Econ 3710 .edu



Econ 3710

STUDY GUIDE FOR FINAL**

**Disclaimer-This study guide is not exhaustive. The final will be comprehensive, so be sure to also review material that was discussed prior to the second material.

Major (New) Topics:

Costs

a. Relationship between marginal productivity and marginal costs

b. Relationship between marginal costs and average costs

c. General shape of various cost curves

How to find cost minimizing allocation of inputs

a. Marginal rate of Technical Substitution

b. Shapes of different production functions

c. Marginal productivity per dollar

d. Differences between nations

Profit Maximization

a. The distinction between economic and accounting profit

b. Marginal revenue and Marginal costs

Perfect Competition

a. Conditions of perfectly competitive firms

b. Determining profit maximizing quantity and profits from graph

c. Relationships between costs/revenue (TR and TC, MR and MC) and profit

i. Relating graphs

ii. Calculating MR and MC from TR and TC functions

d. True importance of the P=MC condition

e The shutdown rule

f. Long-run equilibrium price conditions

i. Minimum of ATC

g. Why and how economic profits equal zero in the long run for perfectly competitive firms

h. Competitive Market Efficiency

i. Consumer and Producer Surplus

ii. Deadweight Loss from government intervention

Monopoly

a. Barriers to Entry/Sources of market power

b. Calculating marginal revenue from demand

c Determine profit maximizing quantity, price and profits on a graph

d. Comparing competitive equilibrium to monopoly outcome

i. Deadweight loss area associated with monopoly

e. Price discrimination

i. Examples

ii. First, second, and third degree

-Two part tariffs

-Quantity and surplus areas with perfect price discrimination

Practice Problems. I will post the answers to these problems on the class website by Friday, May 1. Study hard and you will do well! See you Tuesday 5/5 at 3:15 pm.

1. If the marginal product of labor is currently 10, and the marginal rate of technical substitution is currently 20, what does the marginal product of capital equal?

2. A firm has access to two production processes with the following marginal cost curves:

MC1=0.4Q and MC2= 2 + 0.2Q

a. If it wants to produce 8 units of output, how much should it produce with each process?

3. You have been hired by the IRS to audit a dead economist's consulting firm. He left his records incomplete so that only a student trained in economics could fill in the blanks.

Clients |Total Costs |Total Fixed Costs |Total Variable Costs |Average Total Costs |Average Variable Costs |Average Fixed costs |Marginal Costs | |0 | |100 | | | | | | |1 | | |75 | | | | | |2 | | | | | | |65 | |3 | | |230 | | | | | |4 | | | |112.5 | | | | |5 | | | | |100 | | | |6 | | | | | | |200 | |7 |1100 | | | | | | | |Does the consulting firm exhibit diminishing returns for any number of clients between 0 - 7?

4. Doug wants to go into the donut business. For $500 per month he can rent a bakery complete with all the equipment he needs to make a dozen different kinds of donuts (K=l). He must pay unionized donut bakers a monthly salary of $400 each. He projects his production function to be Q = 5KL (where Q is tons of donuts).

a. What is Doug's monthly total cost function, variable cost function, and marginal cost?

b. How many bakers will Doug hire to make 25 tons of donuts?

c. What will happen to Doug's total cost if his production function turns out to be Q=2KL?

5. A firm’s production is given by Q = K1/3L2/3; the price of labor (w) equals $12 and the price of capital (r) equals $16.

a.) What is the optimal amount of capital and labor needed to produce 2,000 units?

b.) What do their total costs equal?

6. Suppose your firm uses labor and capital in the production of commodity X. You are currently employing 15 workers and 30 units of capital. The total wage bill (L x w) is $800 per day, and the total capital payments bill is $1200 per day (K x r).

a. Suppose that you know that the marginal physical products of labor and capital are 20 and 18 respectively. Is your firm currently minimizing long run costs? Explain.

b. Alternatively, assume that your firm is indeed minimizing long run costs. What is the long run marginal cost of output if you are certain that the marginal product of capital, MPk, at the current output rate is 10? Explain.

7. Assume a firm has total revenue function given by TR = 80Q and a total cost function given by TC = 200 + Q2. Solve for their profit maximizing quantity and price. What do their profits equal?

8. Suppose a representative firm in a perfectly competitive, constant cost industry has a cost function TC = 4Q2 + 100Q + 100.

a. What is the long-run equilibrium price for this industry?

b. If market demand is given by the function Q = 1000 – P, where P denotes price, what is the total quantity produce sold in this market? If all firms produce the same quantity, what is the total number of firms in this market?

