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A firm will maximise its profits if it produces and sells the level of output where: MC = MB If at the current level of output a firm's price exceeds its marginal revenue and its marginal revenue exceeds its marginal cost, then to maximise profits it should : reduce price and raise output. The optimum point for a profit-maximising firm to produce will be at the bottom of the AC curve. False A firm will always maximise profits by charging a price equal to both marginal cost and marginal revenue. False Normal profit is the opportunity cost of being in business, and is included in the cost curves. True A firm's total revenue exceeds its total costs. Which of the following terms does not describe the firm's position? The firm is making:
Normal profit only
Normal profit is the excess of total revenue over total cost in a normal year. False A key element of a firm's cost is the opportunity cost incurred by being in business. True When calculating profit, opportunity cost is included in total cost. True Normal profit is that needed such that the owners of a business are (just) content to remain in that industry.
True
Supernormal profits are only made in really good years. False Supernormal profits are the excess of total profit over normal profit. True A firm that cannot make supernormal profits in the long run will close down False If firms in an industry are all making supernormal profits, then other firms will want to enter the industry.
True
A firm will choose to shut down rather than continue to produce in the short run when at any positive output
level
AR is less than AVC
he figure shows a firm's cost and revenue curves. It is currently producing at an output of X. In order to maximise profits it should :
Reduce output in the short run and close down in the long run.
A firm faces the following total cost and total revenue schedules : TC 100 20Q3QQ 2 TR 60Q 2Q 2 What is the equation for average cost? 100/Q 20 3QQ A firm faces the following total cost and total revenue schedules: TC 100 20Q3QQ 2 TR 60Q 2Q 2 What is the equation for marginal cost? -20+6Q A firm will choose to shut down rather than continue to produce in the short run when at any positive output level :
AR is less than AVC
Consider a firm operating in a market in which it is a price taker. In other words, it faces a horizontal demand curve. Assume that it faces a market price of $ 44 per unit for its product. What shape is its total revenue curve? A straight line out from the origin.
If a change in the price of good X from pound£75 to pound£ 70 leads to a change in the
amount sold from 200to 220 units, what would be the MR? 20 Marginal revenue is: the added revenue that a firm takes when it increases output by one additional unit. Jerry grows lettuces commercially. He is a price taker, so faces a perfectly elastic demand curve. If he wants to try to increase revenue, he should: keep the price the same but produce more to increase sales
Having installed this level of capital, the firm now decides it wishes to produce Upper Q 2 Q 2 output. On which short-run cost curve will the firm operate in the very short (immediate) run? SAC Subscript a SAC a On which short-run cost curve will the firm operate in the short run? Upper Q 3Q Q 3Q Assuming that the firm still wishes to produce Upper Q 2 Q 2 output, on which short-run cost curve will the firm operate in the long run? SAC Subscript b SAC b Which level of output would allow the firm to produce at the minimum long-run average cost? Upper Q 3Q Q 3Q Beyond which point would decreasing returns to scale set in? SAC Subscript a SAC a The long-run average cost curve will be tangential with the bottom points of the short-run average cost curves. Is this statement true or false? False Empirical studies show that the typical shape of firms' long-run average cost curves is: sloping down to the right and then levelling off. If a firm is achieving maximum economies of scale then its LRAC = SRAC = LRMC = SRMC. Is this statement true or false? True When constructing a long-run average cost curve, a number of assumptions need to be made. Identify which of the following are such assumptions: Factor prices are given. Yes The state of technology is given. Yes All factors are variable. Yes Firms will choose the least-cost factor combination. Yes
