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

Size: px
Start display at page:

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

Transcription

1 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 technological relationship between the maximum amount of output that a firm can produce with a given combination of inputs (factors of production).the short run in production is defined as that period of time during which at least one factor of production held fixed. The long run in production is defined as that period of time during which all factors of production are variable. In the short run, the firm is subject to the law of diminishing returns (sometimes referred to as the law of diminishing marginal product), which states that as additional units of a variable input are combined with one or more fixed inputs, at some point the additional output (marginal product) will start to diminish. The short-run production function is characterized by three stages of production. Assuming that output is a function of labor and a fixed amount of capital, stage I of production is the range of labor usage where the average product of labor (AP L ) is increasing. Over this range of output, the marginal product of labor (MP L ) is greater than the average product of labor. Stage I ends and stage II begins where the average product of labor is maximized, i.e., AP L = MP L. Stage II of production is the range of output where the average product of labor is declining and the marginal product of labor is positive. In other words, stage II of production begins where AP L is maximized, and ends wither MP L = 0. Managerial Economics: Theory and Practice 63 Copyright 2003 by Academic Press. All rights of reproduction in any form reserved.

2 WSG5 7/7/03 4:35 PM Page Production Stage III of production is the range of product where the marginal product of labor is negative. In stage II and stage III of production, AP L > MP L.According to economic theory, production in the short run for a rational firm takes place in stage II of production. If we assume two factors of production, the marginal rate of technical substitution (MRTS KL ) is the amount of a factor of production that must be added (subtracted) to compensate for a reduction (increase) in the amount of another input to maintain a given level of output. If capital and labor are substitutable, the marginal rate of technical substitution is defined as the ratio of the marginal product of labor to the marginal product of capital, i.e., MP L /MP K. Returns to scale refer to the proportional increase in output given an equal proportional increase in all inputs. Since all inputs are variable, returns to scale is a long-run production phenomenon. Increasing returns to scale (IRTS) occurs when a proportional increase in all inputs results in a more than proportional increase in output. Constant returns to scale (CRTS) occurs when a proportional increase in all inputs results in the same proportional increase in output. Decreasing returns to scale (DRTS) occurs when a proportional increase in all inputs results in a less than proportional increase in output. Another way to measure returns to scale is the coefficient of output elasticity (e Q ), which is defined as the percentage increase (decrease) in output with respect to a percentage increase (decrease) in all inputs. The coefficient of output elasticity is equal to the sum of the output elasticity of labor (e L ) and the output elasticity of capital (e K ), i.e., e Q =e L +e K. IRTS occurs when e Q > 1. CRTS occurs when e Q = 1. DRTS occurs when e Q < 1. The Cobb-Douglas production function is the most popular specification in empirical research. Its appeal is largely due to the fact that it exhibits several desirable mathematical properties, including substitutability between and among inputs, the law of diminishing returns to a variable input, and returns to scale. The Cobb-Douglas production function has several shortcomings, however, including an inability to show marginal product in stages I and III of production. Most empirical studies of cost functions use time series accounting data, which present a number of problems. Accounting data, for example, tend to ignore opportunity costs, the effects of changes in inflation, tax rates, social security contributions, labor insurance costs, accounting practices, etc. There are also other problems associated with the use of accounting data including output heterogeneity and asynchronous timing of costs. Economic theory suggests that short-run total cost as a function of output first increases at an increasing rate, then increases at a decreasing rate. Cubic cost functions exhibit this theoretical relationship, as well as the expected U-shaped average total, average variable and marginal cost curves.

3 WSG5 7/7/03 4:35 PM Page 65 Multiple Choice Questions 65 MULTIPLE CHOICE QUESTIONS 5.1 Production function represent: A. The maximum amounts of inputs required to product a given amount of output. B. The maximum amount of output that can be obtained from a given set of inputs. C. The minimum amount of inputs required to produce a given amount of output. D. Both B and C are correct. 5.2 Production in the short run is: A. The period of time during which at least one factor of production is fixed. B. The period of time during which all factors of production are variable. C. The period of time during which all factors of production are fixed. D. Less than one year. 5.3 Production in the long run is: A. The period of time during which at least one factor of production is fixed. B. The period of time during which all factors of production are variable. C. The period of time during which all factors of production are fixed. D. Greater than one year. 5.4 The firm operates in the, but plans in the. A. long-run; short-run B. long-run; long-run C. short-run; long-run D. short-run; short-run 5.5 The production function: A. Is only applicable in the short run. B. Cannot be empirically estimated. C. Summarizes the relationship between output and factors of production. D. Summarizes the least-cost combination of inputs to produce a given output.

4 WSG5 7/7/03 4:35 PM Page Production 5.6 Consider the production function Q = f(k, L, M), where K is capital, L is labor, and M is land. The Cobb-Douglas production: A. Is Q = AK a L b M g, where A is a constant and 0 (a, b, g) 1. B. Illustrates the substitutability of the factors of production. C. Can be used to determine returns to scale. D. Is consistent with the law of diminishing marginal product. E. All of the above. 5.7 Consider the production function Q = f(k, L), where K is capital and L is labor. The marginal product of labor is: A. The change in total output resulting from a change in labor input. B. Total output per unit of labor input. C. The change in labor output resulting from a change in total output. D. The contribution to total output from the last unit of labor employed. E. Both A and D are correct. 5.8 Suppose that Q = f(k, L), where K is capital and L is labor. Diminishing marginal product of labor implies that: XIII. The marginal product of labor is less than the average product of labor. XIV. The marginal product of labor is falling. XV. The total product of labor is increasing at a decreasing rate. Which of the following is correct? A. I only. B. II only. C. I and II only. D. II, and III only. 5.9 The average product of capital increases when: A. MP L > MP K. B. MP K > AP K. C. AP L > MP L. D. MP K > MP L. E. MP L = MP K In response to an increase in demand, a microchip manufacturer increased its labor force by 5 percent. This action resulted in an increase in the total product of labor. For this to happen:

