2. Supply; Market Equilibrium & Efficiency Flashcards
Consider the following statements. Which of the statements are correct?
(i) The marginal cost of producing the xth unit is equal to the difference in
the total costs of producing x units and (x-1) units.
(ii) In a perfectly competitive market, if a firm is producing x units of a
product, it must be true that the marginal cost of producing the xth
unit is smaller than or equal to the equilibrium price of the product.
a. Both i and ii.
b. Only i.
c. Only ii.
d. Neither statement is correct.
e. All of the above are correct.
a. Both i and ii.
i. The marginal cost is the additional cost incurred by producing one more unit of a good or service. In other words, it represents the change in total cost resulting from a one-unit change in production quantity. Mathematically, marginal cost (MC)) is calculated by dividing the change in total cost (ΔTC) by the change in quantity (ΔQ).
MC = ΔTC / ΔQ
Here, (ΔTC) is the change in total cost, and (ΔQ) is the change in quantity.
ii. In a perfectly competitive market, the equilibrium price is determined by the intersection of the market’s supply and demand curves. In the short run, firms in a perfectly competitive market will produce at the quantity where marginal cost (MC) equals marginal revenue (MR), and this quantity is sold at the market equilibrium price.
In the short run equilibrium for a profit-maximizing firm in a perfectly competitive market:
MC=MR=P
Here:
MC is the marginal cost. MR is the marginal revenue. P is the equilibrium price.
In other words, in the short run, a firm in a perfectly competitive market will produce where its marginal cost equals the market price. If the marginal cost is less than the equilibrium price, the firm can increase its profit by producing more. If the marginal cost is greater than the equilibrium price, it is not profitable to produce more.
Bagels (made with flour) and cream cheese (made with milk) are often eaten together because they are complements. Suppose the equilibrium price of cream cheese has risen, but the equilibrium quantity of bagels has fallen. What could be responsible for this pattern?
a. A fall in the price of flour.
b. A fall in the price of milk.
c. A rise in the price of flour.
d. A rise in the price of milk.
d. A rise in the price of milk.
When bagels (made with flour) and cream cheese (made with milk) are complements, an increase in the price of one complement may lead to a decrease in the quantity demanded for both products. Let’s analyze the possible factors mentioned in the problem:
1. A fall in the price of flour (ingredient for bagels):
- If the price of flour falls, it would typically reduce the production cost of bagels, making them more affordable to produce. However, this factor alone might not explain a decrease in the quantity of bagels if there’s no specific reason for a decrease in demand.
2. A fall in the price of milk (ingredient for cream cheese):
- If the price of milk falls, it could reduce the production cost of cream cheese. This might lead to an increase in the quantity demanded for cream cheese, but it doesn’t directly explain the decrease in the quantity of bagels.
3. A rise in the price of flour:
- An increase in the price of flour, a key ingredient for bagels, could lead to an increase in production costs for bagels. This might contribute to a decrease in the quantity of bagels.
4. A rise in the price of milk:
- An increase in the price of milk, a key ingredient for cream cheese, could lead to an increase in production costs for cream cheese. This might contribute to a decrease in the quantity of cream cheese, and since bagels and cream cheese are complements, it could also lead to a decrease in the quantity of bagels.
Given the information, the most likely explanation for the pattern described (a rise in the price of cream cheese leading to a fall in the equilibrium quantity of bagels) is a rise in the price of milk (option d). This is because an increase in the cost of producing cream cheese, a complement to bagels, could result in a decrease in the quantity demanded for both cream cheese and bagels.
A firm with “market power” has:
a. the ability to drive competitors from a defined market
b. the ability to raise price to marginal cost
c. a downward-sloping demand curve
d. the ability to modify its selling regime so that the firm is always ensured to enjoy economic profits
c. a downward-sloping demand curve
A firm with “market power” holds a significant position in its industry due to its ability to influence the market conditions, particularly the price and quantity of goods or services. Market power allows a firm to act as a price maker rather than a price taker, meaning it can set prices for its products or services to some extent.
Firms with market power have a downward-sloping demand curve due to the nature of their influence over the market. Market power is the ability of a firm to set prices and/or quantities in a market. The downward-sloping demand curve reflects the inverse relationship between the price of a good or service and the quantity demanded by consumers.
a. is incorrect because even though a firm with “market power” is a price maker, it does not always means they can drive a competitor from a defined market. b. is incorrect because firms without “market power” have the ability to raise prices to marginal costs.d. is incorrect because having the ability to modify does not absolutely guarantee economic profits.
Daniela is an undergraduate at UCLA (a school known for its nation-leading 11national championships in basketball) and is considering going to law school at George Mason. Which of the following is NOT an opportunity cost of going to law school for Daniela?
a. The salary Daniela would earn at the job she was been offered straight out of school at a management consulting firm.
b. The value Daniela derives from watching UCLA basketball live at Pauley Pavilion since she would remain in Los Angeles.
c. The increased salary Daniela can expect from earning a JD.
d. None of the above; all of the answers are opportunity costs to Daniela.
c. The increased salary Daniela can expect from earning a JD.
