ECO 3101 EXAM 2 Questions with Complete Answers.

ECO 3101 EXAM 2 Questions with Complete Answers In monopolies, MR is always - Correct Answers: twice as steep as original demand function What creates market power (monopolies)? - Correct Answers: Patents, Control over inputs, Economies of scale,Network externalities, Franchises If an industry has IRTS - Correct Answers: There will be few large firms If an industry has DRTS - Correct Answers: There will be lots of small firms The more firms there are in a market - Correct Answers: the higher consumer surplus will be. DWL also decreases with a greater number of firms. Consumer surplus is the area - Correct Answers: below the demand curve and above the price Two factos for third degree price discrimination to occur: - Correct Answers: 1) Prevent resale 2) Must be able to identify if someone is a part of a group If firms are making profit in a perfectly competitive market: - Correct Answers: more firms will join the market, shifting supply to the right, and dropping price (MR) back down. the analog to budget constraints in consumer theory is ____ in producer theory - Correct Answers: Isocosts profit - Correct Answers: revenue - cost P*Q - c(Q) Long run - Correct Answers: the time period in which all inputs can be varied Short run - Correct Answers: the period of time during which at least one of a firm's inputs is fixed law of diminishing returns - Correct Answers: When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines. - Slope increases and then decreases - You keep getting gains but they get smaller and smaller each time - Short run concept Thomas Malthus - Correct Answers: 1798 said human population will outgrow food supply - knew land was fixed, but forgot to consider technology Marginal Product - Correct Answers: The change in output generated by adding one more unit of input. MP L = change in Q/ change in L Average Product - Correct Answers: Total output divided by the amount of variable input - AP L = Q/L Isoquant - Correct Answers: A collection of labor and capital that brings the same quantity Marginal Rate of Technical Substitution - Correct Answers: How much K you must give up to get more L. - MRTS = | change in K/change in L | - MRTS = MP L / MP K - MRTS = w/r Perfect substitute Isoquants - Correct Answers: Only thing that matters is price. Straight diagonal lines Perfect complements isoquants - Correct Answers: At the kink is the most optimal combination. L shaped IRTS - Correct Answers: A proportional increase in all inputs results in a more than proportional increase in output. ex: Doubling K & L results in an output growth of 2.5 If c*F(K,L) F(c*K, c*L) -- Multiplying both inputs by "c" gets us greater than c times the output CRTS - Correct Answers: Doubling all inputs = double the output DRTS - Correct Answers: A proportional increase in all inputs results in a less than proportional increase in output. ex: Doubling K & L results in output only growing by 1.5 -Long run concept If alpha + beta 1 If alpha + beta = 1 If alpha + beta 1 Must be in Cobb-Douglas form(F(K,L) = (K^alpha * L^beta) !!! - Correct Answers: DRTS CRTS IRTS Test Question: Why is marginal analysis critical? - Correct Answers: Marginal analysis is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. Companies use marginal analysis as a decision-making tool to help them maximize their potential profits. Variable costs - Correct Answers: = wL w represents the wage rate paid to workers Total costs - Correct Answers: fixed costs + variable costs =rK + wL Fixed Costs - Correct Answers: =rK r represents rental rate of capital Average Fixed Cost (AFC) - Correct Answers: = FC/Q changes as quantity changes, constantly drops towards 0 Average Variable Cost (AVC) - Correct Answers: =VC/Q Average Total Cost (ATC) - Correct Answers: =TC/Q - On a graph, AVC and ATC get closer and closer together because AFC is constantly getting smaller Marginal Cost (MC) - Correct Answers: the change in total costs associated with a one-unit change in output MC = Change in TC / Change in Q -- Since FC doesn't change .. MC = Change in VC / Change in Q MC intersects AVC - Correct Answers: at AVC's minimum MP intersects AP at... - Correct Answers: AP's maximum Why does the union support minimum wage increases? - Correct Answers: With an increase in minimum wage, the cost of unskilled labor increases. Less labor = more capital . Higher minimum wages = more automation The analog to Indifference curves in consumer theory is _____ in producer theory - Correct Answers: isoquants total product - Correct Answers: All the goods and services produced by a business during a given period of time with a given amount of input average product - Correct Answers: the average amount produced by each unit of a variable factor of production Marginal product - Correct Answers: the increase in output that arises from an additional unit of input For perfect competition, price equals - Correct Answers: marginal revenue Firms release output until - Correct Answers: MR = MC Shut down when - Correct Answers: PAVC Stay in production when - Correct Answers: P AVC third degree price discrimination - Correct Answers: charging different prices to different demographic market segments