EREC Quiz #7

Question 1

Factors of production:

Answer 1

goods/services that businesses demand in order to create other goods to be sold (INPUTS)
- Ex: labor, wood for chairs, flour for cakes

Question 2

Derived demand:

Answer 2

demand for factors of production

Question 3

If the price of a factor of production increases, then:

Answer 3

1) substitution away from the input by producers
2) substitutions away from the (now) more expensive final product by consumers

Question 4

Shifts in factor demand are caused by

Answer 4

1. Change in demand for the final product
2. Change in productivity of the resource
3. Change in the price of a substitute resource

Question 5

how does a firm respond to the prices of the factors of production they use?

Answer 5

A firm will MAXIMIZE PROFITS where the marginal revenue product of each input used is equal to the cost of that unit of input. MRP=MFC (Marginal revenue product=Marginal factor cost)

Question 6

MPP:

Answer 6

change in TPP from adding one more unit of input (factor)

Question 7

MRP (marginal rev. prod.) :

Answer 7

MPP*MR
- Basically MPP
- Ex. one input how much revenue do you get

Question 8

VMP (value of MP):

Answer 8

MPP * (output) price

Question 9

IF pure competition:

Answer 9

MRP=VMP

Question 10

To MAXIMIZE PROFIT with multiple inputs what will you do?

Answer 10

you will produce where the ratios of MRP to Price are the same for each input. At this point, you are also MINIMIZING COSTS.

Question 11

π max. w/ multiple inputs:

Answer 11

MRPk = MPPkP=P
MRP L =MPP LP=P L

So In general  MRP1/P1 = MRP2/P2 = MRP3/P3….

Question 12

5 general rules that summarize factor markets

Answer 12

1. An increase in resource price leads to
   - Substitution in production
   - Substitution in Consumption
2. The price elasticity of a renounce usually increases with time
3. Shifts in derived demand caused by
   - Change in demand for the product
   - Change in productivity of resource
   - Change in price of substitute
4. Production cost minimized when:
   - MRP1/P1 = MRP2/P2 =…MRPN/PN
5. L.R. equilibrium in factor market when
   - S = D
   - Resource owners must be earning a market rate of return

Question 13

Max profit is when:

Answer 13

MFC = MRP