...diminishing marginal product both mathematically and verbally. Does this hypothesis hold in the short run or the long run? Explain. The long run is defined as a period of time sufficiently long so that all inputs to production can be freely varied. In contrast, the short run is a period of time sufficiently short so that at least one input is fixed (cannot be varied). For simplicity, let’s make the standard assumption that the variable input in the short run is labor and proceed by defining the hypothesis in terms of labor. The hypothesis of eventually diminishing marginal product states that as we increase labor while holding all other inputs fixed, we will eventually reach a point where the additional output gained with each increase in labor gets smaller and smaller. (e.g. the 5th baker increases output by 3 loaves, the 6th baker by 2 loaves, the 7th baker by 1.) Since the hypothesis is regarding what we expect to see when we vary one input while holding others fixed, this hypothesis is relevant in the short run and not in the long run. Mathematically, the marginal product of labor is MPL = q( L, K ) . L Under the hypothesis of eventually diminishing marginal product (of labor), the following will eventually hold: 2 q( L, K ) 0. L2 (Again, note that this is a partial derivative, so we are hypothesizing this will be true when capital is held fixed, a short-run situation.) 2) Under what conditions will we see an “S-shaped” total product curve? How does this...
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...SUPPLY: THE THEORY OF PRODUCTION AND COST Grading * straightforward questions & definitions ** challenging questions *** more challenging questions MULTIPLE CHOICE QUESTIONS In economics, the short run is a period of time (*) 2 of one year or less. 3 in which all inputs are variable. 4 in which all inputs are fixed. 5 in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. 6 in which all inputs are variable but technology is fixed. Which of the following statements is correct? (*) 2 The short run is a time period of one year or less. 3 The short run is a period of time during which the quantities of all inputs can be varied, but technology is held constant. 4 The short run is a period of time during which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. 5 The long run is a period of time during which the quantities of all factor inputs are fixed. 6 The time period separating the short run from the long run is at least 3 months. Answer Questions 3 and 4 with reference to the following table, which shows the short-run production function of a polo ball manufacturer. |Number of machines |Number of workers |Output | | | ...
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...involves a short-run decision and which involves a long-run decision? Explain January, 31, 2008: Starbucks will open 75 more stores abroad than originally predicted, for a total of 975. This decision is a long-run decision. It increases the quantity of all of Starbucks’ factors of production, labor and the size of Starbucks’ plant. February, 25, 2008: For three hours on Tuesday, Starbucks will shut down every single one of its 7,100 stores so that baristas can receive a refresher course. This decision is a short-run decision. It involves increasing the quality of Starbucks’ labor and so only one factor of production—labor—changes and all the other factors remain fixed. June, 2, 2008: Starbucks replaces baristas with vending machines. This decision is a short-run decision. It involves changing two of Starbucks’ factors of production, labor and one type of capital. But other factors of production, such as Starbucks’ land and other capital inputs such as the store itself, remain fixed. July, 18, 2008: Starbucks is closing 616 stores by the end of March. This decision is a long-run decision. It decreases the quantity of all of Starbucks’ factors of production, labor and the size of Starbucks’ plant. Labor (workers per week) | Output (surfboards per week) | 1 | 30 | 2 | 70 | 3 | 120 | 4 | 160 | 5 | 190 | 6 | 210 | 7 | 220 | 2. The table sets out Sue’s Surfboards’ total product schedule. a. Draw the total product curve. To draw the total product curve measure...
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...Exercise 8 Solution Chapter 10 Technology, Production, and Costs 10.1 Technology: An Economic Definition 1) A firm has successfully adopted a positive technological change when A) it can produce more output using the same inputs. B) it produces less pollution in its production process. C) can pay its workers less yet increase its output. D) it sees an increase in worker productivity. Answer: A Comment: Recurring Diff: 2 Page Ref: 326/326 Topic: Technological Change Objective: LO1: Define technology and give examples of technological change. AACSB: Reflective Thinking Special Feature: None 2) Which of the following is an example of market "production", as used by economist? A) Garvey takes out a low-cost government loan to start his pet-sitting business. B) Heidi makes a pizza for her family's dinner. C) Katrina works as a cashier at the local produce stand. D) The theatre and film studies department in Fine Art's College stages a play at the local theatre. Answer: D Comment: Recurring Diff: 1 Page Ref: 326/326 Topic: Technology Objective: LO1: Define technology and give examples of technological change. AACSB: Reflective Thinking Special Feature: None 3) A firm increased its production and sales because the firm's manager rearranged the layout of his factory floor. This is an example of A) investment in human capital. B) economies of scale. C) positive...
