401 Midterm II

Question 1

What is Accounting Profit?

Answer 1

Accounting profit = revenue - expenses

Question 2

What is Economic Profit?

Answer 2

Economic profit = revenue - (expenses + opportunity costs of time and financial capital)

Question 3

Define Opportunity Cost

Answer 3

Opportunity cost refers to the potential benefits missed when choosing one alternative over another, such as investment returns or alternative uses of time.

Question 4

Define Normal Return

Answer 4

Normal return is the return needed to compensate capital suppliers for investment risk.

Question 5

What is Sunk Cost?

Answer 5

Sunk cost is an incurred expense that cannot be recovered and should not affect future decision-making.

Question 6

Short Run vs. Long Run Costs

Answer 6

In the short run, some inputs are fixed (e.g., buildings, equipment); in the long run, all inputs become variable.

Question 7

Define Fixed Cost

Answer 7

Fixed cost is a cost that remains constant regardless of output level, such as buildings and equipment.

Question 8

Define Variable Cost

Answer 8

Variable cost changes with the level of production, including costs like labor, rented equipment, and energy.

Question 9

What is Average Cost (AC)?

Answer 9

Average Cost (AC) = Total Cost (TC) / Output (Q)

Question 10

What is Average Fixed Cost (AFC)?

Answer 10

Average Fixed Cost (AFC) = Fixed Cost / Output (Q)

Question 11

What is Average Variable Cost (AVC)?

Answer 11

Average Variable Cost (AVC) = Variable Cost / Output (Q)

Question 12

What is the Short-Run Marginal Cost (SMC) for labor at a wage of $20 and a marginal product of labor (MPL) of 0.5?

Answer 12

SMC = $40, as calculated by dividing the wage by the marginal product of labor.

Question 13

Define Long-Run Average Cost (LAC)

Answer 13

LAC is the cost per unit of output when all inputs are variable in the long run.

Question 14

Minimum Efficient Scale (MES)

Answer 14

MES is the lowest output level at which a firm can produce at the minimum long-run average cost.

Question 15

Shut-Down Rule

Answer 15

In the short run, firms should continue if revenue > variable costs. In the long run, firms continue if expected profit is positive after fixed costs.

Question 16

Short-Run Marginal Cost (SMC)

Answer 16

calculated by dividing the wage by the marginal product of labor.

Question 17

Conditions for perfect competition

Answer 17

Large numbers of firms and consumers

No entry barriers (zero economic profit)

Identical products (allows for single price)

Firms and consumers are price takers (actions do not impact price)

Question 18

Producer surplus equation

Answer 18

Price - marginal cost

Question 19

Consumer surplus equation

Answer 19

WTP (marginal benefit) - market price

Question 20

The Market for Driverless Cars will trend towards a monopoly

Answer 20

Waymo 3/330,000 vs 22/120,000
Argues more data will lead to better services at the top and huge barriers to entry, points to potential government pairing for public transport

Essentially an economy of scale

Question 21

economists pin more blame on big tech:

Answer 21

Half of the increasing wage gap growth in the last 40 years was due to the automation of tasks

• Globalization weakens the role of unions
• by Acemoglu, who is one of the most widely cited economists in academic journals

Despite gridlock they are hoping to find common ground on some steps to help workers

There was a pre 1980’s phase where growing technology actually helped

Also cites the example of “so-so” tech: like self checkout stations and automated phone menus, stuff that does nothing but kill jobs without a real benefit

Question 22

Long run market supply in constant cost and increasing cost industries

Answer 22

In a constant cost industry is a horizontal line

Increasing cost industry is upward sloping long run supply curve

Question 23

Pareto efficiency

Answer 23

Pareto efficiency, also known as Pareto optimality, is an economic concept that describes a situation where resources are allocated in the most efficient way and no further improvements can be made to society’s well-being

Question 24

Derive the optimal capital/labor ratio by writing down the slope of the isoquant and the isocost.

Answer 24

Question 25

slope of the isoquant

Answer 25

Question 26

slope of the isocost

Answer 26

Question 27

write down the labor demand
schedule

Answer 27

Question 28

at equilibrium of the labor market, what happens to wages

Answer 28

wages will equal worker’s marginal revenue
products of labor, which is the MPL * Price

Question 29

Labor demand schedule graph with a price of 20

Answer 29

Question 30

How is the optimal capital labor ratio devised?

Answer 30

By setting the isoquant and isocost equal to each other!

Question 31

Given average cost (from a fixed cost and variable cost function) what are two ways to find minimized average cost?

Answer 31

1, where ẟAC = 0, and 2, where AC = MC

Question 31

Given an MRTS of L / K = 6, what is the optimal ratio of labor to capital

Answer 31

We read this as 6 / 1 so 6 units labor to 1 capital

Question 32

How do you analyze a firm’s viability in the short run vs the long run?

Answer 32

Short run is just rev - var costs at current q, long run is rev - AC at current q

Question 33

How is MPL calculated without an equation (ie only values given)

Answer 33

Overall output / workers needed to get there; ie the amount produced per one more laborer at the value youre at

Question 34

What formula derives the contribution to paying fixed costs that a revenue provides?

Answer 34

Q*(P-AVC)

Question 35

Maximizing profit as a firm comes at

Answer 35

MC = MR!