9. Use the following production/cost table to answer the following questions.

Labor Output(Q) Fixed Costs Variable Costs Total Costs Marginal Costs

0 0 ____ 0 400

1 10 ____ ____ 450 ____

2 22 ____ 100 ____ ____

3 30 ____ 150 ____ ____

4 38 ____ 200 ____ ____

5 40 ____ 250 ____ ____

6 41 ____ 300 ____ ____

a. Fill in the blanks in the table above.

b. If this firm sells all its output at a constant price of $25, what is the profit maximizing Q?

c. What do their profits equal?

10. Use the following diagram representing a perfectly competitive firm to answer the following questions

a) What is the profit maximizing quantity?

b) What does revenue equal at the profit maximizing Q?

c) What do total costs equal at the profit maximizing Q?

d) What does profit equal at the profit maximizing Q?

[pic]

11. Refer to the graph above. If the market price increases from $50 per unit to $60 per unit, how will a profit-maximizing perfectly competitive firm change their output?

12. Suppose a firm is earning negative profit, but is continuing to operate. What do we know must be true of TC compared to TR, and VC compared to TR? What do we know must be true of ATC compared to P, and AVC compared to P?

13. Suppose a barber shop has fixed cost equal to $1,000/month and total costs equal to $5000/month. This shop will continue to operate in the short run as long its total revenue is greater than ____?

14. Explain what Adam Smith was referring to when he used the analogy of an “invisible hand” leading us and guiding the allocation of resources in society?

15. Give the formulas for economic and accounting profit. Why can economic profits never be below accounting profit?

16. If total revenue=$3,000, explicit costs=$2,000, and implicit costs=$1,200, what is this firms economic and accounting profit?

17. What does it mean when economic profits are negative for a firm (mathematically and intuitively)?

18. A firm’s accounting profit is $20,000, economic profit is $5,000, and total revenue equals $100,000. What do their explicit costs and what implicit costs equal?

19. Draw the MR, MC, ATC curves for a perfectly competitive firm that is earning zero profit.

20. Explain the sequence of events that will occur when firms are earning economic profits in a perfectly competitive industry by filling in the blanks below:

1. Firms _______________ the industry; 2. Market _______________ shifts _______________. ;

3. Equilibrium price _______________. ; 4. Firms’ marginal _______________ ___________;.

5. Firms’ profits _______________ to zero.

21. Suppose farmers suddenly can earn considerably more per acre from growing wheat than from growing potatoes. What can we expect will happen in the long run as far as number of farmers in each industry and the prices of each good?

22. In a competitive industry consisting of 10,000 firms, the short-run marginal cost curve for each firm is given by MC = 200 + 30Q, and supply for the industry is given by 200 + .003Q. The demand curve faced by the industry is given as P = 400 - .002Q.

a. Calculate the equilibrium price and quantities for the industry and each firm.

b. Calculate the producer and consumer surplus at the equilibrium price.

23. Suppose you are a profit maximization consultant for firms (which means you’re a consultant). Given the selected information, select one of the following recommendations for each firm and briefly explain why that is your recommendation. The options are:

a. Remain at the current output level.

b. Increase output.

c. Decrease output.

d. Shut down.

e. Go back and recalculate your figures because the ones supplied are not correct.

Firm P MR TR Q TC MC ATC AVC

1 $3.90 $3.00 2000 $7400 $2.90

2 $9.00 $44000 4000 $9.00 $11.90 $10.74

3 $35.90 $37.90 5000 $37.90 $35.90

24. A monopolist has a demand curve given by P = 100 - Q and a total cost curve given by

TC = 16 + Q2. Find the monopolist’s profit-maximizing quantity and price. How much economic profit will the monopolist earn?

25. Now suppose the monopolist in question 13 has a total cost curve given by TC = 32 + Q2 (Fixed costs have doubled). Find the monopolist’s profit-maximizing quantity and price. How much economic profit will the monopolist earn?

26. Now suppose the monopolist in question 13 has a long-run marginal cost curve given by MC = 20. What is the deadweight loss area associated with this monopolist?

[pic]

Suppose the firm above is able to price discriminate, charges a price of $80 for the first 120 units, and a price of $60 for the next 50 units. Calculate the change in consumer and producer surplus and deadweight loss as a result of this price discrimination (compared to if they were a single price monopolist).

28. Use the following diagram representing a monopoly to answer the following questions

a.) What is the profit maximizing quantity of production?

b.) What is the profit maximizing price to charge?

c.) What do profits equal?

d.) What could we expect price and quantity to be if this were a competitive industry?

e.) What would the quantity sold be if this were a perfectly price discriminating monopolist?

f.) What would the deadweight loss equal if this were a perfectly price discriminating monopolist?

-----------------------

20

15

14

Q

800

600

500

400

MC

ATC

AVC

d=MR

6

P

$80

$60

$40

120 170

D

D

MR

MC

Q

P

3

9

8

7

3000 3300

2400

5000

MR

12

11

Q

MC

ATC

D

P

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download