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...ANSWERS TO End-of chapter QUESTIONS AND exercises Answers to Questions for Review 1. (Explicit and Implicit Costs) Amos McCoy is currently raising corn on his 100-acre farm and earning an accounting profit of $100 per acre. However, if he raised soybeans, he could earn $200 per acre. Is he currently earning an economic profit? Why or why not? Amos McCoy is not currently making an economic profit, despite the fact that he is making an accounting profit. This is so, because the accounting profit calculation does not take into account an important implicit cost—the opportunity cost of not raising soybeans. Actually, McCoy is experiencing an economic loss. According to our theory, he should get out of the corn business and begin growing soybeans. This question highlights the important distinction between accounting profit and economic profit. 2. (Explicit and Implicit Costs) Determine whether each of the following is an explicit cost or an implicit cost: a) Payments for labor purchased in the labor market b) A firm’s use of a warehouse that it owns and could rent to another firm c) Rent paid for the use of a warehouse not owned by the firm d) The wages that owners could earn if they did not work for themselves a) explicit; b) implicit; c) explicit; d) implicit 3. (Alternative Measures of Profit) Calculate the accounting profit or loss as well as the economic profit or loss in each of the following situations: ...
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...Perfect Competition Market Characteristics ……..………………….5 1.2. Perfect Competition Supply and Demand…………………………...9 CHAPTER II Perfect Competition Short-Run Supply………………………………..13 2.1. Short-Run Production Alternatives of a Competitive Firm………... .13 2.2. Short-Run Equilibrium and Supply Curve ………………………… 23 CHAPTER III Perfect Competition Long-Run Supply………………………………29 3.1. Long-Run Equilibrium Conditions…………………………………..29 3.2. Long-Run Industry Supply Curve…………………………………...33 3.3. Perfect Competition Market Efficiency……………………………...36 CHAPTER IV Practical analysis……………………………………………………..41 CONCLUSIONS……………………………………………………………………...45 LITERATURE………………………………………………………………………...47 APPENDIX…………………………………………………………………………...49 INTRODUCTION The issue of supply in the perfect competition conditions is a rather complex topic. It comprises of many crucial points that I will try to identify and explain. Some of them will be caused by the perfect competitive conditions’ regulations of the general processes of the supply formation, profit maximization, equilibrium achieving and others, dictated by the characteristics of the perfect competition itself, such as a large number of small firms, identical products sold by all firms, perfect resource mobility or the freedom of entry into and exit out of the industry, and perfect knowledge. It is obvious that when dealing with perfect...
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... Creativity- indv max. their personal satisfaction given resource constraints Marginal Analysis and Benefits- more than dollars and cents 1. When to use it: in your own life and to change behavior 2. Sunken cost- costs and benefits that have already occurred a. Irrelevant to economic decision making b. Use opportunity cost rather than historic cost *Sunk cost fallacy: tendency to throw good money after bad 3. Opportunity cost: The value of the best alternate use 4. Indifference curves: preferences (all combinations of goods that yield the same utility.) Most people balance combinations/utility is max @ the pt of tangency btween the constraint and an indifference curve 5. If benefits are greater than the costs= DO IT 6. Explicit cost: opportunity cost that involves direct monetary payment 7. Implicit cost: opportunity cost that does not involve monetary payment (time) 8. Economic profit: takes into account implicit and explicit costs Accounting profit: only takes explicit cost into account 9. Risk premium: ppl will pick the option with the most certainty. Different Models -Happy-is-Productive: satisfied employees provide better service -Economic: highly compensated/paid employees provide better service -Good citizens: no need for incentive pay b/c ppl are intrinsically interested in a doing a good job; employees place employers’ interest before their own -Product of the environment: upbringing determines behavior *Economic model...