5 WSG5 7/7/03 4:35 PM Page 67 Multiple Choice Questions 67 I. The average product of labor must have increased. II. Additional units of capital must have been employed. III. The marginal product of labor must have increased. Which of the following is correct? A. I only. B. II only. C. III only. D. I and III only. E. None of the above When MP L < AP L, then AP L must be: A. Rising. B. Falling. C. Equal to MP L. D. Greater than AP K Suppose that the firm s production function is Q = 25K 0.5 L 0.5. If K = 121 and L = 36, then total output is: A. 1,250. B. 1,500. C. 1,650. D. 1, Suppose that the firm s production function is Q = 25K 0.5 L 0.5. If K = 100 and L = 25, then the marginal product of labor is: A B C. 10. D Suppose that the firm s production function is Q = 25K 0.5 L 0.5. If K = 225 and L = 36, then the marginal product of capital is: A. 2. B. 4. C. 5. D Decreasing returns to scale occurs when: A. Output decreases following a proportional increase in all inputs. B. Output increases at a decreasing rate following a proportional increase in all inputs. C. Output increases less than proportionally to a proportional increase in all inputs. D. Input usage falls as the rate of output increases.

6 WSG5 7/7/03 4:35 PM Page Production 5.16 If the output remains unchanged when all inputs are doubled, then the production function exhibits: A. Increasing returns to scale. B. Decreasing returns to scale. C. Constant returns to scale. D. Zero returns to scale Consider Figure 1, which shows two total product curves for producing silicon chips using different amounts of a fixed factor (capital) and different amounts of a variable factor (labor). I. A movement from A to B exhibits decreasing returns to scale. II. A movement from A to C exhibits increasing returns to scale. III. A movement from A to D exhibits decreasing returns to scale. Which of the following is correct? A. I only. B. II only. C. III only. D. I and II only. E. II and III only. FIGURE Consider the production function Q = f(k, L), where K is capital and L is labor. Diminishing returns to labor occurs when: A. MP L declines as more labor is added to a fixed amount of capital. B. MP L declines as more labor is added to an increased amount of capital. C. MP L declines because of increased specialization. D. MP L declines because the ratio of capital to labor is increasing The law of diminishing returns: C. Implies that productive resources are not efficiently employed. D. Is a long-run phenomenon. E. Can only occur when all inputs are increased proportionally. F. Is a short-run phenomenon.

7 WSG5 7/7/03 4:35 PM Page 69 Multiple Choice Questions Which of the following production functions exhibits the law of diminishing returns as soon as production begins? A L B L L 2 C L L 2 D. Cannot be determined on the basis of the information provided Consider the production function Q = f(k, L), where K is capital and L is labor. If MP L < 0, then the firm must be operating in: A. Stage I of production. B. Stage II of production. C. Stage III of production. D. Stage IV of production In Stage II of production: A. TP L must be increasing at an increasing rate. B. MP L must be greater than AP L. C. AP L must be greater than MP L. D. AP L is increasing. E. MP L must be increasing Stage I of production ends where: A. AP L = MP L. B. AP L is maximized. B. AP L = 0. C. MP L is maximized. D. Both A and B are correct Stage II of production ends where: A. MP L is maximized. B. AP L is maximized. C. TP L is maximized. D. MP L = 0. E. Both C and D are correct Consider the production function Q = f(k, L), where K is capital and L is labor. An isoquant: A. Summarizes all the combinations of K and L necessary to produce a given level of output. B. Summarizes all the combinations of K and L that can be efficiently produced with a given production technology. C. Summarizes all the combinations of two outputs that can be produced with a given combination of K and L. D. Illustrates the least-cost combination K and L necessary to produced a given level of output.

8 WSG5 7/7/03 4:35 PM Page Production 5.26 Consider the production function Q = f(k, L), where K is capital and L is labor. The slope of an isoquant is: I. The capital-labor ratio. II. The negative of the ratio of marginal products of the inputs. III. The rate at which one input can be substituted for another input. Which of the following is correct? A. I only. B. II only. C. III only. D. I and II only. E. II and III only Consider the production function Q = f(k, L), where K is capital and L is labor. A convex isoquant indicates that: A. K and L are perfectly substitutable. B. K and L must be used in fixed proportions. C. K and L are imperfectly substitutable. D. As more of K is used, increasingly smaller amounts of L must be substituted for it in order to produce a given level of output Consider the production function Q = f(k, L), where K is capital and L is labor. The marginal rate of technical substitution may be defined as: I. The rate at which K and L may be substituted for each other while total output remains constant. II. Equal to the slope of the isoquant. III. The rate at which all combinations of K and L equal total cost. Which of the following is correct? A. I only. B. II only. C. I and II only. D. II and III only Consider the production function Q = f(k, L), where K is capital and L is labor. An L-shaped isoquant indicates that: A. K and L are perfect substitutes for one another. B. K and L must be used in fixed proportions. C. K and L are imperfect substitutes for one another. D. None of the above statements are true.

