# Theories of Returns. Total Product. Unit of workers

Size: px
Start display at page:

Download "Theories of Returns. Total Product. Unit of workers"

Transcription

1 Theories of Returns Production Function: It shows a mathematical relationship between input factors and the output. Production function may be of the short run or the long run. A rational producer always looks for the least cost combinations. He evaluates different methods or theories in short run as well as in the long run to get that combination. Theory of diminishing marginal return According to this theory, under the given circumstances as a firm adds successive units of variable factors to the fixed factor of production, marginal return increases and eventually diminishes. Following assumptions should be considered to prove this theory. a) This is a theory of short run where there is minimum of one fixed cost. b) Labour and land are the factors which is used to produce given goods c) Land is the fixed factor, whereas labour is a variable factor of production d) All workers are homogenous e) State of technology is given. f) Price of the product remains the same. Unit of workers Total Product Marginal Product Average Product In the above table it is shown as there is an increase in number of labourers marginal product increases and then diminishes. TR MR AR O Number of workers

2 As firm employee s worker 1, 2 and 3, marginal product increases, it is called increasing marginal return. By employing 4 th worker marginal product remains the same; it is called constant marginal return. But afterwards marginal product starts decreasing; it is the stage of diminishing return. Conclusions:. (a) Marginal product always intersect Average product from its maximum point (b) When marginal product approaches to zero total product will be maximum (c) When average product approaches to zero total product will be zero too. (d) When marginal product is negative, total product starts falling. A rational producer wants to produce maximum of goods with in the given resources. Therefore, whenever he employs an additional worker he makes the comparison between marginal product and the price of the factor. He will employ up to that extent where marginal product is equal to price of the factor. That is, MP=P Hence MP p 1 He employs different factors at one time therefore, in all cases MPa MPb MPc 1, 1, 1 Pa Pb Pc Hence, MPa MPb MPc MPn..= Pa Pb Pc Pn It is called law of variable proportions. This states ceteris paribus a rational producer employs factors up to that extent where ratio of marginal product and price is equal to the ratio of marginal product and price of the other product. Note that the law of diminishing returns assumes that all units of labor are of equal quality. Each successive worker is presumed to have the same innate ability, motor coordination, education, training, and work experience. Marginal product ultimately diminishes, not because successive workers are less skilled or less energetic but because more workers are being used relative to the amount of plant and equipment available. Limitations of the Theory This is a theory of short run but firms usually take long run decisions, Return to scale It is a concept of the long run. In this case firm changes its size of production. For example, if firm changes its size of production and output is changed at greater proportion, it will be considered, increasing return to scale. If output changes at the same proportion, it is called as constant return to scale. However if output changes but at lesser proportion, it is called decreasing returns to scale. MP2 AP2 Return to scale MP1 AP1 MP3 AP3 Out put

3 Since a long run consist on many short runs, therefore a period of return to scale also consist on many periods of diminishing returns as is shown in the above fig. Production and time period Very Short run or momentary time period In this time period a firm is unable to change its output because all input factors are fixed. In momentary time period supply is perfectly inelastic and is called as fixed elastic. Short run In the short run a firm may change its output by bringing changes in some of its variable factors of production. However, minimum of one of the factor remain fixed. Long run In the long run firm increases its output by changing its size of production. In this time period all factors of production are varied. Long run is nothing in itself; it is made up of many short runs. Very long run In very long run there are some technological changes. In this time period there is a change in pattern of production. For example, from manual work to mechanization or automation. Fixed factors of production These factors remain the same in a production process in the given period of time. For example, in the above case land is the fixed factor of production. Variable factors of production These factors vary in a production process usually in the same direction with the output over a period of time. For example, in the above illustration labour is an example of variable factor of production. Iso Quant and Iso Cost Curves Iso quant curve shows certain level of output even by employing different combinations of given input factors. To draw iso quant curve, it is assumed that there are just two factors of production i.e., capital and labour, and these factors are producing the certain output, e.g., 100 units of the given commodity. Iso quant map consist on many Iso quant curves, which shows different level of output. As it shifts outwards, it shows better level of production, and if it shifts leftwards, it shows relatively low level of output. Iso quant curves are negatively sloped as increase in one factor of production will decrease another factor, backwards bending due to marginal rate of technical substitution and non-intersecting because each iso quant curve shows certain level of output but as they intersect, level of output will be the same which is not possible. Marginal rate of substitution means the rate at which one factor has to be decreased in order to retain the same level of productivity if another factor is increased. The marginal rate of technical substitution shows the tradeoffs between factors, such as capital and labor, that a firm must make in order to keep output constant. The marginal rate of technical substitution diminishes means that lesser units of one factor has to forgo to employ an additional unit of another factor.

4 Capital Iq 3 O Iq 1 Iq 2 Labour Iso cost curve shows, different combinations of given input factors which can be purchased by a firm under given conditions i.e., budget is given, input factors are given, no change in their prices and firm will have to spend all of its budget. Iso cost curve may be shifted if there is a change in the budget or prices of input factors. Iso cost curve may be shifted completely, or there is a pivotal or intersecting shift. Capital Iso Cost Labour A firm gains least cost combination at that point where Iso cost curve making tangent to the Iso quant curve.