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...quantity is the: Long run. Production run. → Short run. Investment decision. | 20-3. The change in total output associated with one additional unit of input is the: Opportunity cost of the output. Average productivity. → Marginal physical product. Marginal cost. | 20-4. If a firm could hire all the workers it wanted at a zero wage (i.e., the workers are volunteers), the firm should hire: Enough workers to produce the output where diminishing returns begin. Enough workers to produce the output where worker productivity is the highest. → Enough workers to produce where the MPP equals zero. All the workers that can fit into the factory. | 20-5. Ceteris paribus, the law of diminishing returns states that beyond some point, the: Returns on stocks and bonds diminish with higher security prices. Addition to total utility diminishes as more units of a good are consumed. → Marginal physical product of a factor of production diminishes as more of that factor is used. Output of any good increases as more of a variable input is used. | 20-6. Which of the following is the best explanation of why the law of diminishing returns does not apply in the long run? → In the long run, firms can increase the availability of space and equipment to keep up with the increase in variable inputs. The MPP does not change in the long run. In the long run, firms have enough time to find the most qualified workers. All factors of production are fixed in the long run. | 20-7. The most...
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... CONTENTS 1. Introduction 2. Types of costs 3.1 Opportunity, implicit and explicit costs 3.2 Fixed and variable costs 3.3 Average costs 3. Types of cost curves 4.4 Marginal cost curve 4.5 Average cost curves 4. Costs in Short run and in the Long run 5.6 Short run 5.7 Long run 5.8 Economies of scale 5. Cost analysis in the real world 6.9 Economies of scope 6.10 Experiential learning & technological advances 6.11 Many dimensions 6.12 Unmeasured costs 6. Conclusion SUMMARY REFERENCES SUMMARY This study examines the different types of costs such as opportunity, implicit, explicit, fixed, variable and average costs that a firm would incur in order to carry out the production process. It talks about different types of cost curves to understand various measures of cost and establish a relationship between the changing patterns of different cost curves. It also tells how costs vary significantly in the long run and in the short run and how it effects the firms’ production and pricing decisions. Apart from the standard model, it also tells about the real world scenario in which the situations are even more complex than that of a text book. IT emphasizes...
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...CHAPTER 7 PRODUCTION AND COST IN THE FIRM QUESTIONS FOR REVIEW 1. (Explicit and Implicit Costs) Amos McCoy is currently raising corn on his 100-acre farm and earning an accounting profit of $100 per acre. However, if he raised soy beans, he could earn $200 per acre. Is he currently earning an economic profit? Why or why not? a. No he is not. He could be earning $100 more per acre and gaining that in economic profit. 2. (Explicit and Implicit Costs) Determine whether each of the following is an explicit cost or an implicit cost: a. Payments for labor purchased in the labor market i. Explicit b. A firm’s use of a warehouse that it owns and could rent to another firm i. Implicit c. Rent paid for the use of a warehouse not owned by the firm i. Explicit d. The wages that owners could earn if they did not work for themselves i. Implicit 3. (Alternative Measures of Profit) Calculate the accounting profit or loss as well as the economic profit or loss in each of the following situations: a. A firm with total revenues of $150 million, explicit costs of $90 million, and implicit costs of $40 million i. Accounting Profit: $60 Million ii. Economic Profit: $20 Million b. A firm with total revenues of $125 million, explicit costs of $100 million, and implicit costs of $30 million i. Accounting Profit: $25 Million ii. Economic Loss: $5 Million c. A firm with total revenues of $100 million, explicit costs of $90 million, and implicit costs of $20 million i. Accounting...
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...revenue by • A. increasing production • B. decreasing production • C. increasing price • D. decreasing price Bottom of Form Correct : To increase revenue, firms look to increase price or quantity, as price multiplied by quantity equals total revenue. Purely competitive firms can sell as much as they want at the market price. Adding additional units of the product does not result in a change in the market price. Therefore, since purely competitive firms do not influence price, they increase total revenue by increasing quantity. Materials • Profit-Maximizing Case Top of Form 2 . What are two ways for a competitive firm to determine the optimal level of production, that is, the level of production that will maximize profit or minimize losses? • A. Comparing total revenue to total cost or marginal revenue to marginal costs • B. Comparing average revenue to average costs or marginal revenue to marginal costs • C. Comparing average variable costs to price or marginal revenue to price • D. Comparing total revenue to average variable costs or price to average variable costs Bottom of Form Correct : A firm can look at two factors when considering whether it is maximizing profit or minimizing losses. First, it can find the maximum difference between total revenue and total cost. Second, a firm can look at the additional revenue gained from selling one more unit and at the additional cost from producing that additional unit. As long...