9 WSG5 7/7/03 4:35 PM Page 71 Multiple Choice Questions Consider the production function Q = f(k, L), where K is capital and L is labor. A linear isoquant indicates that: A. K and L are perfect substitutes for one another. B. K and L must be used in fixed proportions. C. K and L are imperfect substitutes for one another. D. None of the above statements are true Suppose that the firm s production function is Q = 2L 0.25 K 0.5, where K is capital and L is labor. With K on the vertical axis and L on the horizontal axis, the marginal rate of technical substitution is: A. -2K/L. B. -K/L. C. -K/2L. D. -L/K The output elasticity of capital is: A. AP K /K. B. MP K /AP K. C. MP K /K. D. K/L Consider the Cobb-Douglas production function Q = 33K 0.33 L 0.66, where K is capital and L is labor. This production function exhibits: A. Increasing returns to scale. B. Constant returns to scale. C. Decreasing returns to scale. D. Zero returns to scale. E. Cannot be determined from the information provided The production function is Q = KL -1 exhibits: A. Increasing returns to scale. B. Decreasing returns to scale. C. Constant returns to scale. D. Zero returns to scale. E. None of the above Consider the Cobb-Douglas production function Q = 47K 0.45 L 0.55, where K is capital and L is labor. The coefficient of output elasticity is: A B C. 1. D. Cannot be determined from the information provided.

10 WSG5 7/7/03 4:35 PM Page Production SHORTER PROBLEMS 5.1 A firm s production function is: Q = 250K 0.7 L 0.3 Determine the marginal product of capital and the marginal product of labor when K = 50 and L = Suppose that a firm s production function is Q = 7K 0.5 L 0.5 where Q is units of output, K is machine hours, and L is labor hours. Suppose that the amount of K available to the firm is fixed at 144 machine hours. A. What is the firm s total product of labor equation? B. What is the firm s marginal product of labor equation? C. What is the firm s average product of labor equation? 5.3 A firm s production function is: Q = 250K 0.7 L 0.3 Verify that AP L = MP L when AP L is maximized. 5.4 A firm s production function is: Q = 200KL - 10KL 2 Verify that AP L = MP L when AP L is maximized. 5.5 A firm s production function is: Q = 250K 0.7 L 0.3 Verify that this expression exhibits the law of diminishing marginal product with respect to variable labor input. 5.6 A firm s production function is: Q = 250K 0.7 L 0.3 Suppose that Q = 1,000. A. What is the equation of the corresponding isoquant in terms of L? B. Demonstrate that this isoquant is convex with respect to the origin.

11 WSG5 7/7/03 4:35 PM Page 73 Longer Problems 73 LONGER PROBLEMS 5.1 Suppose that the average product of labor is given by the equation AP L = L - 5L 2 A. What is the equation for the total product of labor (TP L )? B. What is the equation for the marginal product of labor (MP L )? C. At what level of labor usage is AP L = MP L? 5.2 The research department of Merriweather International has estimated the following production function Q = 50K 0.5 L 0.4 F 0.4 where Q represents of units of output, K represents units of capital, L represents labor hours, and F represents thousands of square feet of factory floor space. A. Does this production function exhibit increasing, decreasing or constant returns to scale? B. Estimate the coefficient of output elasticity. C. Determine the marginal product equations. D. Suppose that K = 625, L = 20, and F = 50. Estimate total output. 5.3 Consider the following production functions: 1) Q = 200K 0.5 L 0.5 2) Q = 2K + 2L + 5KL 3) Q = K + 5L 4) Q = 3K/3L where Q represents of units of output, K represents units of capital, and L represents labor hours. A. Suppose that K = L = 1. Calculate total output for each production function. B. Suppose that K = L = 2. Calculate total output for each production function. C. Based upon your answers to parts A. and B., do these production functions exhibit increasing, decreasing, or constant returns to scale? 5.4 Consider the following production function: Q = 300KL + 18L 2 + 3K 2-0.5L K 3 where Q is units of output per month, L is the number of workers, and K is units of capital. Assume that L = 20 and K = 10.

12 WSG5 7/7/03 4:35 PM Page Production A. Calculate total output per month. B. Calculate MP L and MP K. C. Calculate AP L and AP K. 5.5 Consider the following production function: Q = 225L + 100K - 7.5L 2-5K 2 + KL where Q represents units of output per month, L is the number of workers, and K is units of capital. A. How much K and L will maximize Q? B. What is the maximum output per month? ANSWERS TO MULTIPLE CHOICE QUESTIONS 5.1 D. 5.2 A. 5.3 B. 5.4 C. 5.5 C. 5.6 E. 5.7 A. 5.8 D. 5.9 B E B C D C C B C A D C C C D E A E C C B A C B C B C. SOLUTIONS TO SHORTER PROBLEMS 5.1 MP K = Q K / K = 0.7(250)K -0.3 L 0.3 = 175K -0.3 L 0.3 = 175(L/K) 0.3 = MP L = Q L / L = 0.3(250)K 0.7 L = 75K 0.7 L -0.7 = 75(K/L) 0.7 = A. TP L = 7(144) 0.5 L 0.5 = 84L 0.5 B. MP L = dtp L /dl = 0.5(7)(144) 0.5 L -0.5 = 42L -0.5 C. AP L = TP L /L = 84L 0.5 /L = 84L -0.5