The firm experiences economies of scale. No There are no fixed factors of production. Yes The MPP/P ratios for all factors are equal. Yes To get a full picture of how markets work, we must take account of the time dimension. Given that producers and consumers take time to respond fully to price changes, we can identify different equilibria after the lapse of different periods of time. Generally, short-run supply and demand tend to be less price elastic than long-run supply and demand. As a result, any shifts in demand or supply curves tend to have a relatively bigger effect on price in the short run and a relatively bigger effect on quantity in the long run. The short-run (retail) supply of freshly cut flowers is much less elastic than that of pot plants because: florists cannot keep freshly cut flowers as long as pot plants. When people have more time to respond to price changes, demand becomes: more elastic. The price of petrol increases by 20% and remains at the new higher level. Which of the following statements is true, assuming that everything else stays unchanged? Initially after the price change the price elasticity of demand will be less elastic than it will be a few years after the price change. Stabilising speculation can be defined as: A situation where the actions of speculators tend to reduce price fluctuation Buyers and sellers are likely to anticipate what will happen to prices before they buy or sell. If people believe that prices are likely to rise, current supply will shift to the Left and current demand will shift to the Right
For firm A, is the following an internal or external economy of scale? Firm A benefits from lower administration costs per unit as a result of opening a second factory. Internal Firm A is able to sell by-products to other firms. Internal Firm A benefits from research and development conducted by other firms in the industry. External Other firms benefit from firm A's discovery of a new technique of mass production. Internal The ability of a firm to diversify into other markets is an example of which type of economy of scale? Risk can be spread When economists talk of 'spreading overheads' they mean: increasing output to reduce average fixed costs. External economies of scale occur because: The industry becomes larger Given that all factors of production are variable in the long run, a firm will want to choose the least-cost combination of inputs for any given level of output. Assuming that a firm uses three factors A, B and C, whose prices are respectively P A, P B and P C, which of the following represents the least-cost combination of these factors?
MPPa/Pa=Mppb/Pb=Mppc/Pc
The following is a list of various types of economy of scale : (i) The firm can benefit from the specialisation and division of labour. (ii) It can overcome the problem of indivisibilities. (iii) It can obtain inputs at a lower price. (iv) Large containers/machines have a greater capacity relative to their surface area. (v) The firm may be able to obtain finance at lower cost. (vi) It becomes economical to sell by-products. (vii) Production can take place in integrated plants. (viii) Risks can be spread with a larger number of products or plants. The table given below gives details of the output of good X obtained from different combinations of factors A, B and C. Output of good X from various factor combinations Quantity of input A Quantity of input B Quantity of input C Output of X
100 50 3Q0 1000
100 50 3Q1 1005
100 51 3Q0 1010
101 50 3Q0 1003Q
Assume that the price of factor A is
pound£6.
What must the prices of factors B and C be if the least-cost factor combination to produce 1000 units of X is the one shown in the top row of the table? Price of B : B: 20 C : 10 Suppose that a firm faces a two-factor production function, where capital ( K ) and labour ( L )
are the two factors. Which of the following is a Cobbdash–Douglas production function?
TPP=AKaLb Suppose that a firm faces a two-factor
Cobbdash–Douglas
production function, where capital ( K ) and labour ( L ) are the two factors.
The function takes the form: TPP = AKLβ. If alphaα + betaβ = 1, the firm faces:
Constant return to scale
The function takes the form: TPP = AKLβ. If alphaα + betaβ > 1, the firm faces:
Increasing return to scale With the quantity of factor A measured on the vertical axis and the quantity of factor B measured on the horizontal axis, the slope of an isoquant gives (for that output): MPPb/MPPa With the quantity of factor A measured on the vertical axis and the quantity of factor B measured on the horizontal axis, the slope of an isocost gives : Pb/Pa A firm achieves productive efficiency when: input utilisation is such that the ratio of the marginal product of any two inputs is equal to the ratio of their prices.
Assume that a firm uses just two factors of production. The table given below shows what happens to output as the firm increases one or both of these inputs. The effects of increasing the amounts of both inputs Situation(i) Situation(ii) Input 1 Input 2 Output Input 1 Input 2 Output 1 1 12 1 2 14 2 2 24 2 2 24 3Q 3Q 3Q6 3Q 2 3Q 4 4 48 4 2 3Q 5 5 60 5 2 42 Are the figures consistent with the law of diminishing marginal returns? YES For firm A, is the following an internal or external economy of scale? Firm A benefits from a pool of trained labour in the area. External