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...per unit, its accounting: a. profits were $100,000 and its economic profits were zero. b. losses were $500,000 and its economic losses were zero. c. profits were $500,000 and its economic profits were $1 million. d. profits were zero and its economic losses were $500,000. 3. Which of the following is a short-run adjustment? a. A local bakery hires two additional bakers. b. Six new firms enter the plastics industry. c. The number of farms in the United States declines by 5 percent. d. BMW constructs a new assembly plant in South Carolina. 4. The first, second, and third workers employed by a firm add 24, 18, and 9 units to total product respectively. Therefore, we can conclude that: a. marginal product of the third worker is 9. b. the third worker has to work with poorer-quality tools and raw materials. c. the firm will not want to hire more than three workers. d. the first worker puts forth more effort than the second and third workers. 5. In the diagram, the range of diminishing marginal returns is: a. 0Q3. b. 0Q2. c. Q1Q2. D . Q1Q3. 6. If you operated a small bakery, which of the following would be a variable cost in the short run? a. Baking ovens. b. Interest on business loans. c. Annual lease payment for...
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...transformation of inputs or resources into output of goods and services. Inputs are the resources used in the production of goods and services and are generally classified into three broad categories—labour, capital and land or natural resources. They may be fixed or variable. Fixed Inputs are those that cannot be readily changed during the time period under consideration except, perhaps at a very great expenses. (e.g., a firm’s plant). Variable Inputs are those that can be varied easily and on very short notice (e.g., most raw materials and unskilled labour). The time period during which at least one input is fixed is called the Short-Run, while the time period when all inputs are variable is called the Long-Run. The length of the long-run depends on the type of industry, e.g., the long-run for a dry cleaning business may be a few weeks or months. Generally, a firm operates in the short-run and plans increases or reductions in its scale of operation in the long-run. In the long-run, technology generally improves, so that more output can be obtained from a given quantity of inputs, or the same output from less inputs. Production Function: a mathematical model relating the maximum quantity of output that can be produced from given amounts of various inputs. –or a schedule (table, equation) showing...
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...competition TOP: Market power MSC: Definitional 2. A book store that has market power can a. influence the market price for the books it sells. b. minimize costs more efficiently than its competitors. c. reduce its advertising budget more so than its competitors. d. ignore profit-maximizing strategies when setting the price for its books. ANS: A PTS: 1 DIF: 1 REF: 14-0 NAT: Analytic LOC: Perfect competition TOP: Market power MSC: Applicative 3. The analysis of competitive firms sheds light on the decisions that lie behind the a. demand curve. b. supply curve. c. way firms make pricing decisions in the not-for-profit sector of the economy. d. way financial markets set interest rates. ANS: B PTS: 1 DIF: 1 REF: 14-0 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 4. For any competitive market, the supply curve is closely related to the a. preferences of consumers who purchase products in that market. b. income tax rates of consumers in that market. c. firms’ costs of production in that market. d. interest rates on government bonds. ANS: C PTS: 1 DIF: 1 REF: 14-0 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Interpretive 5. Suppose a firm in each of the two markets listed below were to increase its price by 20 percent. In which pair would the firm in the first market listed experience a dramatic decline in sales, but the firm in the second market listed would not? a. corn and soybeans b. gasoline...
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...the choice of optimal output in the short run, thereby revealing the underlying structure of short-run supply curves, the choice of output in the long run and long-run competitive equilibrium. Along the way, the concepts of producer surplus and economic rent are introduced, and the chapter ends with development of the long-run industry supply curve. Section 8.1 identifies the three basic assumptions of perfect competition and section 8.2 discusses the assumption of profit maximization as the goal of the firm. Students often find some of these assumptions to be unrealistic and/or very restrictive, so it is important to acknowledge that the world is more complex, but remind them that our goal is prediction. Although the world does not work quite as simply as the model of perfect competition suggests, the model predicts quite well even when some of the assumptions hold loosely at best. To put perfect competition in perspective, it can be helpful to give a brief overview of monopoly, oligopoly, and monopolistic competition before or after presenting the assumptions of perfect competition. Restrict this discussion to identifying the number of firms in the industry, product differentiation, and barriers to entry and exit. This has the added benefit of stimulating student interest in future topics. Section 8.3 derives the general result that any firm wanting to maximize profit should produce where marginal revenue is equal to marginal cost. It also identifies perfect competition...
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