5 Capital A K 1 E B Iq 3 Iq 1 Iq 2 Labour O L 1 Short run Cost and cost curves Short run Total cost These are expenditures which incur by a firm to produce a given level of output. For instance, if a firm incurs expenditures of \$100 to produce 10 units, it will be considered as total cost of production. Short run Fixed cost Fixed costs remain the same in a production process. Such costs do not vary with the output. This cost is incurred by a firm even at zero output. For example, rent, salaries of managers, insurance premium, depreciation etc. Short run Variable cost These costs vary with the output. These costs move in the same direction of output. At zero level of output, variable cost will be zero. Raw material, fuel charges are common examples of variable cost. Total cost (TC) =Total Fixed cost (TFC) +Total variable cost (TVC) TVC SRTC TFC TVC TC TFC TVC OUTPUT OUTPUT OUTPUT

6 The shape of the total variable cost is because of average variable cost which is theoreticallyof U shaped. In the short run it is because of law of diminishing marginal return. Average total cost It is the per unit cost of production. It is calculated by dividing total cost of production by output. ATC= totalcost totaloutput Average total cost is of U-shaped because of diminishing marginal return. When average product increases, short run average cost falls, and, when average product falls, average cost rises. When average product is maximum at the certain level of output, average cost will be minimum. ATC ATC Qty Average fixed cost It is the per unit fixed cost of production. It is calculated by dividing total fixed cost by output.because the total fixed cost is, by definition, the same regardless of output, AFC must decline as output increases. As output rises, the total fixed cost is spread over a larger and larger output. total fixed cost AFC= totaloutput AFC Average variable cost AFC Qty It is per unit variable cost of production. It is calculated by dividing total variable cost by output. As added variable resources increase output, AVC declines initially, reaches a minimum, and then increases again. A graph of AVC is a U-shaped or saucer-shaped curve. Because total variable cost reflects the law of diminishing returns, so must AVC, which is derived from total variable cost. Because marginal returns increase initially, fewer and fewer additional variable resources are needed to produce given units of output. As a result, variable cost per unit declines. AVC hits the minimum and beyond that point AVC rises asdiminishing returns require more and more variable resources to produce each additional unit of output.

7 total variable cost AVC= totaloutput AVC AVC Qty Marginal cost It is the change in total cost due to production of the next or the last unit of a product. MC can be determined for each added unit of output by noting the change in total cost that unit s production entails. Marginal costs are costs the firm can control directly and immediately. Specifically, MC designates all the cost incurred in producing the last unit of output. Thus, it also designates the cost that can be saved by not producing that last unit. Average cost figures do not provide this information. cange in total cost Marginal cost = cange in output Relationship between Cost Curves. -The gap between TC and TVC is considered as TFC -In the beginning ATC falls due to increasing return as well as the gradient of TC curve, as output increases firm faces decreasing return, as a result ATC rises and the gradient of TC function too. -MC always intersects AVC and ATC from their lowest point from below. -At low output there is a wider gap between ATC and AVC, but as output increases, the gap is narrowed up. It is because a fall in AFC as output increases -As output increases AFC falls but will never be zero.

8 Cost and Cost curves in the Long run A long run is made of with many short runs. In the long run there is no fixed cost,i.e., all costs are varied. This is why long run total cost emerges from origin. LRTC TC OUTPUT The shape of the LATC is because of return to scale or because of long run average total cost. Long Run Average Total Cost (LRATC) Since long run is made up of with many short run, hence LRATC is also made up of with many SRATC. LRATC curve is also called as envelope curve, because it envelopes many of short run average total cost curves. Theoretically it is of U shaped, because of return to scale. Firstly, firm

11 Revenue and Revenue Curves Total revenue The amount generates by a firm by selling certain units of the given product in specified period of time. Total Revenue = price quantity For example if a firm sells 50 units of a product at the price of 5 each, the total revenue will be 250. Average Revenue It is the per unit revenue of the given quantity. Price and average revenue are the same. total revenue Average Revenue = total output Or price quantity quantity = price AR curve is considered as a price line or demand curve. Marginal Revenue It s the change intotal revenue by selling an additional unit of the given product. cange in total revenue MR = cange in output For example if a firm generates \$50 by selling 10 units and \$54 by selling 11 units then the marginal revenue of selling the 11 th unit is \$4. Revenue curves under perfect competition In perfect competition all firms are price taker, hence are unable to change prices and sell any quantity at the given price. This is why, AR and MR remain the same. Units Price Total Revenue Marginal Revenue Average Revenue 0 \$ \$5 \$5 \$5 \$5 2 \$5 \$10 \$5 \$5 3 \$5 \$15 \$5 \$5 4 \$5 \$20 \$5 \$5 5 \$5 \$25 \$5 \$5 TR AR=MR Revenue curves under imperfect competition In imperfect competition firms are price maker, therefore to sell more quantity they have to reduce their prices. This is why demand curve (AR) is negatively sloped and marginal Qty

12 revenue (MR) curve lies beneath the demand curve. In fact change in MR is always double than the change in AR, hence, MR s x-intercept is half of the x-intercept of AR curve. Imperfect competition includes monopolies, oligopolies, monopolistic competition etc. Qty (units) Price (\$) TR (\$) MR (\$) AR (\$) Relationship between AR, MR and TR curves - MR curve lies beneath the AR curve - Change in MR is always double as compare to change in AR - If MR is +ive, TR will rise - If MR=0, TR will be maximum - If MR is ive, TR will fall - If MR is +ive, then demand will be elastic during that level of output - Demand will be unitary elastic as MR approaches to zero and at that point TR will be maximum and also that will be the midpoint of the demand curve (AR). - If MR is -ive, demand will be price inelastic. Profit It is the difference between total revenue and total cost. It is positive if total revenue exceeds total cost and negative if total cost exceeds total revenue. A firm considers loss under this condition. If total revenue is equal to the total cost at the given level of output, it is called as break-even point for the firm, i.e., no profit, no loss.

