Download STUDY GUIDE FOR 2nd MIDTERM

Econ 2610
STUDY GUIDE FOR 2nd MIDTERM
-Consumer Choice
-Law of diminishing marginal utility
-Utility maximization
-Marginal utility per dollar
-The rational spending rule
-Study by Kahneman and Deaton on Income and Utility
-Production and Costs
-Adam Smith Quote
-How productivity is measured and why it’s important
-Difference between long-run and short-run production
-Marginal productivity of labor
-Law of diminishing marginal returns
-Relationship between marginal productivity and marginal costs
-Relationship between marginal costs and average costs
-General shape of various cost curves
-Profit maximization and perfect competition
-How firms maximize profit
-The profit maximizing rule (MR and MC)
-Determine profit maximizing quantity using a production table or graph
- Perfect Competition
-Characteristics that determine perfect competition
-Measure firms profits with P, ATC, and Q
-The shutdown rule (TR and VC, P and AVC).
-Label firms’ profit or loss area on a graph, the shutdown price.
-Long run condition for perfectly competitive firms
-Economic and accounting profit
-Implicit costs and normal profit
-Long-run adjustments to profits and losses
-The allocative function of price (the invisible hand)
-Limitations of markets and roles for the government
-Barriers to entry
Practice Problems:
1. Assume at the current level of consumption Joe’s Marginal Utility of X is 50 utils and his marginal
utility of Y is 20 utils. The price of X is $10 and the price of Y is $5. In order to maximize utility, what
will Joe purchase next?
Quantity
0
1
2
3
4
Total Utility
0
30
44
49
48
2. Refer to the table above. Marginal utility begins to decline when this individual consumes the
___ quantity.
3. A utility maximizing consumer purchases 8 units of good A and 2 units of good B each week. What
do we know must be true of the 8th unit of good A compared to the 3rd unit of good B?
4. Total utility is maximized generally when a consumer’s _____________________ is equalized for the
last unit of each good he or she buys.
5. Given the table below, how much pizza and beer will Bob consume if the price of a piece of pizza is
$2.00 and the price of a beer is $2.00 if he has $10 to spend?
Quantity
Marginal
Quantity
Marginal
of pizza
utility
of beer
utility
1
44
1
42
2
32
2
40
3
28
3
32
4
18
4
10
5
4
5
4
6. Harry spends all his income ice cream and snicker bars. The price of ice cream is $5/quart and the price
of a snickers bar is $1. Harry has $20 to spend on the two goods. Note, we’re starting at the 9th snickers
bar, which means he has already purchased the first 8 snickers bars.
Harry's preferences for ice cream and snickers bars are as stated in the table below.
Q ice
Utility ice MU ice
MU/dollar Q
MU/dollar
MU
cream
cream
cream
snickers
snickers
bars
bars
1
60
9
14
2
110
10
10
3
150
11
8
4
180
12
6
5
200
13
4
6a. Fill in the blanks in the table above
6b. In order to maximize utility given the prices and income above, Harry will buy ___ quarts of ice
cream and ___ snicker bars.
7. How is productivity measured and what does it mean to become more productive?
8. What is the distinction between short-run and long-run production decisions?
9. Use the following production table to answer questions.
Labor
Output(Q)
0
0
1
10
2
22
3
30
4
38
5
40
6
41
9a. What is the marginal productivity of the second worker?
9b. Marginal productivity begins to decline when the firm hires the ___ worker.
9c. Marginal costs begin to rise with the firm hires the ___ worker.
10. Explain the law of diminishing marginal returns and how it relates to marginal costs.
11. Suppose at the current level of production average total costs=$300 and average variable costs=$250.
If marginal costs associated with the next units are $275, what will happen to average total costs and
average variable costs if they expand production?
12. Use the following production/cost table to answer the following questions.
Labor
Output(Q)
Fixed Costs Variable Costs Total Costs Marginal Costs
0
0
____
0
400
1
10
____
____
450
____
2
22
____
100
____
____
3
30
____
150
____
____
4
38
____
200
____
____
5
40
____
250
____
____
6
41
____
300
____
____
12a. Fill in the blanks in the table above.
12b. If this firm sells all its output at a constant price of $25, what is the profit maximizing Q?
12c. What do their profits equal?
13a. It costs a firm $50 to produce an additional unit of their product. If they can sell the product for $50,
what would happen to their profits if they produce it?
13b. What will happen to their profit if they can sell it for $40 and their costs equal $50?
13b. What will happen to their profit if they can sell it for $50 and their costs equal $30?
14. Suppose a firm announces that they are investing $10 million in their facility in order to expand production.
What do we know must be true in order for this firm to be willing to make this investment?
15. A firm knows it can make an additional $800 in revenue if it produces one more unit Their current average
total costs equal $700. What happens to their profits if they produce the additional unit.
16. Suppose a Firm A has half of the fixed costs as firm B, but the same total revenue and variable costs
for all quantities. What does this mean as far as the profit maximizing quantity of the 2 firms (will Firm
A’s be greater than, less than, or equal to Firm B’s?). What does this mean as far as the profit of the two
firms?
17. What are the three characteristics of perfectly competitive markets?
18. The demand curve in a perfectly competitive market is _______________. The demand curve of a
perfectly competitive firm is _______________.
19. Use the following diagram representing to answer the following questions
P
MC
ATC
AVC
20
d=MR
15
14
6
400
a.
b.
c.
d.
450
600
800
Q
What is the profit maximizing quantity?
What does profit equal at the profit maximizing Q?
What is the shutdown price?
At what price would profits equal zero?
Cost
marginal
cost
$70.00
E
$60.00
D
$50.00
C
$40.00
B
$30.00
A
$20.00
$10.00
$0.00
0
45
55
65
75
85
Quantity
20. Refer to the graph above. If the market price increases from $50 per unit to $60 per unit, how will a
profit-maximizing perfectly competitive firm change their output?
21. Refer to the graph above. If the market price equals $60, what will this firm’s revenue equal? What
will their profits equal?
22. Suppose a firm is earning negative profit, but is continuing to operate. What do we know must be
true of TC compared to TR, and VC compared to TR? What do we know must be true of ATC compared
to P, and AVC compared to P?
23. Suppose a barber shop has fixed cost equal to $1,000/month and total costs equal to $5000/month.
This shop will continue to operate in the short run as long its total revenue is greater than ____?
24. What was Adam Smith talking about when he used the analogy of an “invisible hand” leading us and
allocating resources in society?
25. Give the formulas for economic and accounting profit. Why can economic profits never be below
accounting profit?
26. If total revenue=$3,000, explicit costs=$2,000, and implicit costs=$1,200, what is this firms economic and
accounting profit?
27. What does it mean when economic profits are negative for a firm (mathematically and intuitively)?
28. A firm’s accounting profit is $20,000, economic profit is $5,000, and total revenue equals $100,000.
What do their explicit costs and what implicit costs equal?
29. Draw the MR, MC, ATC curves for a perfectly competitive firm that is earning zero profit.
30. Explain the sequence of events that will occur when firms are earning economic profits in a perfectly
competitive industry by filling in the blanks below:
1. Firms _______________ the industry; 2. Market _______________ shifts _______________. ;
3. Equilibrium price _______________. ; 4. Firms’ marginal _______________ ___________;.
5. Firms’ profits _______________ to zero.
31. Suppose farmers suddenly can earn considerably more per acre from growing wheat than from
growing potatoes. What can we expect will happen in the long run as far as number of farmers in each
industry and the prices of each good?
32. List three limitations of markets (or roles for the government in market systems).
33. List four barriers to entry.