13 WSG5 7/7/03 4:35 PM Page 75 Solutions to Shorter Problems MP L = 0.3(250K 0.7 L -0.7 ) AP L = Q/L = (250K 0.7 L 0.3 )/L AP L / L = [0.3(250K 0.7 L -0.7 )L - 250K 0.7 L 0.3 ]/L 2 = 0, i.e., the first-order condition for AP L maximization. Since L > 0, this implies that 0.3(250K 0.7 L -0.7 )L - 250K 0.7 L 0.3 = 0 0.3(250K 0.5 L -0.7 ) = 250K 0.7 L 0.3 /L MP L = AP L 5.4 MP L = 200K - 20KL AP L = (200KL - 10KL 2 )/L AP L / L = [(200K - 20KL)L - (200KL - 10KL 2 )]/L 2 = 0, i.e., the first-order condition for AP L maximization. L > 0 implies that (200K - 20KL)L - (200KL - 10KL 2 ) = 0 (200K - 20KL)L = 200KL - 10KL 2 200K - 20KL = (200KL - 10KL 2 )/L MP L = AP L 5.5 MP L = Q L / L = 0.3(250)K 0.7 L -0.7 = 75K 0.7 L -0.7 > 0 since L and K are positive. The second partial derivative of the production function is MP K / K = 2 Q K / K 2 =-0.7(75)K 0.7 L -1.7 < 0 which is clearly negative since L -1.7 = 1/L 1.7 > A. 1,000 = 250K 0.7 L 0.3 Solving this equation for K in terms of L yields K 0.7 = 1,000(250L 0.3 ) -1 = 1,000(250-1 L -0.3 ) = 4L -0.3 (K 0.7 ) 1/0.7 = (4L -0.3 ) (1/0.7) K = 4 1/0.7 L -0.3/0.7 B. Taking the first and second derivatives of this expression yields dk/dl = (-0.3/0.7)(4 1/0.7 L -1.3/0.7 ) < 0 Since L -1.3/0.7 = 1/L 1.3/0.7 > 0 d 2 K/dL 2 = (-1.3/0.7)(-0.3/0.7)(4 1/0.7 L -2.3/0.7 ) = (0.39/0.7)(4 1/0.7 L -2.3/0.7 ) > 0 Since L -2.3/0.7 = 1/L 2.3/0.7 > 0 Since the first derivative is negative and the second derivative is positive then the isoquant is convex with respect to the origin.

14 WSG5 7/7/03 4:35 PM Page Production SOLUTIONS TO LONGER PROBLEMS 5.1 A. TP L = (AP L )L = ( L - 5L 2 )L = 100L + 500L 2-5L 3 B. MP L = dtp L /dl = ,000L - 15L 2 C. AP L = MP L L - 5L 2 = ,000L - 15L 2 10L 2 = 500L 10L = 500 L = 50 Alternatively, dap L /dl = L = 0, i.e., the first-order condition for AP L maximization. L = 50 d 2 AP L /dl 2 =-10 < 0, i.e., the second-order condition for AP L maximization is satisfied. 5.2 A. Let l be some factor of proportionality. E =50(lK) 0.5 (ll) 0.4 (lf) 0.4 = 50l 0.5 K 0.5 l 0.4 L 0.4 l 0.4 F 0.4 =l K 0.5 L 0.4 F 0.4 =l 1.3 Q If all inputs are increased by the scalar l, enrollments will increase by l 1.3. Thus, this production function exhibits increasing returns to scale. Alternatively, the above production function exhibits increasing returns to scale because = 1.3 > 0. B. e Q =e K +e L +e F = = 1.3 C. MP K = 0.5(50)K -0.5 L 0.4 F 0.4 = 25K -0.5 L 0.4 F 0.4 MP L = 0.4(50)K 0.5 L -0.6 F 0.4 = 20K 0.5 L -0.6 F 0.4 MP F = 0.4(50)K 0.5 L 0.3 F -0.6 = 20K 0.5 L 0.4 F -0.6 D. Q = 50K 0.5 L 0.4 F 0.4 = 50(625) 0.5 (20) 0.4 (50) 0.4 = 50(25)(3.31)(4.78) = 19, A. 1) Q = 200(1) 0.5 (1) 0.5 = 200 2) Q = 2(1) + 2(1) + 5(1)(1) = 9 3) Q = (1) + 5(1) = 60 4) Q = 3(1)/3(1) = 1 B. 1) Q = 200(2) 0.5 (2) 0.5 = 400 2) Q = 2(2) + 2(2) + 5(2)(2) = 28 3) Q = (2) + 5(2) = 70 4) Q = 3(2)/3(2) = 1

15 WSG5 7/7/03 4:35 PM Page 77 Solutions to Longer Problems 77 C. 1) Since output doubled as K and L were doubled, then this production function exhibits constant returns to scale. Alternatively, for Cobb-Douglas production functions, returns to scale may be determined by adding the values of the exponents. Since = 1, then this production function exhibits constant returns to scale. 2) Since output more than doubled as K and L were doubled, then this production function exhibits increasing returns to scale. 3) Since output less than doubled as K and L were doubled, then this production function exhibits decreasing returns to scale. 4) Since output less than doubled (remained unchanged) as K and L were doubled, then this production function exhibits decreasing returns to scale. 5.4 A. Q = 300(10)(20) + 18(20) 2 + 3(10) 2-0.5(20) (10) 3 = 60, , , = 63,250 B. MP L = Q/ L = 300K + 36L - 3L 2 = 300(10) + 36(20) - 3(20) 2 = 3, ,200 = 2,520 MP K = Q/ K = 300L + 6K K 2 = 300(20) + 6(10) (10) 2 = 6, = 6,525 C. AP L = Q/L = (300KL + 18L 2 + 3K 2-0.5L K 3 )/L = 300K + 18L + 3K 2 /L - 0.5L K 3 /L = 300(10) + 18(20) + 3(10) 2 /20-0.5(20) (10) 3 /10 = 3, = 3,150 AP K = Q/K = (300KL + 18L 2 + 3K 2-0.5L K 3 )/K = 300L + 18L 2 /K + 3K - 0.5L 3 /K K 2 = 300(20) + 18(20) 2 /10 + 3(10) - 0.5(20) 3 / (10) 2 = 6, = 6,325