13 Profit = TR TC As output changes profit may be changed, for instance, as output increases total revenue will be increased as well as total cost. If increase in total revenue is more than the increase in total cost, firm s profit will be increased and, if, total cost exceeds ore then the total revenue, firm incurs loss. Similarly, as a firm reduces its output, total revenue and total cost fall. If total revenue falls more than the total cost, firm incurs the loss. However, if total cost falls more than the total revenue, profit will be increased. As output changes, there may be no change in fixed cost. It also affects the size of the profit. To increase revenue, a firm should consider price elasticity of demand for its product. For instance if demand is elastic then by decreasing price more revenue can be generated but if demand is price inelastic then firm increases price to raise more revenue. Firms may increase revenue or to reduce average cost through inventions and innovations. As a new product is introduced effectively through promotion will generate revenue for the firm. Similarly, better techniques of production will reduce average cost but also quality of products. Another way to raise revenue is diversification. It is opposite to specialization where a firm increases lines of products and/or increases branches or number of departments. It helps the firm to spread the risk as well as increase in revenue. Another option which a firmhas is competition or collusion. Competition may be on price basis or a non price competition. Mostly firms reduce prices to increase revenue provided that their demand is elastic, but in certain cases firms increase prices and create quality consciousness and increase revenue. It is called as price skimming. Incase of non price competition a firm advertises or uses promotion to increase its revenue. In collusion, firms avoid competition to save advertising and promotion costs. On the other hand they collectively determine the price which maximizes industry profit, it may rise profit of the most of the firms. In the short run, since fixed cost remains the same hence as output increases, average fixed cost will fall, however, if firm should make policies to reduce average variable cost like increase productivity of workers or use better techniques of production. A firm can reduce its average cost of production by increasing its size of production i.e. economies of large scale. For instance, technical economies, financial economies, marketing economies, managerial economies, risk bearing economies etc. may help out a firm to reduce its average cost of production. Accountant profit vs Economist profit According to accountant profit only explicit costs are included, like labour cost, rental cost, capital cost etc. whereas in case of economist profit implicit costs are also considered. An example of an implicit cost is the opportunity cost of a sole proprietor working in her own business. If she works somewhere else, she can earn certain income which is forgone now. Therefore, to calculate economist profit that income must be deducted from the accountant profit. Accountant s profit = Total Revenue Total Cost Economist s profit = Accountant s profit opportunity cost Objectives of a firm Profit maximization Traditionally it is the main objective of a firm. According to this a firm prefers to produce at that point where it can make maximum of profit. To gain that level of production a firm may follow to different rules i.e. total revenue, total cost rule and marginal cost marginal revenue rule. According to the total revenue and total cost method a firm produces to that extent where there is a maximum difference between total revenue and total cost. According to marginal cost and marginal revenue rule, a firm produces to that extent where marginal revenue and marginal cost are equal. Before the equilibrium output MR is more than the MC and a firm which wants to maximize its profit wants to earn every profit on each and every unit. It wants to earn maximum profit on the whole.

14 MC E AR MR O Q QUANTITY P D=AR=M O Quantity However, in practice it is not possible for a firm to make maximum of the profit in the long run due to following reasons. Firstly, firms do not make maximum profit because it may attract new firms, hence competition will be increased. Secondly, firms are reluctant to make maximum profit to avoid government watch dogs. Thirdly, it may damage the relationship between stakeholders, such as consumers and workers. Fourthly, it may be possible to the certain scale of production, but it is difficult to calculate MR and MC in mass production. Usually firms work out on their average cost and add on a profit margin to determine the selling price. In some cases management may have some other objectives. It is also not possible, where goods are not divisible by nature. Profit maximization is also not possible in service sector. Managerial and Behavioural Theories Sales Revenue Maximization A firm can maximize its sales revenue by producing up to that extent where MR approaches to zero. A firm is prepared to charge low prices when it wants to increase its market share. This is a price penetration policy. A firm can make abnormal profit if TR is more than TC at the given output. This policy is also chosen when management salaries are linked with the sales. The solution of this conflict of interest is to offer management some shares as a bonus or link their salaries to profit. This policy is also formed by the state when industry experiences growth and a firm want to increase its market share.