Opportunity costs are about the value of the next best alternative forgone, so options (a) and (b) are opportunity costs as they represent alternatives that Daniela would be giving up by choosing law school. Option (c) is not an opportunity cost; rather, it is a potential benefit from choosing law school. Option (d) is incorrect as previously explained.
Coca-Cola sells its product through a vending machine on the 2nd floor of Scalia Law. Yesterday, the price of a 20-ounce bottle of Coca-Cola was $1.00 and the vending machine sold 100 units. Today, the price of the same bottle of soda was increased 10% to $1.10. The vending machine made 80 sales, 20% fewer than
yesterday. Demand for soda at this price interval is best characterized as:
a. Elastic
b. Inelastic
c. Unitary elastic
d. Perfectly elastic
a. Elastic
To determine the elasticity of demand, we can use the following formula:
Elasticity = (%change in quantity demanded) / (%change in price)
Given that the price increased by 10%, and the quantity demanded decreased by 20%, we can use these values to calculate the elasticity.
Elasticity=−20%/ 10% = −2
Now, let’s interpret the result:
If the elasticity is greater than 1 (in absolute value), it is elastic.
If the elasticity is less than 1 (in absolute value), it is inelastic.
If the elasticity is equal to 1 (in absolute value), it is unitary elastic.
In this case, the elasticity is −2, which is greater than 1 in absolute value. Therefore, the demand for soda at this price interval is best characterized as elastic.
When Electronics Arts canceled its first-person shooter Tiberium after years of development, they stated that “[t]his decision will result in some individuals being released. Eligible employees will receive severance and outplacement support.” Given this decision, how would we characterize the costs in developing the game?
a. Variable costs
b. Total costs
c. Sunk costs
d. Marginal costs
c. Sunk costs
The cancellation of the first-person shooter Tiberium and the mention of eligible employees receiving severance and outplacement support suggest that the costs incurred in developing the game may be categorized in different ways. Let’s analyze the options:
a. Variable costs:
- Variable costs are costs that vary with the level of production or activity. They change in proportion to the quantity produced. In the context of game development, variable costs could include things like materials, labor, and distribution costs. Severance and outplacement support for employees are more likely to be fixed costs rather than variable costs because they are not directly tied to the quantity of games produced.
b. Total costs:
- Total costs encompass all costs incurred by a firm in producing a particular quantity of goods or services. This includes both fixed and variable costs. The statement provided doesn’t specify whether it refers to all costs incurred in developing the game, so it’s a broader term that could include a combination of fixed and variable costs.
c. Sunk costs:
- Sunk costs are costs that have already been incurred and cannot be recovered. If the decision to cancel the game has already been made, the costs associated with the development of the game may be considered sunk costs. Severance and outplacement support may also be considered sunk costs once they are incurred, as they cannot be recovered.
d. Marginal costs:
- Marginal costs represent the additional cost incurred by producing one more unit of a good or service. In the context of canceling a game, it’s not directly about producing more units. Marginal costs might be more relevant in ongoing production decisions rather than the decision to cancel a project.
Conclusion:
- Given the information provided, the costs associated with developing the game and the support for eligible employees are best characterized as sunk costs. Sunk costs are costs that have already been incurred and are not recoverable, aligning with the decision to cancel the project.
The value of the marginal product of labor, VRPL, is always equal to
a. the total revenue the firm receives from selling the equilibrium amount of output.
b. the extra revenue the firm receives from selling the output of one
additional unit of labor.
c. the extra revenue from the sale of one more unit of output.
d. the price of the product multiplied by the marginal revenue.
b. the extra revenue the firm receives from selling the output of one
additional unit of labor.
The value of the marginal product of labor (VRPL) is always equal to the additional revenue generated by the sale of one more unit of output resulting from the employment of an additional unit of labor.
A perfectly competitive firm will tend to expand its output as long as
a. marginal revenue is positive.
b. marginal revenue exceeds the market price.
c. the market price exceeds marginal revenue.
d. the market price exceeds marginal cost.
d. the market price exceeds marginal cost.
In a perfectly competitive market, firms are price takers, meaning they take the market price as given and can sell any quantity of output at that price. The profit-maximizing condition for a perfectly competitive firm is to produce at the level where marginal cost (MC) equals the market price (P).
a. Marginal revenue being positive is not necessarily a condition for a perfectly competitive firm to expand its output. Marginal revenue could be positive, zero, or negative, but the key factor is the relationship between marginal cost and market price.
b. Marginal revenue exceeding the market price is unlikely in a perfectly competitive market because the firm can sell any quantity at the prevailing market price. In perfect competition, marginal revenue is equal to the market price.
c. The market price exceeding marginal revenue is not a characteristic of a perfectly competitive firm. In perfect competition, marginal revenue is equal to the market price.
d. The correct choice. A perfectly competitive firm will tend to expand its output as long as the market price exceeds marginal cost. When the market price is higher than the marginal cost, the firm can increase its profit by producing more units until marginal cost equals the market price. If the market price is less than the marginal cost, the firm would be better off producing fewer units or shutting down in the short run to minimize losses.
