Introductory Economics May 2015 Clark G. Ross Frontis Johnston Professor of Economics Davidson College Box 7022 Davidson, NC 28035-7022

More information

Economics 103h Fall 2012: Part 1 of review questions for final exam

Economics 103h Fall 2012: Part 1 of review questions for final exam Economics 103h Fall 2012: Part 1 of review questions for final exam This is the first set of review questions. The short answer/graphing go through to the end of monopolistic competition. The multiple

More information

11 PERFECT COMPETITION. Chapter. Key Concepts. Perfectly Competitive Firm s Demand Curve

11 PERFECT COMPETITION. Chapter. Key Concepts. Perfectly Competitive Firm s Demand Curve Chapter 11 PERFECT COMPETITION Key Concepts FIGURE 11.1 Perfectly Competitive Firm s Demand Curve Competition Perfect competition is an industry with many firms, each selling an identical good; many buyers;

More information

THE COST OF PRODUCTION

THE COST OF PRODUCTION Chulalongkorn University: BBA International Program, Faculty of Commerce and Accountancy 2900 (Section ) Chairat Aemkulwat Economics I: Microeconomics Spring 205 Solution to Selected Questions: CHAPTER

More information

N. Gregory Mankiw Principles of Economics. Chapter 13. THE COSTS OF PRODUCTION

N. Gregory Mankiw Principles of Economics. Chapter 13. THE COSTS OF PRODUCTION N. Gregory Mankiw Principles of Economics Chapter 13. THE COSTS OF PRODUCTION Solutions to Problems and Applications 1. a. opportunity cost; b. average total cost; c. fixed cost; d. variable cost; e. total

More information

Economics 2106 Principles of Microeconomics Exam 2 Feb 28, 2002 Professor Robert Collins

Economics 2106 Principles of Microeconomics Exam 2 Feb 28, 2002 Professor Robert Collins Economics 2106 Principles of Microeconomics Exam 2 Feb 28, 2002 Professor Robert Collins 1) The price elasticity of demand measures A) the responsiveness of quantity demanded to a change in price. B) the

More information

Microeconomics Instructor Miller Perfect Competition Practice Problems

Microeconomics Instructor Miller Perfect Competition Practice Problems Microeconomics Instructor Miller Perfect Competition Practice Problems 1. Perfect competition is characterized by all of the following except A) heavy advertising by individual sellers. B) homogeneous

More information

Problem Set 5 Answers. A grocery shop is owned by Mr. Moore and has the following statement of revenues and costs:

Problem Set 5 Answers. A grocery shop is owned by Mr. Moore and has the following statement of revenues and costs: Problem Set 5 Ansers 1. Ch 7, Problem 7. A grocery shop is oned by Mr. Moore and has the folloing statement of revenues and costs: Revenues $5, Supplies $5, Electricity $6, Employee salaries $75, Mr. Moore

More information

D) Marginal revenue is the rate at which total revenue changes with respect to changes in output.

D) Marginal revenue is the rate at which total revenue changes with respect to changes in output. Ch. 9 1. Which of the following is not an assumption of a perfectly competitive market? A) Fragmented industry B) Differentiated product C) Perfect information D) Equal access to resources 2. Which of

More information

Chapter 14: Firms in Competitive Markets. Total revenue = price per unit sold number of units sold = p q

Chapter 14: Firms in Competitive Markets. Total revenue = price per unit sold number of units sold = p q Chapter 14: Firms in Competitive Markets Profit and Revenue The firm's goal is to maximize profit. Profit = total revenue - total cost (opportunity cost) Total revenue = price per unit sold number of units

More information

MATH MODULE 5. Total, Average, and Marginal Functions. 1. Discussion M5-1

MATH MODULE 5. Total, Average, and Marginal Functions. 1. Discussion M5-1 MATH MODULE Total, Average, and Marginal Functions 1. Discussion A very important skill for economists is the ability to relate total, average, and marginal curves. Much of standard microeconomics involves

More information

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY TEACHING NOTES This chapter begins by explaining what we mean by a competitive market and why it makes sense to assume that firms try to maximize profit.

More information

Lab #11. Chapter 11 Perfect Competition

Lab #11. Chapter 11 Perfect Competition University of Lethbridge Department of Economics ECON 1010 Introduction to Microeconomics Instructor: Michael G. Lanyi Lab #11 Chapter 11 Perfect Competition 1) Perfect competition occurs in a market where

More information

Eco 200 Group Activity 4 Key Chap 13 & 14 & 15

Eco 200 Group Activity 4 Key Chap 13 & 14 & 15 Eco 200 Group Activity 4 Key Chap 13 & 14 & 15 Chapter 13: 1. 4 th Edition: p. 285, Problems and Applications, Q4 3 rd Edition: p. 286, Problems and Applications, Q4 a. The following table shows the marginal

More information

ECO 610: Lecture 7. Perfectly Competitive Markets

ECO 610: Lecture 7. Perfectly Competitive Markets ECO 610: Lecture 7 Perfectly Competitive Markets Perfectly Competitive Markets: Outline Goal: understanding firm and market supply in competitive markets Characteristics of perfectly competitive industries

More information

Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young

Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Chapter 9 Pricing and Output Decisions: i Perfect Competition and Monopoly M i l E i E i Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Pricing and

More information

CHAPTER 8 COSTS OF PRODUCTION

CHAPTER 8 COSTS OF PRODUCTION CHAPTER 8 COSTS OF PRODUCTION Chapter in a Nutshell This chapter gives an in-depth look at the costs of production for firms, both in the short run and in the long run. Although production techniques may

More information

POTENTIAL OUTPUT and LONG RUN AGGREGATE SUPPLY

POTENTIAL OUTPUT and LONG RUN AGGREGATE SUPPLY POTENTIAL OUTPUT and LONG RUN AGGREGATE SUPPLY Aggregate Supply represents the ability of an economy to produce goods and services. In the Long-run this ability to produce is based on the level of production

More information

Mod 59: Graphing Perfect Competition

Mod 59: Graphing Perfect Competition Learning Targets: I Can Evaluate a perfectly competitive firm s situation using a graph. Determine a perfect competitor s profit or loss. Explain how a firm decides whether to produce or shut down in the

More information

Describe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly

Describe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly www.edupristine.com Describe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly Prerequisite Characteristics of different market

More information

Chapter 12. The Costs of Produc4on

Chapter 12. The Costs of Produc4on Chapter 12 The Costs of Produc4on Copyright 214 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. What will you learn

More information