15 Sales Maximization This policy maximizes sales instead of sales revenue maximization. Theoretically it is possible when a firm produces to that extent where average revenue approaches to zero. In practice a firm may produce up to the breakeven point, where total revenue is equal to the total cost. A higher output implies loss making behaviour. It is possible when a firm may subsidize its loss by using the profit of some other firms. It could be positive in state-owned business organization which has some social objectives. Another possibility may be a firm wants to clear its existing stock at the end of a season or due to an exit from the market, so, to make any recovery. Satisficing Profit. According to this policy a firm is determined to make reasonable profit, sufficient to keep on its activities or to satisfy its share holders. It may wants to keep all stakeholders happy. It may spend more on wages or on the improvement of working conditions, which increases cost of production. It may charge low prices to keep its customers happy. This profit may be anywhere between normal profit and positive economic profit. Survival Mainly it will be the objective of a firm when there is question mark on its existence and the firm finds it difficult to survive. Usually it happens at the early stage of the firm, when existing firms make it difficult to penetrate. Secondly, when trading becomes difficult due to fall in demand for the product or due to bad debts or losing confidence of customer. Thirdly, when there is downturn of the economy and presences of recessionary pressure make it difficult for the firm to survive. Under such condition(s) primary objective is the survival. Conclusion: The ultimate objective of all business organization is profit maximization. All other objective are formed for the short run by forgoing objective of profit maximization. Types of profit Normal profit It is the minimum profit which is required to a firm to keep its existence in the long run. At equilibrium output i.e. (where marginal revenue is equal to marginal cost), average revenue is equal to the average cost. At this level of profit economic profit is zero.

16 Perfect competition Imperfect competition This will be the break- even point for the firm because at this level of output total revenue is equal to the total cost. Usually it is thought that there is no profit for the entrepreneur but actually it takes profit as a reward of a factor of production which is measured as explicit cost. Abnormal Profit It is the any profit which in excess of the normal profit. At equilibrium output average revenue exceed average total cost. At this point a firm makes positive economic profit. Perfect competition Imperfect competition Loss/ Subnormal profit with contribution A firm incurs loss if at the equilibrium output its average total cost exceeds its average revenue. At this point economic profit of the firm will be negative. However, it will continue its production unless it meets to its average variable cost. As is shown in the following figures, where average total cost is passing above the average revenue curve and shaded area show the amount of loss at output OQ.

17 Loss/ subnormal profit without contribution- the shut down point Price at the shutdown point is the minimum price which is acceptable for a firm to continue its production in the short run but if average revenue is below than the average cost of production, the firm stops production and exit from the market.

### 23 Perfect Competition

23 Perfect Competition Learning Objectives After you have studied this chapter, you should be able to 1. define price taker, total revenues, marginal revenue, short-run shutdown price, short-run breakeven

### Total Costs. TC = TFC + TVC TFC = Fixed Costs. TVC = Variable Costs. Constant costs paid regardless of production

AP Microeconomics Total Costs TC = TFC + TVC TFC = Fixed Costs Constant costs paid regardless of production TVC = Variable Costs Costs that vary as production is changed Cost TFC TVC TFC Output Profit

### Perfect competition: occurs when none of the individual market participants (ie buyers or sellers) can influence the price of the product.

Perfect Competition In this section of work and the next one we derive the equilibrium positions of firms in order to determine whether or not it is profitable for a firm to produce and, if so, what quantities

### Slides and Images, Worth Publishers Inc. 8-1

Perfect Competition Michael J. Murray Slides and Images, Worth Publishers Inc. 8-1 Market Structure Analysis By observing a few industry characteristics, we can predict pricing and output behavior of the

### AP Microeconomics Review With Answers

AP Microeconomics Review With Answers 1. Firm in Perfect Competition (Long-Run Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry (which means show

### 1.3. Levels and Rates of Change Levels: example, wages and income versus Rates: example, inflation and growth Example: Box 1.3

1 Chapter 1 1.1. Scarcity, Choice, Opportunity Cost Definition of Economics: Resources versus Wants Wants: more and better unlimited Versus Needs: essential limited Versus Demand: ability to pay + want

### MICRO EXAM REVIEW SHEET

MICRO EXAM REVIEW SHEET 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

### AP Microeconomics Review Session #3 Key Terms & Concepts

The Firm, Profit, and the Costs of Production 1. Explicit vs. implicit costs 2. Short-run vs. long-run decisions 3. Fixed inputs vs. variable inputs 4. Short-run production measures: be able to calculate/graph

### Graded exercise questions. Level (I, ii, iii)

Graded exercise questions Level (I, ii, iii) 248 MICRO ECONOMICS LEVEL 1 GRADED EXERCISE QUESTIONS (LEVEL I, II, III) INTRODUCTION 1. Why does an economic problem arise? 2. What is economics about? 3.

### ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions

www.liontutors.com ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions 1. A A large number of firms will be able to operate in the industry because you only need to produce a small amount

### 2010 Pearson Education Canada

What Is Perfect Competition? Perfect competition is an industry in which Many firms sell identical products to many buyers. There are no restrictions to entry into the industry. Established firms have

### ECONOMICS ASSIGNMENT CLASS XII MICRO ECONOMICS UNIT I INTRODUCTION. 4. Is free medicine given to patients in Govt. Hospital a scarce commodity?