In the short run, which of the following must be true?
a. One input must be fixed.
b. Supply and demand are out of equilibrium.
c. All inputs are variable.
d. All of the above.
a. One input must be fixed.
In the short run, at least one input is considered fixed because there is not enough time to adjust all inputs. In economic terms, the short run is a period during which firms can vary some inputs but not others. This fixed input could be, for example, capital or a specific type of labor. The other options (b and c) are not necessarily true in all short-run scenarios. Supply and demand equilibrium can be achieved in the short run, and not all inputs need to be variable; at least one must be fixed.
In the long run, which of the following must be true?
a. One input must be fixed.
b. Supply and demand are out of equilibrium.
c. All inputs are variable.
d. All of the above.
c. All inputs are variable.
In the long run, firms have more flexibility to adjust all of their inputs because there is enough time to make changes to their production processes, including capital and labor. Unlike the short run, where at least one input is fixed, the long run allows for the adjustment of all inputs. This flexibility is a key characteristic of the long-run equilibrium in microeconomics. Options (a and b) are not necessarily true in the long run; all inputs can be adjusted, and supply and demand can reach equilibrium in the long run.
Which of the following is not a variable that influences supply?
a. Price of inputs.
b. Number of suppliers.
c. Income.
d. Expectations.
e. None of the above.
c. Income.
Supply is influenced by various factors, and the options provided represent some of these factors:
a. Price of inputs: This is a variable that influences supply. If the cost of inputs increases, it can reduce the profitability of production, leading to a decrease in supply.
b. Number of suppliers: The number of suppliers in the market affects the overall quantity of a good or service available. More suppliers often lead to an increase in supply.
d. Expectations: Expectations about future prices or changes in market conditions can influence present supply decisions. For example, if suppliers expect the price of a good to rise in the future, they may reduce supply now to sell at a higher price later.
c. Income: Income is typically a determinant of demand rather than supply. An increase in income generally leads to an increase in demand for goods and services, not a change in the quantity supplied.
So, the correct answer is (c) Income, as it is not a variable that directly influences supply.
Suppose that the marginal product of an input exceeds zero, but it falls as input usage increases. Total product is then:
a. decreasing at a decreasing rate.
b. increasing at an increasing rate.
c. increasing at a decreasing rate.
d. decreasing at an increasing rate.
c. increasing at a decreasing rate.
The marginal product refers to the additional output produced by using one more unit of input. When the marginal product is positive but falling as input usage increases, it means that each additional unit of input is still contributing positively to the total output, but its incremental contribution is diminishing.
In such a scenario, the total product is still increasing because each additional input is adding to the output, but the rate of increase is slowing down. This is characteristic of a situation where the production is “increasing at a decreasing rate.”
So, the correct answer is (c) increasing at a decreasing rate.
In the short-run, average total cost equals
a. change in total costs / change in quantity produced.
b. (fixed costs + variable costs) / change in quantity produced.
c. change in total costs / quantity produced.
d. (fixed costs + variable costs) / quantity produced.
d. (fixed costs + variable costs) / quantity produced.
Average Total Cost (ATC) is calculated by dividing the total cost by the quantity produced. Total cost consists of both fixed costs (costs that do not vary with the level of production) and variable costs (costs that vary with the level of production). Therefore, the formula for average total cost is:
ATC = (Fixed Costs + Variable Costs) / Quantity Produced
So, the correct answer is (d) (fixed costs + variable costs) / quantity produced.
Average total cost is at a minimum when the output level is
a. three units.
b. four units.
c. five units.
d. six units.
c. five units.
Average total cost (ATC) is at a minimum when the output level is at the point where marginal cost equals average total cost. Mathematically, this is represented as:
MC=ATC
Where:
MC is the marginal cost, representing the additional cost incurred by producing one more unit of output. ATC is the average total cost, which is the total cost per unit of output.
When MC=ATCMC=ATC, it means that the cost of producing an additional unit is equal to the average cost of all units produced. At this point, the average total cost is at its minimum.
This condition is based on the principle that as long as the marginal cost is less than the average total cost, producing one more unit brings down the average cost. Conversely, if the marginal cost is greater than the average total cost, producing an additional unit raises the average cost.
Output level 4 = ATC = TC/Output = 120 / 4 = 30
Output level 5 = ATC = TC/Output = 145 / 5 = 29
Output level6 = ATC = TC/Output = 190 / 6 = 31
Output level 5 has the lowest ATC.
