Pennsylvania State University - MICRO ECON 102 Midterm Study Guide.

MICRO ECON 102 Midterm Study Guide Lesson 5 – Production and Costs 1) Dexter is an accountant earning $45,000 per year but he hates his job. Dexter decides to leave his accounting job and start his own white water ra ...

MICRO ECON 102 Midterm Study Guide Lesson 5 – Production and Costs 1) Dexter is an accountant earning $45,000 per year but he hates his job. Dexter decides to leave his accounting job and start his own white water rafting guided tour business. He needs $80,000 to start his business. Dexter has $40,000 in savings that he will use to start his new business and he borrows the remaining $40,000 from a bank. The interest rate is 3%. The explicit cost of opening Dexter’s white-water rafting business is ____ and the implicit cost of opening the new business is ______. a. $1200-$46,200 Explicit costs require an outlay of money 2) Norman’s Bagel shop sold 3 million bagels last year. Half of the bagels were plain bagels and sold for $.50 each. The remaining bagels were cinnamon raisin bagels and sold for $.80 each. Last year Norman’s a. Total revenue was $1.95 million You can calculate Norman’s total revenue: $.50*1.5 million+$.80*1.5 million= $1.95 million 3) The short run is a situation such that a. At least one input to production is fixed in quantity In the short run at least one input is fixed. In the long run all inputs may vary 4) The production function shows the relationship between a. The inputs to production and the quantity of output produced The production function shows the relationship between the quantity of inputs used in production (for example labor) and the quantity of output produced 5) The extra output that the last worker hired adds to total production is called the a. Marginal product of labor The marginal product of labor is the additional output produced by the last worker hired 6) Jack has a restaurant that specializes in cereal. The first employee that Jack hired was able to produce 11 bowls of cereal per day. The second worker Jack hired added 13 bowls of cereal to total production. The third worker produced 9 bowls and the fourth worker hired added 7 bowls to production for a total of 40 bowls of cereal per day. Jack’s workers exhibit the property of a. Diminishing marginal product In the short run, as the variable input to production increases, the marginal product of that input will eventually decline 7) Which of the following is a variable cost to a firm that produces bagels? a. All of them All of the costs listed vary with output 8) Marginal cost will eventually rise as production expands due to a. Diminishing marginal product In the short run marginal product may at first increase but will eventually decrease. Marginal cost may at first decrease but will eventually increase 9) Labor Output Variable Cost Fixed Cost Total Cost 0 0 12 1 10 5 2 18 22 3 24 15 4 28 20 32 Consider the table above. What is this firm’s fixed cost at 18 units of output? $12 When output is zero, variable cost is zero and total cost is equal to fixed cost 10) What is the time difference between the short run and the long run? a. It depends on the industry The short run is the time period such that at least one input to production is fixed. In the long run all factors of production may vary Lesson 6: Input Markets 1) Select the answer below that corresponds to the idea of a derived demand curve a. A bagel producer decides to supply more bagels to the market, and as a result her demand for bagel workers increases The demand for bagel workers is derived from the decision to supply bagels to the market 2) Your bagel shop sells bagels for $1.00 each and currently employs 4 bakers. The marginal product of the last worker hired is 12. The current wage is $8. Could you increase profits? a. Yes you could increase profits by hiring at least one more worker. The wage is less than the MRP of labor, so the firm should hire more workers 3) When a firm hires labor up to the point where the wage is equal to the marginal revenue product of labor, the firm is a. Maximizing profit When a firm hires labor up to the point where w=MRP of labor, the firm is maximizing profit 4) Labor Output MP of labor MRP labor Wage Marginal profit 0 0 NA NA NA NA 1 4 4 40 30 10 2 10 30 3 5 50 30 4 3 30 0 5 20 6 21 1 30 -20 Consider the table above. How much output is produced when 4 workers are hired? 18 Use the MP of labor column to fill in the Output column 5) Labor Output MP of labor MRP labor Wage Marginal profit 0 0 NA NA NA NA 1 4 4 40 30 10 2 10 30 3 5 50 30 4 3 30 0 5 20 6 21 1 30 -20 Consider the able above. What is the marginal revenue product of the 4th worker? $30 The fourth worker contributes $3*10=$30 to the firm’s total revenue 6) When each additional worker hired contributes less than the previous worker hired to total output, we can say there is a. Diminishing marginal returns As more and more of a variable input is added to a fixed input, the additional output produced by the variable input will eventually decline 7) Norman has an upward sloping labor supply curve. If the opportunity cost of leisure rises for Norman, he will work a. More When an individual has an upward sloping supply curve, they will work more as the wage rises 8) You own a bread bakery on College Avenue. The baking ovens you own are considered to be a. Capital goods In economics, equipment in the production process as known as physical capital, or simply capital 9) A perfectly competitive firm using multiple inputs maximizes profit by hiring inputs until the a. Marginal product per dollar is the same for all inputs When multiple inputs are used the profit maximizing condition requires that the marginal product per dollar for all inputs be equal to one another 10) When the price of a factor of production increases, firms that use that factor will a. Reduce output and increase their demand for other inputs This is the output effect of a factor price increase. The demand for other inputs can go up or down depending on the substitutability between factors of production. For instance, in an office, if secretaries can do the job of computers, then an increase in the price of computers would lead firms to hire more secretaries. On the other hand, if secretaries cannot work without computers, an increase in the price of computers will decrease demand for secretaries. Lesson 7: Perfect Competition 1) In a perfectly competitive market, there are: a. Many firms, each too small to influence the market price In a perfectly competitive market, there are many firms. Each firm is too small to influence the market price 2) A perfectly competitive firm faces a demand curve that is a. Perfectly elastic A perfectly competitive firm is a price taker, and so faces a perfectly elastic demand curve 3) In the above figure, assume that S0 represents the industry supply curve and D0 represents the demand curve in a perfectly competitive market. A perfectly competitive firm will charge $1.25 A perfectly competitive firm takes the equilibrium industry price as given. In this case, it is $1.25 4) If a perfectly competitive firm chooses output such that MR [Show More]