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Question 2

Quantity of Computers Produced -2 3,000 2,200 2,000 o Cost of each car computers 1.3 Cost of each car computers Cost of each car computers 6.6 600 700 Quantity 1,000 of Cars Produced

  • Concave-to-the-origin production possibilities frontiers are due to the law of increasing costs

Question 8

  • Economic profits = (Demand - ATC) * Quantity

Price Price Average total cost Profit (a) Firm Makes Profit Profit- maximizing quantity MC ATC Demand Quantity

Price Average total cost Price Losses Loss- minimizing quantity (b) Firm Makes Losses MC ATC Demand Quantity

Question 10

(a) Existing Firm Response to Price, cost $18 14 Price (b) Short-Run and Long-Run Market Response to Increase in Demand Long-run industry supply curve, LRS (c) Existing Firm Response to Increase in Demand An increase in demand rmses pnce and profit. x Price, cost New Entrants Higher industry output from new entrants dhves price and profit back down. MC ATC Quantity MKT MKT QxQr •ZMkT D Qz Quantity MC ATC Quantity Increase in output from new entrants Panel (b) shows how an industry adjusts in the short and long run to an increase in demand; panels (a) and (c) show the corresponding adjustments by an existing firm. Initially the market is at point XMKT in panel (b), a short-run and long-run equilibrium at a price of $14 and industry output of Qx. An existing firm makes zero economic profit, operating at point X in panel (a) at minimum average total cost. Demand increases as DI shifts rightward to D2 in panel (b), raising the market price to $18. Existing firms increase their output, and industry output moves along the short-run industry supply curve Sl to a short-run equilibrium at YMKT. Correspondingly, the existing firm in panel (a) moves from point X to point Y. But at a price of $18 existing firms are profitable. As shown in panel (b), in the long run new entrants arrive and the short-run industry supply curve shifts rightward, from Sl to S2. There is a new equilibrium at point ZMKT, at a lower price of $14 and higher industry output of Qz. An existing firm responds by moving from Y to Z in panel (c), returning to its initial output level and zero economic profit. Production by new entrants accounts for the total increase in industry output, Qz— Qx. Like XMKT, ZMKTis also a short-run and long-run equilibrium: with existing firms earning zero economic profit, there is no incentive for any firms to enter or exit the industry. The horizontal line passing through XMKT and ZMKT, LRS, is the long-run industry supply curve: at the break-even price of $14, producers will produce any amount that consumers demand in the long run.

  • An increase in demand will cause no change in the long-run equilibrium price for a constant-cost perfectly competitive industry.

Question 21

Machine generated alternative text: PRICE/COST PS P3 P2 - 0 Marginal 0 , Average Total Cost 01 02 Q3 04 05 06 Marginal RA , venue , ATTENDANCE

  • With the conditions of a natural monopoly, long-run average total cost decreases as output increases

Question 25

  • If the average variable cost of producing 5 units of a good is $100 and the average variable cost of producing 6 units is $150, then the marginal cost of increasing output from 5 to 6 units is _____.

  • 6 * 150 - 5 * 100 = 400

Question 28

  • economic profit

    • The difference between the total revenue received by the firm from its sales and the total opportunity costs of all the resources used by the firm.
  • accounting profit

    • The total revenue minus costs, properly chargeable against goods sold.

Question 34

i)ud ru!Gu0 001 aoud ut aiurqo aamiaond puetuap JO papuetuap Kmuenb = aogd u! ajueqo ainu

The price elasticity of demand determines whether the demand curve is steep or flat. Note that all percentage changes are calculated using the midpoint method 2.... 2.. 2.. 1 FIGURE The Price Elasticity of Demand (a) Perfectly Inelastic Demand: Elasticity Equals 0 (b) Inelastic Demand: Elasticity Is Less Than 1 Price $5 4 1. An Increase n price . 0 Price $5 4 Increase •n price 0 Demand IOO Price $5 4 Increase In pnce . Quantity 90 IOO Demand Quantity leaves the quantity demanded unchanged. .. leads to an 11% decrease in quantity demanded. (c) Unit Elastic Demand: Elasticity Equals 1 Price $5 4 Increase In price 0 IOO Demand Quantity .. leads to a 22% decrease in quantity demanded. 2.. (d) Elastic Demand: Elasticity Is Greater Than 1 50 IOO Demand Quantity Price $4 0 (e) Perfectly Elastic Demand: Elasticity Equals Infinity . At any price above $4, quantity manded is zero. Demand . At exactly $4, consumers will buy any quantity. Quantity .. leads to a 67% decrease in quantity demanded. 3. At a price below $4, quantity demanded is infinite.

