Managerial Economics Exam 2

If the present value of all future profit is positive, it means that the firm is expected to generate enough profit in the long run to cover all its costs, including fixed costs. Therefore, even if the firm is currently earning a negative profit in the short run, it should continue operating because it has the potential to turn profitable in the future. Shutting down the firm would result in the loss of potential future profits.

In a perfectly competitive market, there are many buyers and sellers, and all firms sell identical products. This means that no single firm has control over the market price. Instead, the price is determined by the overall supply and demand in the market. As a result, a firm operating in a perfectly competitive market will have to accept the market price for its product, rather than being able to set its own price. This is because if the firm tries to charge a higher price, buyers will simply choose to purchase from a competitor who is offering the product at the market price. Therefore, the firm must take the price of its product as determined by the market.

A sunk cost refers to a past cost that has already been incurred and cannot be recovered. It is no longer relevant for decision making because the cost has already been spent and cannot be changed. When making decisions, it is important to focus on future costs and benefits rather than being influenced by sunk costs. Sunk costs should not be considered when evaluating the potential outcomes of a decision.

When it becomes more profitable for a firm to specialize, it means that the firm can generate higher profits by focusing on a specific aspect of the production process and outsourcing the rest. This allows the firm to take advantage of economies of scale and expertise in that particular area, leading to increased efficiency and profitability. As a result, firms may choose to vertically disintegrate and specialize in order to maximize their profits.

If the average cost is decreasing, it means that the cost of producing each additional unit is decreasing. This implies that the marginal cost, which represents the cost of producing one additional unit, must be less than the average cost. Therefore, the correct answer is "Marginal cost is less than average cost."

Consumer surplus is the difference between what a consumer is willing to pay for a good and the actual price they pay. It represents the additional value that the consumer receives from the good beyond what they had to pay for it. This surplus occurs when the consumer perceives the good to be more valuable than its market price, resulting in a gain for the consumer.

The given correct answer is "How to handle the cost if the value changes overtime." This is because the cost of a durable good may fluctuate over time due to various factors such as inflation, changes in market demand, or technological advancements. Therefore, it becomes challenging to accurately account for the cost of the good if its value keeps changing.

Sometimes a manager is rewarded for an objective other than maximizing profits. This means that the compensation system in place may incentivize managers to focus on goals other than maximizing profits, such as increasing market share, expanding the company's product line, or improving employee morale. This can lead to a misalignment between the interests of the manager and the interests of the shareholders, as the manager may prioritize other objectives over maximizing profits.

If a market is not perfectly competitive, government intervention may increase economic well-being. This is because in imperfectly competitive markets, there are barriers to entry and limited competition, which can result in higher prices and lower output. Government intervention, such as implementing regulations or antitrust laws, can help promote competition, reduce market power, and improve efficiency. This can lead to lower prices, increased consumer surplus, and overall economic well-being. However, it is important to note that government intervention may not always be successful and can have unintended consequences, so it is not always guaranteed to increase economic well-being.

If a profit maximizing firm finds that, at its current level of production, MR>MC, it means that the marginal revenue (MR) from selling an additional unit of output is greater than the marginal cost (MC) of producing that unit. This suggests that the firm can increase its profits by producing and selling more units. Therefore, the firm should increase its output.

The market structure depends on all three factors mentioned: the number of firms in the market, the ease of entry, and the ability of firms to differentiate their goods and services. The number of firms determines the level of competition in the market, while the ease of entry determines how easy or difficult it is for new firms to enter the market. Additionally, the ability of firms to differentiate their goods and services allows them to create a unique selling proposition and gain a competitive advantage. Therefore, all of these factors play a significant role in determining the market structure.

Learning by doing refers to the process of acquiring knowledge and skills through hands-on experience. This learning process becomes more effective and efficient as the cumulative output of goods or services increases. As the production volume increases, workers become more experienced and efficient, leading to lower costs in the long run. Therefore, learning by doing is a function of cumulative output, making the answer "A function of cumulative output, that is producing more of the good or service" the correct choice.

Competitive firms are considered price takers because they have no control over the price of their products. They simply accept the market price determined by the forces of supply and demand. These firms have no market power to influence prices and must adjust their output and production levels based on the prevailing market conditions. This means that they cannot set higher prices to increase their profits or lower prices to attract more customers. Instead, they must accept the market price as given and focus on maximizing their efficiency and reducing costs to remain competitive.

Limited liability is a benefit to corporations because it protects the personal assets of the shareholders from being used to satisfy the debts and liabilities of the corporation. This means that if the corporation were to face financial difficulties or legal issues, the shareholders would not be personally responsible for the debts or liabilities beyond their investment in the corporation. This provides a level of financial protection and security for the shareholders, making corporations an attractive business structure.

