Lecture 1

Question 1

Assumptions

ideal traditional firm

Answer 1

owners=managers=firms (no separation of control & ownership)
perfect information: firms knows all relevant costs & prices for production in all future contigencies
Consumers know quality of product
no uncertainty - no unexpected changes in environment or market
Workers always do as they are told (no strikes, become9s ill, essentially act as robots

Question 2

Technical Productive Efficiency

Answer 2

produces on production function (2 cases)
how efficient firm is in transformation process
eff. production is achieved by maximum use of resources available
each point on PPF is technical efficient, but not in/outside)

Question 3

Isoquants

Answer 3

graphical representation of inputs that yield the same output, characteristic of production function
each isoquants gives minimu m combination of K&L for given fixed output (on isoquant production function)
convex to the origin due to imperfect subsitution (marginal rate of subsitution) - L shape or straight line are the extreme

Question 4

Characteristics of P.F

Answer 4

Long Run: returns to scale

Short Run: returns to factor

Question 5

Economic Efficiency

Answer 5

provides all minimum inputs for given output to ensure combination is the cheapest
-W/R (MpLAbour/Mp Capital) is tangent to insoquant
this is important to firm - wanting to determine level of ouput should produce in order to maximise profit, unit costs and demand

Question 6

Costs - LongRun

Answer 6

Increasing RtS where average costs decreases
Constant RtS: MC = AC
Increasing RtS: Ac increases which must correspond MC cost producitng one extra unit is higher than AC

Question 7

Costs - Short Run

Answer 7

capital is fixed - fixed cost present

Question 8

Allocative Inefficiency - Monopoly

Answer 8

restrict output to produce maximising output and increase price as they are the only firm in the market
Thus creating DWL and making consumer worse off by making firms better of (on expense of consumer´s surplus)

Question 9

Surplus

Answer 9

Consumer: surface under demand curve & above price
Seller: below price but above supply
profit - price minus the total variable cost

Question 10

Market Imperfections

Answer 10

firms in perfect competition and equilibrium but quantity produced demanded doesn´t match with supplied
true social benefit/cost of production or consumption doesn´t equal to the private one involve in a particular transaction

Question 11

Externalities

Answer 11

environment costs of production not taken into account private

Question 12

Free-Rider Problem

Answer 12

can´t charge for consumption and make profits and thus little of these good will be provided by private perfectly competitive market
thus market has to be run publicly but doesn´t provide these goods at optimal ouput

Question 13

Business RIsk

Answer 13

competitive firms under right assumptions are pareto optimal

inside firms don´t use market prices (renegotiating) and don´t have market relations

Question 14

if market prices and relationships deliver pareto efficient why not have markets inside the firm

Answer 14

have a contract for several tasks
decisions aren´t based on relative market prices that can be negotiated of carrying out each decisions
don´t renegotiate a contract everyday (costly)

Question 15

Cost- minimisation problem

Answer 15

choose input bundle which costs as little as possible

furtherst to the left for given isocurve

Question 16

tangency point

Answer 16

a) cost mi. bundle of inputs for that specific output must lie on isoquant for same output
b) choose point from whole isoquant curve which lies on on the lowest isocost curve

Question 17

Allocative Efficiency

Answer 17

p=Mc - additional cost incur of producing add. unit will equal to the price you receive
p=AR - average price of all units sold (Demand Curve)
produces amount customers demand and price customers are willing to pay (utility)
no deadweight loss - each experiences surplus

Question 18

isoquants

Answer 18

one would produce on the boundary
inside - would be inefficient
and only concern on the right part of isoquant (other one implies positive MRTS . makes no sense)

Question 19

least cost combination

optimum factor combination

Answer 19

combination of factors which a firm can produce a specific output at the lowest possible cost
Marginal product approach
isoquant/cost approach

Question 20

variable factors - long run decisions

Answer 20

decide which technique of production to use, what design of factory to build, type of machinary etc.
profit max. by substituting the factors whose gain is higher by others until last dollar of each factor brings equal revenue
profit is maximised

Question 21

Perfect Competitive EQ

Answer 21

achieve optimal allocation of resources without any DWL
socially optimal output of resources
industry will produce at point where S=D and no resources wasted as industry produces exactly the quantity demanded

Question 22

Monopoly

Answer 22

can influence price
will price discriminate until reach max. profit quantity which charges higher price and lower output than the comp. equilibrium
DWL - not optimal for society as consumers are still demanding product which monopoly isn´t willing to supply
underproduction of resources - desequilibrium

Question 23

Externality

Answer 23

impact of agent actions on expense of others which isn´t directly reflected on market prices
Social and private cost/benefit differ
under/over production
desequilibrium despite having perfect comp. market

Question 24

public good

Answer 24

provided without profit to all members of a society either by the government or by private individual organisation
non-rival and non-excludable

Question 25

positive externalities

Answer 25

alarm system install in the house
NHS
social services
education

Question 26

public good

Answer 26

streetlight
beaches
human rights
defence

Question 27

Solution to Market Failure

Answer 27

private case
governmental intervention (tax revenue, subsidies)
governmental regulation

Question 28

free-rider problem under public good

Answer 28

rational persons won´t contribute to provison of public good because he doesn´t need to contribute to benefit (going to be produced anyway)