Question 38

  • MR = P = AR = D is above the ATC curve

  • Make sure the ATC and MC intersect at the minimum ATC

  • The market is always right!

  • Economic Profit shaded in green

  • P > minimum ATC, Firm profitable.

  • Entry into industry in the long run.


Question 42

  • If the demand for labor is relatively inelastic, an increase in the effective minimum wage will have less of an impact on employment

Question 43

Machine generated alternative text: Cost minimization or least COSt combination Of resources for a give n I eve 1 Of output The basic concept here is that the firm will find the least cost com- bination of 0 resources when the marginal physical product (MPPL) of one resource, labor, per its marginal factor (MFCL) is equal to the marginal phys- ical product (MPPK) of another resource, capital ( K) per marginal factor cost (MFCK) MPPL MPPK MFCL MFCK or where PL an d PK a re constant factor COStS in perfectly competitive resource marketso MPPL MPPK You may find a few questions on this cost minimization on the exam 。 The important thing to note is that the 仍 are equal, not necessarily the mar- ginal physical products, In Other WO rds , cost minimization is ach i eve d for a give n output when the extra product produced by labor per its cost is equal to the ext r a product produced by capital per its cost. NO Other combination Of inputs, labor and capital, Will produce any improvement in resource efficiency.

Question 46

  • The opportunity cost of …

    • … going to college for a year is not just the tuition, books, and fees, but also the foregone wages

    • … seeing a movie is not just the price of the ticket, but the value of time you spend in the theater

Question 47

  • Scarcity exists when the amount of the good or resources offered is less than what users would want if it were given away free.

  • Free or nonscare goods such as natural resources: oxygen and sun's rays are available in abundance

Question 51


  • The demand curve for a normal good is downward sloping because the income and substitution effects move the quantity demanded in the same direction.

  • Income effect:

    • The money saved can be used for buying another commodities. This can be termed as Additional Income

    • E.g. when the income increases, individuals buy expensive products instead of inferior products

  • Substitution effect:

    • It's an effect which is caused by rise in prices that induces a consumer to buy a relatively lower-priced good and less of a higher-prices one.

    • This is forced to occur due to fall in income or rise in prices

Question 54

Product Market Characteristics 1. Numbers of Sellers 2. Availability of Substitutes 3. Degree of Elasticity 4. Similarity of Products 5. Pricing Policy/ Strategy High value 6. Barriers to Entry/Exit 7. Efficiency/* Rent-Seeking 8. Eco. Profits* 9. P, MC* 10. p MR Many (they are pricetakers from the market). One product type available (fully substitutable) available from atl sellers. Perfectly elastic. Homogeneous products from all sellers. No pricing policy or strategy. Price at market price, price- takers. No barriers to entry/exit. Efficient. Each seller prices at cost. No rents. Only transfer earnings. Zero economic profits. Price = Minimum AC. Ideal sociai pricing P = MC p = MR Fewer than perfect competition, more than oligopoly/ monopoly (some price-makers). Imperfect substitutions. Imperfect elasticity. Depends on degree of innovation. Heterogeneous. Mostly non-price competition; some independent pricing. Weak barriers to entry/exit. Inefficiency, excess capacity since P = AC (but not at minimum). p = AC; tendency for LR zero economic profits. P > MC idop&ly Few sellers who have some control of market share; interdependence. Fewer substitutes available = market pricing power. Varies. Greater elasticity at high prices. Lower elasticity at lower prices. Some markets— homogeneous for specialty products. Other markets heterogeneous products. Much interdepen- dence in pricing. Some evidence of monopoly pricing • poli Formidable barriers to entry/exit. Monopoly pricing power leads to waste/inefficiency. Some economies of scale. Tendency for existence of LR economic profits, p > MC One seller for whom there are no close substitutes. No close substitutes available. Generally inelastic but still elastic at higher prices. FolEows from #1—3 above. Heterogeneous since there are no close substitutes. Monopoly pricing power. High value to ratio: P-MC Complete barriers to entry by definition. Dead-weight loss of monop- oly (loss to society beyond monopoly profits and reduced consumer surplus). Empirical evi- dence of LR economic profits. P > MC Long run tendencies at equilibrium.

Price, cost, marginal revenue -ATC MC MG,c (b) Long-Run Equilibrium in Monopolistic Competition MC ATC QMC Quantity Minimum-cost output

Question 57

  • Advertising is frequently used by monopolistic competition to

    • Increase demand

    • Reduce demand elasticity


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