theory of supply

Question 1

The slope of the indifference
curve equals what?

Answer 1

the marginal rate of substitution

Question 2

A change in price implies what?

Answer 2

a change in relative prices
a change in purchasing power
a change in utility

Question 3

A utility maximizing consumer does what?

Answer 3

sets the MRS equal to the price ratio
sets the marginal utility to price ratio equal for all goods
only buys affordable bundles

Question 4

The Marginal rate of Substitution is always
constant along an indifference curve true or false

Answer 4

true

Question 5

Utility maximization implies that the price ratio is
greater than the Marginal Rate of Substitution true or false?

Answer 5

true

Question 6

The substitution and income effects always work in
the same direction true or false?

Answer 6

true

Question 7

what do we assume about firms?

Answer 7

We assume firms maximize profit.

Question 8

Profits formula is?

Answer 8

= total revenue – total costs
Π = TR - TC

Question 9

what does revenue depend on?

Answer 9

Revenue depends on the demand function

Price x quantity

Question 10

what does cost depend on?

Answer 10

Cost depend on the firm’s productivity and
input prices.

Expenses incurred by producing goods and/or
services

Question 11

what is the Principal-agent problem?

Answer 11

the idea where shareholders want different things to managers and cant control them

Question 12

what is a possible to solution to the principle agent pronblem?

Answer 12

give managers shares
– but managers might game incentives

Question 13

Accounting costs are….

Answer 13

– Actual payments made by a firm in a given period

Question 14

Oppurtunity costs are…

Answer 14

Amount lost by not using a resource in its best
alternative use

Question 15

what is an economists indication of successs?

Answer 15

supernormal profits

Question 16

what are supernormal profits

Answer 16

Supernormal profit is the pure profit
accruing to the owners after allowing for all
economic costs.

Accounting profits do not necessarily
indicate economic profits!

Question 17

how do economists analyse profit maximisation?

Answer 17

Economists analyze profit maximization by asking
whether firm should produce additional output or
not.

Question 18

profit maximizing point is

Answer 18

marginal revenue equals marginal cost.

MC = MR

Question 19

what is Marginal revenue (MR)?

Answer 19

• the increase in total revenue from selling an
  extra unit of output.
• is not the revenue from the “last” unit sold.

Question 20

why does MR steadily fall?

Answer 20

the extra unit must be sold at a lower price
(demand curve slopes down).

price reductions also reduce the revenue earned
from existing units of output

Question 21

average revenue formula

Answer 21

AR = TR/Q

Question 22

marginal revenue formula

Answer 22

MR= change in TR/ change in Q

Question 23

where does MR lie?

Answer 23

MR lies below the demand curve.

MR is less than the price
at which the extra output is
sold.

Question 24

The inverse demand function

Answer 24

P = a-bq

Question 25

Economists assume that firms

Answer 25

profit maximise

Question 26

Firms maximize profit by setting

Answer 26

mc=mr

Question 27

what does the production function state?

Answer 27

the maximum output that can be produced is, given inputs

Question 28

Inputs/factors of production

Answer 28

Any good or service that is used in output production – e.g. capital, labour, natural resources, entrepreneurial ability... * The inputs used in production determine the amount of output produced!

Question 29

what is the short run?

Answer 29

The short run is the period where at least one input/ factor of production is fixed. Example: capital (buildings, machinery, etc.) is fixed in the short run but labour can vary.

Question 30

what is an input?

Answer 30

a factor of production

Question 31

what is the long run?

Answer 31

The long run is the period where no inputs are fixed, all inputs are variable.

Question 32

The marginal product

Answer 32

is the increase in output obtained by adding 1 unit of the variable factor (labour) but holding constant the inputs of all other factors (capital, etc.)

Question 32

The marginal value product

Answer 32

the extra revenue from selling the output made by an extra worker. – marginal product of labour multiplied by output price

Question 33

Diminishing marginal product

Answer 33

Also called diminishing returns. In the short run, the marginal product for a factor decreases if at least one other factor is held fixed. – Trying to increase labour without also increasing capital will bring diminishing returns. – Implies increasing marginal costs.

Question 34

what do costs depend on?

Answer 34

The firm’s production technology – The technology gives the possibilities for transforming inputs into output and is summarized by the production function. – Production function: input-output relationship. * measures the output for given input(s) – Cost function: cost-output relationship. * measures total cost given output (and prices) * Input prices

Question 35

What is the cost of a specific output quantity?

Answer 35

It is the cost of all the required inputs.

Question 36

Different (Short-run) Cost Definitions

Answer 36

* Total Costs –Total Fixed Costs (TFC ) –Total Variable Costs (TVC ) * Average Costs –Average Fixed Costs (AFC) –Average Variable Costs (AVC) * Marginal Costs

Question 37

what are marginal costs?

Answer 37

Marginal cost (MC) is the rise in total cost (TC) if output (Q) increases by 1 unit. – the increase in TC that arises from an extra unit of production. – not the cost of producing the “last” unit

Question 38

marginal cost formula

Answer 38

change in total costs/ change in quantity

Question 39

As output increases, why might marginal costs start high, then fall, then rise again?

Answer 39

-In the short-run for given capital increases in labour specialization might decrease SMC. – At some point more labour might start to get into each other’s way and SMC start increasing.

Question 40

For 2 goods the long-run production function would be

Answer 40

y = f (x1,x2)

Question 41

What happens to output when we double all inputs (t=2)?

Answer 41

is the minimum cost of producing each output level when the firm can adjust all inputs

Question 42

Long-run total cost (LTC)

Answer 42

– is the minimum cost of producing each output level when the firm can adjust all inputs

Question 43

Long-run marginal cost (LMC)

Answer 43

– is the rise in LTC if output rises permanently by 1 unit – required for deciding on the profit maximizing output

Question 44

Long-run average cost (LAC)

Answer 44

– is LTC/Q – required for checking profit is positive

Question 45

when is economies of scale on lac curve

Answer 45

When long-run average costs decline as output rises Reasons: *Increasing returns *Indivisibilities (fixed costs) *Specialisation and division *Labour *Capital

Question 46

Constant economies of scale on a lac curve

Answer 46

When long-run average costs are constant as output rises

Question 47

Diseconomies of scale on a lac curve

Answer 47

When long-run average costs rise as output rises Reasons: * Decreasing returns * Managerial diseconomies * Geography

Question 48

Minimum Efficient Scale

Answer 48

* The quantity where economies of scale are exhausted. * A determinant for the intensity of competition, i.e. the number of competitors. * If MES is large relative to market size there will be a few firms only.

Question 49

where is MES on a lac curve?

Answer 49

lowest point

Question 50

Which UK industry has the highest MES as % of market?

Answer 50

steel

Question 51

If MR > MC, an increase in output will do what to profits?

Answer 51

increase them

Question 52

If MR < MC, a decrease in output will do what to profits?

Answer 52

increase them

Question 53

If the firm is making a loss when MR=MC what should they do

Answer 53

probably close down

Question 53

Mr max

Answer 53

MR = 0

Question 54

what is it if we double all inputs and all outputs double?

Answer 54

constant returns to scale

Question 55

if we double all inputs and outputs increase by more than twice what is this?

Answer 55

increasing returns to scale

Question 56

if we double all inputs and outputs increase by less than twice what is this?

Answer 56

decreasing returns to scale