Principles of Microeconomics, Econ. 101

发布时间：2023-02-25

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Principles of Microeconomics, Econ . 101

Midterm III

Instructions:

[Major Q . 1] (Costs)

1 . Basic Concepts .

a.) Betsy spent $15 on a movie that had great reviews. Ten minutes into the film, however, she realizes it is dreadful. Since she spent $15, obviously she should watch the whole film. Is this fact so obvious?

b.) What is the principal difference between the short run and the long run as it pertains to production and cost?

c.) Can economic profit ever exceed accounting profit?

2 . The Short Run: Marginal and Average Cost .

a.) Let C (Q ) represent the total short run cost of producing Q units of output. What is meant by average total cost AC (Q ) ?

b.) A firm currently is producing Q = 700 units of output at a total cost of C (Q ) = $700. It is contemplating producing an extra unit of output (this would increase its total costs to $725). What are its marginal and average costs at the output level Q = 700?

3 . Short Run: Total Costs . Refer to Table (1.1).

a.) Use these data to illustrate (i.e., draw) the firm’s total-cost curve, C (Q ).

b.) The shape of the total cost curve you have sketched differs according to whether output is less than Q = 250 units or is greater than Q = 250 units. More precisely, over the output range 0 ≤ Q ≤ 250 total costs increase with Q (at a decreasing rate), but over the range 250 ≤ Q ≤ 430 they increase with output, Q ( at an increasing rate). Briefly, what explains this difference in behavior? What does it indicate for the behavior of marginal cost. MC (Q )?

Table 1 . 1 Costs, Output, and Employment

Labor	Output	Marginal Product	Variable Cost	Fixed Cost
0	0	–	$0	$5
1	100	100	$5	$5
2	250	150	$10	$5
3	350	?	$15	$5
4	400	50	$20	$5
5	?	25	$25	$5
6	430	?	$30	$5

4 . Short-Run Costs: Changes . . . .

a.) Recently, we have witnessed a dramatic increase in US interest rates. For many businesses, this has translated into an increase in mortgage rates and mortgage payments on their properties. What impact will this change have on their short-run run total cost curves?

b.) The last three decades have witnessed dramatic— indeed almost unparalleled— increases in worker productivity. Briefly, explain how this productivity increase might be expected to impact the short run total cost curve.

[Major Q .2] (Perfect Competition)

1 . Foundational . In order that an industry be perfectly competitive it is neces- sary that

[Assumption 3] there are many buyers and sellers and

[Assumption 4] consumers are perfectly informed about prices. Briefly, outline the role of each of these assumptions.

2 . Economic Profits . Dougal publishes textbooks. He owns the printing press that is used to print them. Suppose the facts are as follows:

F1. He accrues revenues of R = $4000 per month

F2. His costs of paper, ink, the building rental, and so on are $1500 a month

F3. Lacking any other major talent (to speak of) his next best job is flipping burgers (where he would earn $1500 per month). If he chooses this option, he knowshe also can rent his printing press for $900 per month.

a.) What are Dougal’s economic and accounting profits? Does he earn supernor- mal profits?

b.) Suppose, instead, that he can rent his printing press for $1100. What are his economic profits now? Does this change influence his optimal decision?

3 . Profit Maximization I: Basic Concepts . A competitive firm sells its output for $20 per unit. If the firm produces 200 units of output, average variable cost is $16, marginal cost is $18, and average total cost is $23. Is its choice of 200 units optimal, in the sense of maximizing its profits or minimizing its losses?

4 . Profit Maximization II: Major Principles . Suppose that a competitive firm’s revenues are given by the usual price, p, times quantity, Q, relationship, R (Q ) = p .Q and that its costs are given by a standard short-run total cost curve, C (Q ). It’s marginal costs are MC (Q ) and its average total costs are AC (Q ).

a.) Briefly, explain why the condition p = MC (Q ) is necessary for profit maxi- mization. What is the case if the firm’s current output level, Q, instead satisfies p > MC (Q )?

b.) Figure 1 on the facing page2. depicts the estimated short-run supply curve of a competitive profit-maximizing firm. What explains the peculiar “jump” in the output it supplies at the price p0? Based on these observations, what can we infer about the firm’s cost structure from segments OA & BC of the supply curve, and from point B itself?

5 . The Long Run . In the long run, firms not only can adjust their capital stocks, but also new firms can enter the industry. In the most extreme case, there is free entry—all firms have access to the same technologies and there are no bar- riers to entry. Very briefly, describe how the possibility of free entry changes the nature of the industry’s long-run supply curve.

Output

Fig .2 . 1: A Firm’s Estimated Supply Curve

[Major Q .3] (Labor Markets)

In this question L is labor (measured in labor hours) and Q is total output.

1. If, for a particular farm that grows vegetables, we were told MPL = 200 parsnips per labor hour, what exactly would this fact tell us? Does a negatively sloped MPL schedule imply that output is decreasing as L increases?

2. Briefly explain why the condition,

p . MPL = MBL = MCL = W

is necessary for profit maximization (where MBL and MCL are the respective marginal costs and benefits of employment).

In fact, the marginal benefit of la- bor, MBL = p . MPL , usually is denoted MRPL and is called the marginal rev- enue product of labor

3. In a diagram, mark $ on the vertical axis and employment, L, on the hori- zontal axis. Let W0 , p0 be the current hourly wage and current price. Depict the price, p0 , times marginal product, MPL schedule, p0 × MPL . In your diagram, il- lustrate the profit-maximizing level of employment, L 0(*) . Briefly, explain why, for a competitive firm, the p . MPL schedule is the labor demand curve.

4. Suppose that everything remains as just described, in part 3. of this ques- tion, but with a slight twist. More specifically, assume the government mandates that each employer cover the health insurance costs of its workers. On an hourly basis, to ensuring comparability with the hourly wage, W , these insurance costs are $H .

4 a .) What condition now governs the optimal level of employment?

4 b .) Let, L 1(*) denote the new level employment given W0 , p0 , w0 and the health
insurance cost H . How does L 1() compare with the initial level L 0()? Illustrate and
explain your answer.
5. Suppose the marginal product of labor schedule, MPL , is given by the re-
lationship MPL = 1/ (L 2 ). Does this relation capture the features expected of a standard MPL schedule? If so, suppose the competitive wage rate is W = $2
per labor hour and the competitive price is p = $8. What is the optimal, profit-
maximizing, level of employment, L *?