In the long run, the firm will hire equal amounts of capital and labor only when the wage rate (w) is equal to the rental rate of capital (r). This is because MPL and MPK represent the marginal product of labor and capital respectively, and the firm will hire additional units of labor and capital as long as their marginal products are greater than their respective costs (wage rate and rental rate). When w=r, it means that the additional output produced by hiring one more unit of labor is equal to the additional output produced by hiring one more unit of capital, making it optimal for the firm to hire equal amounts of both factors of production.

An oligopoly refers to a market structure where there are only a few firms that dominate the industry. These firms have significant market power and often collaborate to control prices and limit competition. However, the given correct answer, "Has barriers to entry," suggests that oligopolies also have obstacles that make it difficult for new firms to enter the market. These barriers can include high capital requirements, economies of scale, patents, or government regulations. These barriers protect existing firms from new competition and allow them to maintain their market dominance.

If the market price is greater than or equal to the minimum of AVC but below the minimum of AC, it means that the firm is able to cover its variable costs but not all of its fixed costs. In this case, the firm will still operate because its loss is less than if it shut down. By continuing to operate, the firm can at least cover its variable costs and minimize its losses compared to shutting down completely.

The total cost of producing t-shirts is given by the equation TC = 50 + 2Q, where Q represents the quantity of t-shirts produced. To find the average cost of the 5th shirt, we need to divide the total cost by the quantity of shirts. Since we know that Q = 5, we can substitute this value into the equation to get TC = 50 + 2(5) = 50 + 10 = 60. Finally, we divide the total cost of 60 by the quantity of shirts, which is 5, to get an average cost of 12.

A firm that backward vertically integrates may be producing its own inputs. This means that the firm is acquiring or creating the resources and materials it needs for production internally, rather than relying on external suppliers. By producing its own inputs, the firm can have more control over the quality, cost, and availability of these resources, which can lead to increased efficiency and competitiveness. This strategy can also help the firm to secure a stable supply of inputs and reduce dependence on external suppliers.

In the long run, a firm has the flexibility to adjust its inputs and production processes. This means that it can choose the most efficient combination of inputs to minimize its costs. By moving to the lowest possible isocost curve, the firm can achieve the lowest average cost of production. Therefore, the long run average cost is never greater than the short run average cost.

A monopoly is a market structure in which there is a single seller of a product or service with no close substitutes. As the sole provider in the market, a monopoly has the power to set its own prices without losing any sales. This is because there are no alternative options for consumers to choose from. Therefore, the statement "Produces the market output" is the correct answer as it accurately describes the behavior of a monopoly.

The correct answer is that a firm sets output where marginal revenue minus marginal cost equals zero (MR-MC=0). This means that the additional revenue generated from producing one more unit of output is equal to the additional cost incurred in producing that unit. At this point, the firm maximizes its profit because any further increase in output would result in higher costs than the revenue generated. Similarly, any decrease in output would result in lower revenue than the cost saved. Therefore, setting output where MR-MC=0 ensures that the firm is operating at the optimal level of production.

In a competitive market, the long-run supply curve is horizontal, meaning that firms can produce any quantity of output at the same constant cost. Given that the long-run average cost is minimized at $0.20 per pound when 500 pounds are grown, it implies that the price of potatoes in the market will be $0.20 per pound. Using the demand equation Q = 10,000/p, we can substitute the price of $0.20 to find that the quantity demanded is 50,000 pounds. Therefore, 50,000 pounds of potatoes will be consumed in total.

The correct answer is c. In this scenario, the equation C=ax+by+cxy represents the cost of producing two goods, x and y, taking into account the interaction between them. If c is greater than 0, it implies that there are economies of scope, meaning that the joint production of x and y is more cost-effective than producing them separately. This suggests that there are cost savings or synergies when producing both goods together, indicating the presence of economies of scope.

The average fixed cost can be calculated by dividing the total fixed cost by the quantity produced. In this case, the total fixed cost is 1250 (given in the answer) and the quantity produced is represented by "q" in the production function. Therefore, the average fixed cost is 1250/q.

If there are diseconomies of scale within a given range of output, it means that as the level of output increases, the long run average cost also increases. This implies that the long run average cost curve must be upward sloping within that range of output. Therefore, the correct answer is that the long run average cost curve must be upward sloping within the range of output.

If a firm is a price taker, it means that it has no control over the price of its product and must accept the market price. In such a scenario, the firm's marginal revenue will always equal the price because any additional unit sold will generate revenue equal to the market price. This is because a price taker firm can sell as much as it wants at the prevailing market price without affecting the price itself. Therefore, the marginal revenue will always be equal to the price in a price taker situation.

The owner's accounting profit is $20,000 because it is calculated by subtracting explicit costs ($40,000) from revenue ($60,000). The owner's economic profit is -$5,000 because it takes into account both explicit costs and the opportunity cost of working for someone else ($25,000). Therefore, the economic profit is calculated by subtracting both explicit costs and the opportunity cost from revenue.

