Review questions for test 2

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Review questions for test 2

• In Figure 6-4, marginal product of labor is
  negative for levels of employment
• Between 0 and 35 workers
• Equal to 35 workers
• Between 35 and 80 workers
• Greater than 80 workers
• None of the above

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Marginal productivity continued

• In Figure 6-4, there is diminishing marginal
  productivity over which range of workers?
• Zero to 35 workers
• At the 35th worker only.
• Between 35 and 80 workers
• Greater than 80 workers
• None of the above

3
Sample problems

• Samantha has been working for a law firm and
  earning an annual salary of 90,000. She decides
  to open her own practice. Her annual expenses
  will include 15,000 for office rent, 3,000 for
  equipment rental, 1,000 for supplies, 1,000 for
  utilities, and a 35,000 salary for a
  secretary/bookkeeper. Samantha will cover her
  start-up expenses by cashing in a 20,000
  certificate of deposit on which she was earning
  annual interest of 1,000.
• Find Samanthas annual implicit and explicit
  costs, assuming that there are no additional
  expenses.

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Samanthas Implicit and Explicit Costs

• Implicit costs are the salary she foregoes (
  90,000) the interest she foregoes ( 1,000).
  They total 91,000
• Explicit (out-of-pocket) costs are the other
  costs
• 15,000 for office rent,
• 3,000 for equipment rental,
• 1,000 for supplies,
• 1,000 for utilities,
• 35,000 salary for a secretary/bookkeeper
• 55,000
• Total costs 91,000 55,000 146,000
• Samantha needs to gross 146,000 in her own law
  practice in order to be as well off as working at
  another law firm.

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Sample problems this firm has TFC 50
complete the table
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Sample problem - Find the missing values
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Sample problems

• How much should this firm produce in the short
  run?

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Continued

• Find MR and MC.
• Then double
• check if
• Revenues cover
• variable
• Costs.
• They do not.
• So Q 0

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Another problem

• How much should this firm produce in the short
  run?

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Continued

• Find MR and MC.
• Then double
• check if
• Revenues cover
• Variable
• Costs
• At Q2, MRgtMC
• At Q 3, MRltMC
• So Q 2
• And TVC 900 - 500 400gtTR of 800

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Continued

• Does this firm earn an economic profit?
• No 800 - 900 -100

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Here is market S and D
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What is the market equilibrium P Q?

• At P 2.00 Qd 55 Qs
• Now suppose that each firm has the following
  cost structure on the next slide.
• How many pounds should the typical firm produce?
• Answer 62,000 pounds.

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The typical firm
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What will happen in the long run if the firms
total fixed costs are currently 5,000?

• What is the typical firms total revenues?
• Answer 2 x 62,000 124,000
• What is the typical firms total variable costs?
• Answer 112,000
• What is the typical firms total costs?
• Answer 117,000
• Is the typical firm earning economic profits?
• Answer Yes which implies that it will expand
  its scale and new firms will enter the market,
  shifting market supply to the right and driving
  down the price.

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Monopoly pricing

• A monopolist has the cost and demand conditions
  shown in the table on the next slide.
• Find its profit maximizing price and output if it
  sets a single price in the market.
• Find its output if it can perfectly price
  discriminate.

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One price monopolist
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Monopoly pricing continued

• If it is not able to perfectly price
  discriminate, it will set Q where MRMC and sell
  6 units at a price of 6 each. Its economic
  profits will be 36 - 24.00
• 12
• If it is able to perfectly price discriminate,
  then the demand curve becomes its MR curve and it
  will sell 10 units and its TR is 16 14 12
  10 8 60 and its economic profits will be
  60 - 40.00
• 20.00