ECONOMICS ASSIGNMENT CLASS XII MICRO ECONOMICS UNIT I INTRODUCTION 1. What is the Slope of PPC? What does it show? 2. When can PPC be a straight line? 3. Do all attainable combination of two goods that

### AGENDA Mon 10/12. Economics in Action Review QOD #21: Competitive Farming HW Review Pure Competition MR = MC HW: Read pp Q #7

AGENDA Mon 10/12 Economics in Action Review QOD #21: Competitive Farming HW Review Pure Competition MR = MC HW: Read pp 173-176 Q #7 QOD #21: Competitive Farming A purely competitive wheat farmer can sell

### 7 Costs. Lesson. of Production. Introduction

Lesson 7 Costs of Production Introduction Our study now combines what we have learned about price from Lesson 5 with utility theory from Lesson 6 to allocate resources among cost factors. Consider that

### Principles of Microeconomics Module 5.1. Understanding Profit

Principles of Microeconomics Module 5.1 Understanding Profit 180 Production Choices of Firms All firms have one goal in mind: MAX PROFITS PROFITS = TOTAL REVENUE TOTAL COST Two ways to reach this goal:

### Unit 5. Producer theory: revenues and costs

Unit 5. Producer theory: revenues and costs Learning objectives to understand the concept of the short-run production function, describing the relationship between the quantity of inputs and the quantity

### Monopoly. 3 Microeconomics LESSON 5. Introduction and Description. Time Required. Materials

LESSON 5 Monopoly Introduction and Description Lesson 5 extends the theory of the firm to the model of a Students will see that the profit-maximization rules for the monopoly are the same as they were

### ECON 101 Introduction to Economics1

ECON 101 Introduction to Economics1 Session 10 Cost Concept Lecturer: Mrs. Hellen A. Seshie-Nasser, Department of Economics Contact Information: haseshie@ug.edu.gh College of Education School of Continuing

### Chapter Summary and Learning Objectives

CHAPTER 11 Firms in Perfectly Competitive Markets Chapter Summary and Learning Objectives 11.1 Perfectly Competitive Markets (pages 369 371) Explain what a perfectly competitive market is and why a perfect

### Teaching about Market Structures

Teaching about Market Structures Felix B. Kwan, Ph.D. Professor of Econ/Finance, Maryville University AP Econ Conference - FRB St. Louis June 17-19, 2015 Profits Foundational Concepts Some basic terms/concepts

### MICROECONOMICS CHAPTER 10A/23 PERFECT COMPETITION. Professor Charles Fusi

MICROECONOMICS CHAPTER 10A/23 PERFECT COMPETITION Professor Charles Fusi Learning Objectives Identify the characteristics of a perfectly competitive market structure Discuss the process by which a perfectly

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

Sample Test 3 Ch 10-13 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A cost incurred in the production of a good or service and for which

### ECON 311 MICROECONOMICS THEORY I

ECON 311 MICROECONOMICS THEORY I Profit Maximisation & Perfect Competition (Short-Run) Dr. F. Kwame Agyire-Tettey Department of Economics Contact Information: fagyire-tettey@ug.edu.gh Session Overview

### Production and Costs. Bibliography: Mankiw and Taylor, Ch. 6.

Production and Costs Bibliography: Mankiw and Taylor, Ch. 6. The Importance of Cost in Managerial Decisions Containing costs is a key issue in managerial decisionmaking Firms seek to reduce the number

### SIMON FRASER UNIVERSITY Department of Economics Sample Final Examination. PART I. Multiple Choice. Choose the best answer. (60% - 1 point each!

Econ 103 SIMON FRASER UNIVERSITY Department of Economics Sample Final Examination PART I. Multiple Choice. Choose the best answer. (60% - 1 point each!) PART 1: MULTIPLE CHOICE (answers are at the end

### WJEC (Wales) Economics A-level

WJEC (Wales) Economics A-level Microeconomics Topic 1: Costs, Revenue and Profits 1.1 Costs, revenues and profits Notes The difference between the short run and the long run In the short run, the scale

### Which store has the lower costs: Wal-Mart or 7-Eleven? 2013 Pearson

Which store has the lower costs: Wal-Mart or 7-Eleven? Production and Cost 14 When you have completed your study of this chapter, you will be able to 1 Explain and distinguish between the economic and

### Firm Behavior and the Costs of Production

Firm Behavior and the Costs of Production WHAT ARE COSTS? The Firm s Objective The economic goal of the firm is to maximize profits. Total Revenue, Total Cost, and Profit Total Revenue, Total Cost, and

### UNIT 4 PRACTICE EXAM

UNIT 4 PRACTICE EXAM 1. The prices paid for resources affect A. the money incomes of households in the economy B. the allocation of resources among different firms and industries in the economy C. the

### ECON 260 (2,3) Practice Exam #4 Spring 2007 Dan Mallela

ECON 260 (2,3) Practice Exam #4 Spring 2007 Dan Mallela Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Profit is defined as a. net revenue

### HOMEWORK ECON SFU

HOMEWORK 1998-2 ECON 103 - SFU the law of diminishing returns have on short-run costs? Be specific. (e) âwhen... And when marginal product is diminishing, marginal cost is rising.â Illustrate and... ECON

### Production and Cost Analysis I

CHAPTER 12 Production and Cost Analysis I Production is not the application of tools to materials, but logic to work. Peter Drucker McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All

### ENGINEERING ECONOMICS AND FINANCIAL ACCOUNTING 2 MARKS

ENGINEERING ECONOMICS AND FINANCIAL ACCOUNTING 2 MARKS 1. What is managerial economics? It is the integration of economic theory with business practice for the purpose of facilitating decision making and

### Micro Economics M.A. Economics (Previous) External University of Karachi Micro-Economics

Micro Economics M.A. Economics (Previous) External University of Karachi Micro-Economics Annual Examination 1997 Time allowed: 3 hours Marks: 100 Maximum 1) Attempt any five questions. 2) All questions

### Notes on Chapter 10 OUTPUT AND COSTS

Notes on Chapter 10 OUTPUT AND COSTS PRODUCTION TIMEFRAME There are many decisions made by the firm. Some decisions are major decisions that are hard to reverse without a big loss while other decisions