If a firm's revenue is less than avoidable costs, it means that the firm is not generating enough income to cover the costs that can be avoided by shutting down. In this situation, it would be more beneficial for the firm to shut down rather than continue operating at a loss. Shutting down would prevent further financial losses and allow the firm to redirect its resources towards more profitable ventures.

The market supply curve represents the relationship between the price of a good and the quantity supplied by producers. In this case, the supply curve is given by p = 5 + Q, where p is the price and Q is the quantity supplied. To find the producer surplus at a price of 10, we need to determine the quantity supplied at that price. By substituting p = 10 into the supply curve equation, we get 10 = 5 + Q, which gives us Q = 5. The producer surplus is then calculated as the area between the price and the supply curve, which is (10 - 5) * (5 / 2) = 12.50.

The opportunity cost in this scenario refers to the value of the next best alternative that is forgone. In this case, the money you could have made working overtime at your job represents the opportunity cost because by going out to dinner with your friend, you are giving up the potential earnings from working extra hours. Therefore, option C is the correct answer as it best represents your opportunity cost.

The average variable cost (AVC) is calculated by dividing the total variable cost (TVC) by the quantity of output (q). In this case, the short-run production function is q=10*L, where L represents the units of labor. Since the wage rate is given as 10 per unit of labor, the TVC can be calculated as 10*L. Dividing the TVC by q, which is also equal to L in this case, we get AVC = (10*L)/L = 10. Therefore, the correct answer is 1.

When the isocost line is tangent to the isoquant, it means that the firm is producing the desired level of output at the minimum cost. This occurs when the firm is allocating its resources efficiently, using the optimal combination of inputs to produce the desired level of output. At this point, the marginal rate of technical substitution (MRTS) equals the ratio of input prices, indicating that the firm is getting the most output for the least cost. Therefore, the firm is producing that level of output at minimum cost.

Deadweight loss occurs when the maximum level of total welfare is not achieved. This means that there is a loss of economic efficiency in the market, where the total surplus of both producers and consumers is not maximized. This can happen due to various reasons such as market distortions, government interventions, or externalities. When deadweight loss occurs, it indicates that resources are not allocated efficiently, leading to a loss of overall welfare in the economy.

As output falls, the total fixed cost remains the same while the output decreases. Therefore, the average fixed cost increases because it is calculated by dividing the total fixed cost by the output. This means that as the output decreases, the same fixed costs are spread over a smaller output, resulting in a higher average fixed cost.

A firm's horizontal dimension refers to its size in its primary market. This means that it is referring to the size of the firm in terms of its market share or sales volume in the primary market where it operates. The horizontal dimension focuses on the firm's position and performance within its specific industry or market, rather than considering its size in all markets or the level of supply chain integration. It does not consider the number of stages in the production process that are upstream from the firm's operations.

In a monopolistically competitive market, firms have some degree of control over the price of their products. Unlike in perfect competition where firms are price takers, in monopolistic competition, firms can set their own prices based on factors such as product differentiation and brand image. This ability to set prices allows firms to potentially earn positive economic profit in the long run, as they can adjust prices to maximize revenue and cover their costs. However, it is important to note that in the long run, economic profit tends to be driven towards zero due to the entry of new firms attracted by the potential profits.

A firm will enter a competitive market when it can earn a positive long-run profit. This means that the firm expects to make more revenue than its costs in the long run, which is a desirable outcome for any business. By entering the market, the firm believes it can offer a product or service that will be in demand and generate profits. This decision is based on the firm's analysis of market conditions, potential competition, and its own capabilities to succeed in the market.

The perfectly competitive model is still discussed in economics textbooks because it serves as a benchmark for comparing other market structures. Despite its unrealistic assumptions, it provides a useful framework for understanding how markets work and the implications of different market structures. Additionally, perfectly competitive markets are believed to maximize societal welfare, making it important to study and analyze. Furthermore, many real-world markets are close to being perfectly competitive, which further justifies the relevance of this model.

The marginal rate of technical substitution (MRTS) represents the rate at which a firm can substitute one input for another while keeping the level of output constant. In this case, the MRTS is given as 10. The wage rate for labor is $5. To minimize costs, the firm will hire inputs in such a way that the ratio of their marginal products to their prices is equal. Since the MRTS is the ratio of the marginal products of labor and capital, and the wage rate for labor is known, we can calculate the rental rate for capital. Dividing the wage rate by the MRTS, we get $5/10 = $0.5. Therefore, the rental rate for capital is $0.5.

The deadweight loss associated with output less than the competitive level can be determined by summing the change in the total consumer and producer surplus from moving from the competitive level of output to less output. This means that the deadweight loss is calculated by considering the difference in consumer and producer surplus between the competitive level of output and the actual level of output. By summing these changes, we can measure the overall welfare loss caused by producing less than the competitive level.

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