16 WSG5 7/7/03 4:35 PM Page Production 5.5 A. Q/ L = L + K = 0, i.e., the first-order condition for Q maximization. Q/ K = K + L = 0, i.e., the first-order condition for Q maximization. Solving the first-order conditions simultaneously yields L* = K* = B. Q* = 225(15.77) + 100(11.74) - 7.5(15.77) 2-5(11.74) 2 + (11.74)(15.77) = 3, , , = 2,372.61

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

8. Average product reaches a maximum when labor equals A) 100 B) 200 C) 300 D) 400

8. Average product reaches a maximum when labor equals A) 100 B) 200 C) 300 D) 400 Ch. 6 1. The production function represents A) the quantity of inputs necessary to produce a given level of output. B) the various recipes for producing a given level of output. C) the minimum amounts

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

19 : Theory of Production

19 : Theory of Production 19 : Theory of Production 1 Recap from last session Long Run Production Analysis Return to Scale Isoquants, Isocost Choice of input combination Expansion path Economic Region of Production Session Outline

More information

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

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

AP Microeconomics Chapter 12 Outline

AP Microeconomics Chapter 12 Outline I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.

More information

Profit Maximization. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University

Profit Maximization. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University Profit Maximization PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 The Nature and Behavior of Firms A firm An association of individuals Firms Who have organized themselves

More information

Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization

Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization 2.1. Introduction Suppose that an economic relationship can be described by a real-valued

More information

Production Functions

Production Functions Short Run Production Function. Principles of Microeconomics, Fall Chia-Hui Chen October, ecture Production Functions Outline. Chap : Short Run Production Function. Chap : ong Run Production Function. Chap

More information

NAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Midterm II April 30, 2008

NAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Midterm II April 30, 2008 NAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Section I: Multiple Choice (4 points each) Identify the choice that best completes the statement or answers the question. 1.

More information

Sample Midterm Solutions

Sample Midterm Solutions Sample Midterm Solutions Instructions: Please answer both questions. You should show your working and calculations for each applicable problem. Correct answers without working will get you relatively few

More information

MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.

MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11. MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.2011 TİIE 12:30 STUDENT NAME AND NUMBER MULTIPLE CHOICE. Choose the one

More information

Production Function in the Long-Run. Business Economics Theory of the Firm II Production and Cost in the Long Run. Description of Technology

Production Function in the Long-Run. Business Economics Theory of the Firm II Production and Cost in the Long Run. Description of Technology Business Economics Theory of the Firm II Production and Cost in the ong Run Two or more variable input factors Thomas & Maurice, Chapter 9 Herbert Stocker herbert.stocker@uibk.ac.at Institute of International

More information

or, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost:

or, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost: Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.

More information

An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.

An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers. 1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.

More information

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

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

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

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

The Cobb-Douglas Production Function

The Cobb-Douglas Production Function 171 10 The Cobb-Douglas Production Function This chapter describes in detail the most famous of all production functions used to represent production processes both in and out of agriculture. First used

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 July 14 Chapter 11 WRITE: [2] Complete the following labour demand table for a firm that is hiring labour competitively and selling its

More information

Long Run Economic Growth Agenda. Long-run Economic Growth. Long-run Growth Model. Long-run Economic Growth. Determinants of Long-run Growth

Long Run Economic Growth Agenda. Long-run Economic Growth. Long-run Growth Model. Long-run Economic Growth. Determinants of Long-run Growth Long Run Economic Growth Agenda Long-run economic growth. Determinants of long-run growth. Production functions. Long-run Economic Growth Output is measured by real GDP per capita. This measures our (material)

More information

Macroeconomics Lecture 1: The Solow Growth Model

Macroeconomics Lecture 1: The Solow Growth Model Macroeconomics Lecture 1: The Solow Growth Model Richard G. Pierse 1 Introduction One of the most important long-run issues in macroeconomics is understanding growth. Why do economies grow and what determines

More information

Chapter 9: Perfect Competition

Chapter 9: Perfect Competition Chapter 9: Perfect Competition Perfect Competition Law of One Price Short-Run Equilibrium Long-Run Equilibrium Maximize Profit Market Equilibrium Constant- Cost Industry Increasing- Cost Industry Decreasing-

More information

Keynesian Macroeconomic Theory

Keynesian Macroeconomic Theory 2 Keynesian Macroeconomic Theory 2.1. The Keynesian Consumption Function 2.2. The Complete Keynesian Model 2.3. The Keynesian-Cross Model 2.4. The IS-LM Model 2.5. The Keynesian AD-AS Model 2.6. Conclusion

More information

Table of Contents MICRO ECONOMICS

Table of Contents MICRO ECONOMICS economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...