### Microeconomics. More Tutorial at

Microeconomics 1. Suppose a firm in a perfectly competitive market produces and sells 8 units of output and has a marginal revenue of \$8.00. What would be the firm s total revenue if it instead produced

### COST OF PRODUCTION & THEORY OF THE FIRM

MICROECONOMICS: UNIT III COST OF PRODUCTION & THEORY OF THE FIRM One of the concepts mentioned in both Units I and II was and its components, total cost and total revenue. In this unit, costs and revenue

### Short-Run Costs and Output Decisions

Semester-I Course: 01 (Introductory Microeconomics) Unit IV - The Firm and Perfect Market Structure Lesson: Short-Run Costs and Output Decisions Lesson Developer: Jasmin Jawaharlal Nehru University Institute

### CIE Economics A-level

CIE Economics A-level Topic 2: Price System and the Microeconomy c) Types of cost, revenue and profit, shortrun and long-run production Notes Short-run production function Fixed and variable factors of

### Supply in a Competitive Market

Supply in a Competitive Market 8 Introduction 8 Chapter Outline 8.1 Market Structures and Perfect Competition in the Short Run 8.2 Profit Maximization in a Perfectly Competitive Market 8.3 Perfect Competition

### AP Microeconomics Chapter 8 Outline

I. Learning Objectives In this chapter students should learn: A. Why economic costs include both explicit (revealed and expressed) costs and implicit (present but not obvious) costs. B. How the law of

### MONOPOLY. Characteristics

OBJECTIVES Explain how managers should set price and output when they have market power With monopoly power, the firm s demand curve is the market demand curve. A monopolist is the only seller of a product

### I enjoy teaching this class. Good luck and have a nice Holiday!!

ECON 202-501 Fall 2008 Xiaoyong Cao Final Exam Form A Instructions: The exam consists of 2 parts. Part I has 35 multiple choice problems. You need to fill the answers in the table given in Part II of the

### COST THEORY. I What costs matter? A Opportunity Costs

COST THEORY Cost theory is related to production theory, they are often used together. However, here the question is how much to produce, as opposed to which inputs to use. That is, assume that we use

### Multiple Choice Part II, A Part II, B Part III Total

SIMON FRASER UNIVERSITY ECON 103 (2007-2) MIDTERM EXAM NAME Student # Tutorial # Multiple Choice Part II, A Part II, B Part III Total PART I. MULTIPLE CHOICE (56%, 1.75 points each). Answer on the bubble

### The Firm s Objective. A Firm s Total Revenue and Total Cost. The economic goal of the firm is to maximize profits. A Firm s Profit

The s of Production Chapter 13 Copyright 2001 by Harcourt, Inc. The s of Production The Law of Supply: Firms are willing to produce and sell a greater quantity of a good when the price of the good is high.

### CASE FAIR OSTER PEARSON 2012 Pearson Education, Inc. Publishing as Prentice Hall

PART II The Market System: Choices Made by Households and Firms PRINCIPLES OF MICROECONOMICS E L E V E N T H E D I T I O N CASE FAIR OSTER PEARSON 2012 Pearson Education, Inc. Publishing as Prentice Hall

### 2) All combinations of capital and labor along a given isoquant cost the same amount.

Micro Problem Set III WCC Fall 2014 A=True / B=False 15 Points 1) If MC is greater than AVC, AVC must be rising. 2) All combinations of capital and labor along a given isoquant cost the same amount. 3)

### 8 Perfect Competition

8 Perfect Competition CHAPTER 8 PERFECT COMPETITION 167 Figure 8.1 Depending upon the competition and prices offered, a wheat farmer may choose to grow a different crop. (Credit: modification of work by

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. FIGURE 1-2

Questions of this SAMPLE exam were randomly chosen and may NOT be representative of the difficulty or focus of the actual examination. The professor did NOT review these questions. MULTIPLE CHOICE. Choose

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

Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is correct? A) Consumers have the ability to buy everything

### Practice Exam 3 Questions

1. What is the main goal of a firm? A) To be as big as possible. B) To hire as many people as possible. C) To make as much profit as possible. D) All of the above answers are correct. Practice Exam 3 Questions

### Microeonomics. Firms in Competitive Markets. In this chapter, look for the answers to these questions: Introduction: A Scenario. N.

C H A T E R 14 Firms in Competitive Markets R I N C I L E S O F Microeonomics N. Gregory Mankiw remium oweroint Slides by Ron Cronovich 2009 South-Western, a part of Cengage Learning, all rights reserved

### Production and Cost. This Is What You Need to Know. Explain the difference between accounting and economic costs and how they affect the determination

Chiang_3E_CT_Micro_CH07_Layout 1 3/20/14 2:29 PM Page 175 7 Production and Cost Production and Cost Are Behind Decisions About Supply Having looked in the last chapter at what lies behind demand curves

### Pledge (sign) I did not copy another student s answers

Economics 4020 Dr. Rupp Test #1 Fri. Sept 23 rd, 2011 20 Multiple Choice questions (2.5 points each) Pledge (sign) I did not copy another student s answers 1. The profit maximization rule for a firm is

### T ( P ( ) * FA F D A S

Supply and Demand Basics Law of Supply Law of Demand Equilibrium Key Topics Demand Supply Equilibrium (shortage/surplus) Floor/Ceiling Elasticity Indifference Curves Utility Physical Product (Supply Side)

### Perfect Competition and The Supply Curve

chapter: 13 >> Perfect Competition and The Supply Curve The following materials are taken from Chap. 13, Economics, 2 nd ed., Krugman and Wells(2009), Worth Palgrave MaCmillan. 2009 Worth Publishers 1

### a. Sells a product differentiated from that of its competitors d. produces at the minimum of average total cost in the long run

I. From Seminar Slides: 3, 4, 5, 6. 3. For each of the following characteristics, say whether it describes a perfectly competitive firm (PC), a monopolistically competitive firm (MC), both, or neither.

