Chapter 3 Part 1 Book

Question 0

With respect to the employment of inputs, it is important to recognize that analyzing marginal changes implies considering a small change in one input while holding what constant?

Answer 0

Holding employment of other inputs constant

Question 1

(Profit maximization)

Two things should be noted about this constant search for enhanced profits…

1) a firm can make changes only in variables that are…?
2) because the firm is assumed to constantly search for profit-improving possibilities, our theory must address the….? Change that must be made almost daily.

Answer 1

1) within its control

2) small “marginal” change

Question 2

The profit-maximizing firm will want to expand output by one unit of the added revenue from selling that unit is greater than..?

Answer 2

The added cost of producing it

As long as the marginal revenue from an added unit of output exceeds its marginal cost, the firm will continue to expand output

It will contract output whenever the marginal cost of production exceeds marginal revenue

Question 3

Profits are maximized when?..

Answer 3

Marginal revenue equals marginal cost

Question 4

A firm can expand or contract output only by altering its use of inputs.

These factors of production are?

Answer 4

Labor and capital

Question 5

Marginal revenue

Answer 5

Additional revenue for the production of another good

Question 6

The hiring decision of an employer

A) if the income generated by employing one more unit of an input exceeds the additional expense, then….?

B) if the income generated by one more unit of input is less than the additional expense…?

C) if the income generated by one more unit of input is equal to the additional expense….?

Answer 6

The hiring decision of an employer

A) if the income generated by employing one more unit of an input exceeds the additional expense, then add a unit of that input

B) if the income generated by one more unit of input is less than the additional expense, reduce employment if that input

C) if the income generated by one more unit of input is equal to the additional expense, no further changes in that input are desirable

Question 7

Marginal product of labor

MP(little L)

Answer 7

The change in physical output produced by a change in the units of labor, holding capital constant

Marginal product of labor= change in physical output (divided by) a change in the units of labor

Question 8

Marginal product

Answer 8

Change in physical output produced

Question 9

Marginal revenue product

Answer 9

The marginal income produced by a unit of input

Question 10

Marginal income

Answer 10

Marginal product (multiplied by) the marginal revenue product

If you have a guest appearance at a sporting event, it brings 20,000 more fans. You earn $25 per additional fan.

$25 X 20,000= $500,000

Question 11

Marginal product of capital

MP(little K)

Answer 11

The change in output associated with a one-unit change in the stock of capital, holding labor constant

Marginal product of capital = change in output (divided by) change in stock of capital

Question 12

The marginal revenue that is generated by an extra unit of output depends on the characteristics of the product market in which that output is sold.

Firm in purely Competitive Product Marketing=
-marginal revenue per unit of output sold is equal to..?

Firm with differentiated product (monopoly power) in product market=
-extra units of output can be sold only if..?

Answer 12

Firm in purely Competitive Product Marketing=
-marginal revenue per unit of output sold is equal to product price (P)

Firm with differentiated product (monopoly power) in product market=
-extra units of output can be sold only if product price is reduced (because the firm faces the market demand curve for its particular product) marginal revenue

Question 13

The firms marginal revenue product of labor can be represented as:

MRP(L) = MP(L) * ?
-in the general case

MRP(L) = MP(L) * ?
-if the product market is competitive

Answer 13

MRP(L) = MP(L) * MR
-in the general case

MRP(L) = MP(L) * P
-if the product market is competitive

Question 14

Changing the levels of labor or capital employed will add to or subtract from the firms..?

Answer 14

Total costs

Question 15

The marginal expense of labor (ME(L)) that is incurred by hiring more labor is affected by the nature of competition in…?

Answer 15

The labor market

Question 16

If the firm is in a competitive labor market and is a “wage taker”, then ME(L) is equal to..?

Answer 16

The market wage

They have labor supply curves that are horizontal at the going wage

If they hire an additional hour of labor, their costs increase by an amount equal to the wage rate, W

Question 17

The simplest way to understand how the profit-maximizing behavior of firms generates a labor demand curve is to analyze the firms behavior over..?

Answer 17

Short run

Question 18

In short run…
(With fixed capital)

• the firm needs to decide whether to alter its level of..?
• how to …….. Or …….. Output is not an issue because?

Answer 18

Output

Increase or decrease because only the employment of labor can be adjusted

-with capital fixed, a firms choice of output level and its choice of employment are 2 aspects of the same decision

Question 19

Marginal product of labor

MP(L)

Answer 19

The change in the physical output of a firm when it changes its employment of labor by one unit, holding capital constant.

How many more additional cars can be sold if you hire another worker? That additional amount is the MP(L)

As more salesman are hired, MP(L) must fall
-law of diminishing returns

Question 20

Law of diminishing marginal returns

Answer 20

As employment expands, each additional worker has a progressively smaller share of the capital stock to work with

Assume MP(L) is always decreasing

Question 21

Profits are maximized, then, only when employment is such that any further one-unit change in labor would have a marginal revenue product equal to…?

Answer 21

Marginal expense

MRP(L) = ME(L)

Question 22

MP(L) * P= ?

MP(L) = W/P states the profit-maximizing condition for hiring labor in terms of..?

Answer 22

W

Physical quantities