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

The Aggregate Production Function Revised: January 9, 2008

The Aggregate Production Function Revised: January 9, 2008 Global Economy Chris Edmond The Aggregate Production Function Revised: January 9, 2008 Economic systems transform inputs labor, capital, raw materials into products. We use a theoretical construct called

More information

Multi-variable Calculus and Optimization

Multi-variable Calculus and Optimization Multi-variable Calculus and Optimization Dudley Cooke Trinity College Dublin Dudley Cooke (Trinity College Dublin) Multi-variable Calculus and Optimization 1 / 51 EC2040 Topic 3 - Multi-variable Calculus

More information

Long-Run Average Cost. Econ 410: Micro Theory. Long-Run Average Cost. Long-Run Average Cost. Economies of Scale & Scope Minimizing Cost Mathematically

Long-Run Average Cost. Econ 410: Micro Theory. Long-Run Average Cost. Long-Run Average Cost. Economies of Scale & Scope Minimizing Cost Mathematically Slide 1 Slide 3 Econ 410: Micro Theory & Scope Minimizing Cost Mathematically Friday, November 9 th, 2007 Cost But, at some point, average costs for a firm will tend to increase. Why? Factory space and

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

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

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

Review of Fundamental Mathematics

Review of Fundamental Mathematics Review of Fundamental Mathematics As explained in the Preface and in Chapter 1 of your textbook, managerial economics applies microeconomic theory to business decision making. The decision-making tools

More information

INPUTS AND PRODUCTION FUNCTIONS

INPUTS AND PRODUCTION FUNCTIONS besa44438_ch6.qxd 9/23/24 4:18 PM Page 183 6 C H A P T E R INPUTS AND PRODUCTION FUNCTIONS 6.1 INTRODUCTION TO INPUTS AND PRODUCTION FUNCTIONS 6.2 PRODUCTION FUNCTIONS WITH A SINGLE INPUT 6.3 PRODUCTION

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

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

Pre-Test Chapter 25 ed17

Pre-Test Chapter 25 ed17 Pre-Test Chapter 25 ed17 Multiple Choice Questions 1. Refer to the above graph. An increase in the quantity of labor demanded (as distinct from an increase in demand) is shown by the: A. shift from labor

More information

PART A: For each worker, determine that worker's marginal product of labor.

PART A: For each worker, determine that worker's marginal product of labor. ECON 3310 Homework #4 - Solutions 1: Suppose the following indicates how many units of output y you can produce per hour with different levels of labor input (given your current factory capacity): PART

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

Agenda. Productivity, Output, and Employment, Part 1. The Production Function. The Production Function. The Production Function. The Demand for Labor

Agenda. Productivity, Output, and Employment, Part 1. The Production Function. The Production Function. The Production Function. The Demand for Labor Agenda Productivity, Output, and Employment, Part 1 3-1 3-2 A production function shows how businesses transform factors of production into output of goods and services through the applications of technology.

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

13. If Y = AK 0.5 L 0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1,000.

13. If Y = AK 0.5 L 0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1,000. Name: Date: 1. In the long run, the level of national income in an economy is determined by its: A) factors of production and production function. B) real and nominal interest rate. C) government budget

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

Costs. Accounting Cost{stresses \out of pocket" expenses. Depreciation costs are based on tax laws.

Costs. Accounting Cost{stresses \out of pocket expenses. Depreciation costs are based on tax laws. Costs Accounting Cost{stresses \out of pocket" expenses. Depreciation costs are based on tax laws. Economic Cost{based on opportunity cost (the next best use of resources). 1. A self-employed entrepreneur's

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

Pre-Test Chapter 18 ed17

Pre-Test Chapter 18 ed17 Pre-Test Chapter 18 ed17 Multiple Choice Questions 1. (Consider This) Elastic demand is analogous to a and inelastic demand to a. A. normal wrench; socket wrench B. Ace bandage; firm rubber tie-down C.

More information

MICROECONOMICS AND POLICY ANALYSIS - U8213 Professor Rajeev H. Dehejia Class Notes - Spring 2001

MICROECONOMICS AND POLICY ANALYSIS - U8213 Professor Rajeev H. Dehejia Class Notes - Spring 2001 MICROECONOMICS AND POLICY ANALYSIS - U8213 Professor Rajeev H. Dehejia Class Notes - Spring 2001 General Equilibrium and welfare with production Wednesday, January 24 th and Monday, January 29 th Reading:

More information

John Kennan University of Wisconsin-Madison October, 1998

John Kennan University of Wisconsin-Madison October, 1998 The Hicks-Marshall Rules of Derived Demand: An Expository Note John Kennan University of Wisconsin-Madison October, 1998 1. "The demand for anything is likely to be more elastic, the more readily substitutes

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

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

Monopoly and Monopsony Labor Market Behavior

Monopoly and Monopsony Labor Market Behavior Monopoly and Monopsony abor Market Behavior 1 Introduction For the purposes of this handout, let s assume that firms operate in just two markets: the market for their product where they are a seller) and

More information

14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 15, 2007. Lecture 13. Cost Function

14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 15, 2007. Lecture 13. Cost Function Short-Run Cost Function. Principles of Microeconomics, Fall Chia-Hui Chen October, ecture Cost Functions Outline. Chap : Short-Run Cost Function. Chap : ong-run Cost Function Cost Function et w be the

More information

Problem Set #5-Key. Economics 305-Intermediate Microeconomic Theory

Problem Set #5-Key. Economics 305-Intermediate Microeconomic Theory Problem Set #5-Key Sonoma State University Economics 305-Intermediate Microeconomic Theory Dr Cuellar (1) Suppose that you are paying your for your own education and that your college tuition is $200 per