### ECON 251 Exam 2 Pink. Fall 2012

ECON 251 Exam 2 Pink Use the table below to answer the following four questions The table below shows Harry s total utility from consuming beer and wine. The price of beer is \$2 per bottle. The price of

### PICK ONLY ONE BEST ANSWER FOR EACH BINARY CHOICE OR MULTIPLE CHOICE QUESTION.

Econ 101 Summer 2015 Answers to Second Mid-term Date: June 15, 2015 Student Name Version 1 READ THESE INSTRUCTIONS CAREFULLY. DO NOT BEGIN WORKING UNTIL THE PROCTOR TELLS YOU TO DO SO You have 75 minutes

### JANUARY EXAMINATIONS 2008

No. of Pages: (A) 9 No. of Questions: 38 EC1000A micro 2008 JANUARY EXAMINATIONS 2008 Subject Title of Paper ECONOMICS EC1000 MICROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates

### Jacob: W hat if Framer Jacob has 10% percent of the U.S. wheat production? Is he still a competitive producer?

Microeconomics, Module 7: Competition in the Short Run (Chapter 7) Additional Illustrative Test Questions (The attached PDF file has better formatting.) Updated: June 9, 2005 Question 7.1: Pricing in a

### ECON 251 Practice Exam 2 Questions from Fall 2013 Exams

ECON 251 Practice Exam 2 Questions from Exams Gordon spends all his income on spatulas and mixing bowls. Spatulas cost \$4 and mixing bowls cost \$12. Gordon has \$60 of income and considers both spatulas

### 1. If the per unit cost of production falls, then... A.) the supply curve shifts right (or down)

1. If the per unit cost of production falls, then... A.) the supply curve shifts right (or down) B.) there is a downward movement along the existing supply curve which does not shift C.) the supply curve

### Sample Paper-05 ( ) Economics Class XII. Time allowed: 3 hours Maximum Marks: 100

Sample Paper-05 (2016-17) Economics Class XII Time allowed: 3 hours Maximum Marks: 100 Answers 1. (b) How to produce. 2. (c) tea and coffee 3. (c) Contraction of demand. 4. PPC shift when (i) resources

### Bremen School District 228 Social Studies Common Assessment 2: Midterm

Bremen School District 228 Social Studies Common Assessment 2: Midterm AP Microeconomics 55 Minutes 60 Questions Directions: Each of the questions or incomplete statements in this exam is followed by five

### Multiple choice questions 1-60 ( 1.5 points each)

NAME: STUDENT ID: Final Exam ECON 101, Section 2 summer 2004 Ying Gao Instructions Please read carefully! 1. Print your name and student ID number at the top of this cover sheet. 2. Check that your exam

### Tutor2u Economics Essay Plans Summer 2002

Microeconomics Revision Essay (7) Perfect Competition and Monopoly (a) Explain why perfect competition might be expected to result in an allocation of resources which is both productively and allocatively

### Essential Graphs for Microeconomics

Essential Graphs for Microeconomics Basic Economic Concepts! roduction ossibilities Curve Good X A F B C W Concepts: oints on the curve-efficient oints inside the curve-inefficient oints outside the curve-unattainable

### Edexcel (A) Economics A-level

Edexcel (A) Economics A-level Theme 3: Business Behaviour & the Labour Market 3.3 Revenue Costs and Profits 3.3.2 Costs Notes Formulae to calculate types of costs Total cost: This is how much it costs

### Professor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 2

Economics 2 Spring 2016 rofessor Christina Romer rofessor David Romer SUGGESTED ANSWERS TO ROBLEM SET 2 1.a. Recall that the price elasticity of supply is the percentage change in quantity supplied divided

### The Theory and Estimation of Cost. Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young

The Theory and Estimation of Cost Chapter 8 Managerial Economics: Economic Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young The Theory and Eti Estimation

### The Behavior of Firms

Chapter 5 The Behavior of Firms This chapter focuses on how producers make decisions regarding supply. Individuals demand goods and services. Firms supply goods and services. An important assumption is

### Supply and demand are the two words that economists use most often.

Chapter 13. The Costs of Production The Market Forces of Supply and Demand Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies

### Thursday, October 13: Short and Long Run Equilibria

Amherst College epartment of Economics Economics 54 Fall 2005 Thursday, October 13: Short and Long Run Equilibria Equilibrium in the Short Run The equilibrium price and quantity are determined by the market

### CHAPTER 8: THE COSTS OF PRODUCTION

CHAPTER 8: THE COSTS OF PRODUCTION Introduction Now that we have examined consumer behavior in more detail, it is time to look at the decision making of the firm. Costs of production are important to determine

### The Theory and Estimation of Cost. Chapter 7. Managerial Economics: Economic Tools for Today s Decision Makers, 5/e By Paul Keat and Philip Young