More information

REVIEW OF MICROECONOMICS

REVIEW OF MICROECONOMICS ECO 352 Spring 2010 Precepts Weeks 1, 2 Feb. 1, 8 REVIEW OF MICROECONOMICS Concepts to be reviewed Budget constraint: graphical and algebraic representation Preferences, indifference curves. Utility function

More information

Theoretical Tools of Public Economics. Part-2

Theoretical Tools of Public Economics. Part-2 Theoretical Tools of Public Economics Part-2 Previous Lecture Definitions and Properties Utility functions Marginal utility: positive (negative) if x is a good ( bad ) Diminishing marginal utility Indifferences

More information

Market Supply in the Short Run

Market Supply in the Short Run Equilibrium in Perfectly Competitive Markets (Assume for simplicity that all firms have access to the same technology and input markets, so they all have the same cost curves.) Market Supply in the Short

More information

Econ 202 Exam 3 Practice Problems

Econ 202 Exam 3 Practice Problems Econ 202 Exam 3 Practice Problems Principles of Microeconomics Dr. Phillip Miller Multiple Choice Identify the choice that best completes the statement or answers the question. Chapter 13 Production and

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

Elasticity. I. What is Elasticity?

Elasticity. I. What is Elasticity? Elasticity I. What is Elasticity? The purpose of this section is to develop some general rules about elasticity, which may them be applied to the four different specific types of elasticity discussed in

More information

Agenda. The IS LM Model, Part 2. The Demand for Money. The Demand for Money. The Demand for Money. Asset Market Equilibrium.

Agenda. The IS LM Model, Part 2. The Demand for Money. The Demand for Money. The Demand for Money. Asset Market Equilibrium. Agenda The IS LM Model, Part 2 Asset Market Equilibrium The LM Curve 13-1 13-2 The demand for money is the quantity of money people want to hold in their portfolios. The demand for money depends on expected

More information

I d ( r; MPK f, τ) Y < C d +I d +G

I d ( r; MPK f, τ) Y < C d +I d +G 1. Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the

More information

Ch.6 Aggregate Supply, Wages, Prices, and Unemployment

Ch.6 Aggregate Supply, Wages, Prices, and Unemployment 1 Econ 302 Intermediate Macroeconomics Chul-Woo Kwon Ch.6 Aggregate Supply, Wages, rices, and Unemployment I. Introduction A. The dynamic changes of and the price adjustment B. Link between the price change

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

INTRODUCTORY MICROECONOMICS

INTRODUCTORY MICROECONOMICS INTRODUCTORY MICROECONOMICS UNIT-I PRODUCTION POSSIBILITIES CURVE The production possibilities (PP) curve is a graphical medium of highlighting the central problem of 'what to produce'. To decide what

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

Chapter 4 Online Appendix: The Mathematics of Utility Functions

Chapter 4 Online Appendix: The Mathematics of Utility Functions Chapter 4 Online Appendix: The Mathematics of Utility Functions We saw in the text that utility functions and indifference curves are different ways to represent a consumer s preferences. Calculus can

More information

This is a square root. The number under the radical is 9. (An asterisk * means multiply.)

This is a square root. The number under the radical is 9. (An asterisk * means multiply.) Page of Review of Radical Expressions and Equations Skills involving radicals can be divided into the following groups: Evaluate square roots or higher order roots. Simplify radical expressions. Rationalize

More information

Chapter 04 Firm Production, Cost, and Revenue

Chapter 04 Firm Production, Cost, and Revenue Chapter 04 Firm Production, Cost, and Revenue Multiple Choice Questions 1. A key assumption about the way firms behave is that they a. Minimize costs B. Maximize profit c. Maximize market share d. Maximize

More information

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

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. MBA 640, Survey of Microeconomics, Quiz #4 Fall 2006 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In the short run, A) there are no variable

More information

Production Functions and Cost of Production

Production Functions and Cost of Production 1 Returns to Scale 1 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October, 2007 Lecture 12 Production Functions and Cost of Production Outline 1. Chap 6: Returns to Scale 2. Chap 6: Production

More information

Lecture notes for Choice Under Uncertainty

Lecture notes for Choice Under Uncertainty Lecture notes for Choice Under Uncertainty 1. Introduction In this lecture we examine the theory of decision-making under uncertainty and its application to the demand for insurance. The undergraduate

More information

Definition and Properties of the Production Function: Lecture

Definition and Properties of the Production Function: Lecture Definition and Properties of the Production Function: Lecture II August 25, 2011 Definition and : Lecture A Brief Brush with Duality Cobb-Douglas Cost Minimization Lagrangian for the Cobb-Douglas Solution

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

Microeconomics Instructor Miller Practice Problems Labor Market

Microeconomics Instructor Miller Practice Problems Labor Market Microeconomics Instructor Miller Practice Problems Labor Market 1. What is a factor market? A) It is a market where financial instruments are traded. B) It is a market where stocks and bonds are traded.

More information

Study Questions for Chapter 9 (Answer Sheet)

Study Questions for Chapter 9 (Answer Sheet) DEREE COLLEGE DEPARTMENT OF ECONOMICS EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002 M-W-F 13:00-13:50 Dr. Andreas Kontoleon Office hours: Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:00-17:00 Study

More information

Employment and Pricing of Inputs

Employment and Pricing of Inputs Employment and Pricing of Inputs Previously we studied the factors that determine the output and price of goods. In chapters 16 and 17, we will focus on the factors that determine the employment level

More information

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!!

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! For more, please visit: http://courses.missouristate.edu/reedolsen/courses/eco165/qeq.htm Market Equilibrium and Applications

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

A. a change in demand. B. a change in quantity demanded. C. a change in quantity supplied. D. unit elasticity. E. a change in average variable cost.

A. a change in demand. B. a change in quantity demanded. C. a change in quantity supplied. D. unit elasticity. E. a change in average variable cost. 1. The supply of gasoline changes, causing the price of gasoline to change. The resulting movement from one point to another along the demand curve for gasoline is called A. a change in demand. B. a change

More information

Economics 2020a / HBS 4010 / HKS API-111 FALL 2010 Solutions to Practice Problems for Lectures 1 to 4

Economics 2020a / HBS 4010 / HKS API-111 FALL 2010 Solutions to Practice Problems for Lectures 1 to 4 Economics 00a / HBS 4010 / HKS API-111 FALL 010 Solutions to Practice Problems for Lectures 1 to 4 1.1. Quantity Discounts and the Budget Constraint (a) The only distinction between the budget line with

More information

Constrained optimization.

Constrained optimization. ams/econ 11b supplementary notes ucsc Constrained optimization. c 2010, Yonatan Katznelson 1. Constraints In many of the optimization problems that arise in economics, there are restrictions on the values

More information

ANSWERS TO END-OF-CHAPTER QUESTIONS

ANSWERS TO END-OF-CHAPTER QUESTIONS ANSWERS TO END-OF-CHAPTER QUESTIONS 9-1 Explain what relationships are shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment-demand curve, and (d) the investment schedule.

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

Prot Maximization and Cost Minimization

Prot Maximization and Cost Minimization Simon Fraser University Prof. Karaivanov Department of Economics Econ 0 COST MINIMIZATION Prot Maximization and Cost Minimization Remember that the rm's problem is maximizing prots by choosing the optimal

More information

Increasing for all. Convex for all. ( ) Increasing for all (remember that the log function is only defined for ). ( ) Concave for all.

Increasing for all. Convex for all. ( ) Increasing for all (remember that the log function is only defined for ). ( ) Concave for all. 1. Differentiation The first derivative of a function measures by how much changes in reaction to an infinitesimal shift in its argument. The largest the derivative (in absolute value), the faster is evolving.

More information

CHAPTER 9 Building the Aggregate Expenditures Model

CHAPTER 9 Building the Aggregate Expenditures Model CHAPTER 9 Building the Aggregate Expenditures Model Topic Question numbers 1. Consumption function/apc/mpc 1-42 2. Saving function/aps/mps 43-56 3. Shifts in consumption and saving functions 57-72 4 Graphs/tables:

More information

Chapter 3 Quantitative Demand Analysis

Chapter 3 Quantitative Demand Analysis Managerial Economics & Business Strategy Chapter 3 uantitative Demand Analysis McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Overview I. The Elasticity Concept

More information

CHAPTER 3 CONSUMER BEHAVIOR

CHAPTER 3 CONSUMER BEHAVIOR CHAPTER 3 CONSUMER BEHAVIOR EXERCISES 2. Draw the indifference curves for the following individuals preferences for two goods: hamburgers and beer. a. Al likes beer but hates hamburgers. He always prefers

More information

Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions

Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services

More information

Cost of Production : An Example

Cost of Production : An Example University of California, Berkeley Spring 008 ECON 00A Section 0, Cost of Production : An Example What you should get out of this example: Understand the technical derivation of optimal inputs in Cost

More information

Microeconomics Sept. 16, 2010 NOTES ON CALCULUS AND UTILITY FUNCTIONS

Microeconomics Sept. 16, 2010 NOTES ON CALCULUS AND UTILITY FUNCTIONS DUSP 11.203 Frank Levy Microeconomics Sept. 16, 2010 NOTES ON CALCULUS AND UTILITY FUNCTIONS These notes have three purposes: 1) To explain why some simple calculus formulae are useful in understanding

More information

Microeconomic Theory: Basic Math Concepts

Microeconomic Theory: Basic Math Concepts Microeconomic Theory: Basic Math Concepts Matt Van Essen University of Alabama Van Essen (U of A) Basic Math Concepts 1 / 66 Basic Math Concepts In this lecture we will review some basic mathematical concepts

More information

Figure 4-1 Price Quantity Quantity Per Pair Demanded Supplied $ 2 18 3 $ 4 14 4 $ 6 10 5 $ 8 6 6 $10 2 8

Figure 4-1 Price Quantity Quantity Per Pair Demanded Supplied $ 2 18 3 $ 4 14 4 $ 6 10 5 $ 8 6 6 $10 2 8 Econ 101 Summer 2005 In-class Assignment 2 & HW3 MULTIPLE CHOICE 1. A government-imposed price ceiling set below the market's equilibrium price for a good will produce an excess supply of the good. a.

More information

Chapter 9. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 9. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson Addison-Wesley. All rights reserved Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Chapter Outline The FE Line: Equilibrium in the Labor Market The IS Curve: Equilibrium in the Goods Market The LM Curve:

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

In this chapter, you will learn improvement curve concepts and their application to cost and price analysis.

In this chapter, you will learn improvement curve concepts and their application to cost and price analysis. 7.0 - Chapter Introduction In this chapter, you will learn improvement curve concepts and their application to cost and price analysis. Basic Improvement Curve Concept. You may have learned about improvement

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

Use the following to answer question 9: Exhibit: Keynesian Cross

Use the following to answer question 9: Exhibit: Keynesian Cross 1. Leading economic indicators are: A) the most popular economic statistics. B) data that are used to construct the consumer price index and the unemployment rate. C) variables that tend to fluctuate in

More information