The Theory and Estimation of Cost Chapter 7 Managerial Economics: Economic Tools for Today s Decision Makers, 5/e By Paul Keat and Philip Young The Theory and Estimation of Cost The Importance of Cost

### Exam 3 Practice Questions

Exam 3 Practice Questions 1. The price elasticity of demand is a measure of: a) how quickly a particular market reaches equilibrium. b) the change in supply associated with lower prices. c) the percent

### Monopolistic Competition

CHAPTER 16 Monopolistic Competition Goals in this chapter you will Examine market structures that lie between monopoly and competition Analyze competition among firms that sell differentiated products

### Figure: Profit Maximizing

Name: Student ID: 1. A manufacturing company that benefits from lower costs per unit as it grows is an example of a firm experiencing: A) scale reduction. B) increasing returns to scale. C) increasing

### MEPS Preparatory and Orientation Weeks. Lectures by Kristin Bernhardt. Master of Science in Economic Policy. March 2012

MEPS Preparatory and Orientation Weeks Master of Science in Economic Policy March 2012 Lectures by Kristin Bernhardt Fundamentals of Microeconomics 1. Introduction 2. Markets 3. Consumers and Households

### Chapter 13 Perfect Competition

Chapter 13 Perfect Competition 13.1 A Firm's Profit-Maximizing Choices 1) Is the number of sellers in the market the only thing that is different in each of the four market types economists study? Answer:

### Chapter 28 The Labor Market: Demand, Supply, and Outsourcing

Chapter 28 The Labor Market: Demand, Supply, and Outsourcing Learning Objectives After you have studied this chapter, you should be able to 1. define marginal factor cost, marginal physical product of

### Econ 001: Midterm 2 (Dr. Stein) Answer Key March 23, 2011

Instructions: Econ 001: Midterm 2 (Dr. Stein) Answer Key March 23, 2011 This is a 60-minute examination. Write all answers in the blue books provided. Show all work. Use diagrams where appropriate and

### Chapter 7 Consumer/Producers and Market Efficiency

Midterm #2 Exam Study uestions: (A subset of these questions/concepts will be on the exam) Chapter 5 - Elasticity Define rice elasticity of demand. What does it mean to say demand is highly elastic? What

### CHAPTER 8 Competitive Firms and Markets

CHAPTER 8 Competitive Firms and Markets CHAPTER OUTLINE 8.1 Competition Price Taking Why the Firm s Demand Curve Is Horizontal Why We Study Competition 8.2 Profit Maximization Profit Two Steps to Maximizing

### Monopoly CHAPTER. Goals. Outcomes

CHAPTER 15 Monopoly Goals in this chapter you will Learn why some markets have only one seller Analyze how a monopoly determines the quantity to produce and the price to charge See how the monopoly s decisions

### MICROECONOMICS SECTION I. Time - 70 minutes 60 Questions

MICROECONOMICS SECTION I Time - 70 minutes 60 Questions Directions: Each of the questions or incomplete statements below is followed by five suggested answers or completions. Select the one that is best

### 6. The law of diminishing marginal returns begins to take effect at labor input level: a. 0 b. X c. Y d. Z

Chapter 5 MULTIPLE-CHOICE QUESTIONS 1. The short run is defined as a period in which: a. the firm cannot change its output level b. all inputs are variable but technology is fixed c. input prices are fixed

### Chapter 13. What will you learn in this chapter? A competitive market. Perfect Competition

Chapter 13 Perfect Competition 214 by McGraw-Hill Education 1 What will you learn in this chapter? What the characteristics of a perfectly competitive market are. How to calculate average, marginal, and

### Principles of Economics Final Exam. Name: Student ID:

Principles of Economics Final Exam Name: Student ID: 1. In the absence of externalities, the "invisible hand" leads a competitive market to maximize (a) producer profit from that market. (b) total benefit

### Monopoly. Cost. Average total cost. Quantity of Output

While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The

### Practice Test for Midterm 2 Econ Fall 2009 Instructor: Soojae Moon

Practice Test for Midterm 2 Econ 2010-200 Fall 2009 Instructor: Soojae Moon Please read carefully and choose the choice that best completes the statement or answers the question. Table 7-2 This table refers

### PRINCIPLES OF ECONOMICS PAPER 3 RD

PRINCIPLES OF ECONOMICS PAPER 3 RD Question 1 Objectives. Select appropriate alternative. (A) The meaning of the world Economic is most closely associated with the word. (a) Free (b) Scarce (c) Unlimited

### INTRODUCTION. Two uses of price theory: 1. Descriptive (Positive Theory) 2. Prescriptive (Normative Theory)

INTRODUCTION This course covers the field of microeconomics. Microeconomics addresses individual behavior in markets and the interrelationships between markets. This is quite different from macroeconomics,

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

Micro - HW 4 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In central Florida during the spring, strawberry growers are price takers. The reason

### Exam 1. Pizzas. (per day) Figure 1

ECONOMICS 10-008 Dr. John Stewart Sept. 30, 2003 Exam 1 Instructions: Mark the letter for your chosen answer for each question on the computer readable answer sheet using a No.2 pencil. Note a)=1, b)=2

### The Model of Perfect Competition

The Model of Perfect Competition Key issues The meaning of perfect competition Characteristics of perfect competition and output under competition Competition and economic efficiency Wider benefits of