Understanding Marginal Product and Cost in Economics Exam Review
School
Nguyen Trai University**We aren't endorsed by this school
Course
ECONOMICS MICROECONO
Subject
Economics
Date
Dec 12, 2024
Pages
12
Uploaded by SuperHumanRhinoceros1100
Exam II ReviewAnswers© Prof. Das
Marginal Product of labor = Number of WorkersApples per Day (bushels)15021203180423052706300•Remember that MPL initially increasesand then starts to decrease. •It may increase due to specialization of labor, and then diminishing marginal returns creep in. •The reason is that we have a fixed input (one restaurant), and we keep adding more variable inputs (workers) to this one fixed inputQuestion 1: Marginal Product of LaborWhat is the marginal product of the 5thworker?
Question 2Fill out the tableQuantity of gigaplots FixedCostVariable CostTotalCostAverage FixedCostAverage Variable CostAverageTotalCostMarginal Cost1$25$13$38251338132$25$285312.51426.5153$25$45$708.333333331523.3333333174$25$64896.251622.25195$25$85$11051722216$25$1081334.166666671822.1666667237$25$1331583.571428571922.5714286258$25$160$1853.1252023.12527Fixed cost = TC – VC = $25. It will stay the same regardless of the quantity. Additionally, •TC = FC when Q = 0•VC = 0 when Q = 0 The formulas you should be using are: 1)TC = FC + VC 2)AFC = FC/Q 3)AVC = VC/Q 4)ATC = TC/Q 5)MC =
Question 3In the long run Firm A incurs total costs of $900 when output is 30 units and $1,200 when output is 40 units. What kind of economies of scale does Firm A exhibit? •Economies of scale are with respect to ATC and not TC.•Since we have been given TC in this problem, let’s first calculate the relevant ATC. 1.ATC when Q = 30 TC/Q = 900/30 = $30 2.ATC when Q = 40 TC/Q = 1200/40 = $30 •Since ATC stays constant as Q is increasing, the firm is exhibiting constant returns to scale.
Question 4 What is the value of fixed cost when the quantity of output =10?Let’s first identify the curves •Curve A is MC, Curve B is ATC, Curve C is AVC •I know this because Curve A has taken off faster than curves B and C. •AVC will be below ATC •MC intersects (cuts through) the minimum of both ATC and AVC•The difference between Curve B and Curve C is the AFC •The curve for AFC is not shown here, but the distance is in the arrows•At Q = 10•AVC = $7•ATC = $22 •AFC = ATC-AVC = 22-7 = 15 •FC = AFC * Q = 15*10 = $150 •Extras •TC = ATC * Q = 22*10 = $220 •VC = AVC * Q = 7*10 = $70 MCATCAVC
Question 5If the market price is $20, what is the amount of the firm's profit?This is a perfectly competitive firm because the demand curve is horizontal. In perfect competition, P = MR Profit: 1.Find profit-maximizing (or loss-minimizing) quantity based on MR = MC. In this case, that is Q = 1350. 2.Find the price at the profit-maximizing quantity: P = $20 3.Find the ATC at the profit-maximizing quantity: ATC = $154.Find profit = (P-ATC)*Q = (20-15)*1350 = $6750Extra: TR = P*Q = $20*1350=$27000 (red box)TC = ATC * Q = $15 * 1350 = $20250 (blue box) Profit = TR - TC = 27000-20250 = $6750 ProfitProfit
Question 6•What is the marginal revenue of the 3rd unit? Calculate Price and Output effect when Q increases from 2 to 3 units. Marginal revenue = =$5.50Price effect = (7-6.50)*(2) = $1 this is a loss, negative number, since the price is decreasing. Red box on the graph)Output effect = (3-2) * 6.50 = $6.50 (this is a gain, positive number because quantity is increasing, blue box on the graph)Net gain: 6.50-1 = $5.50 = Marginal RevenueQuantityPrice(dollars)Total Revenue(dollars)1$7.50$7.5027.0014.0036.5019.5046.0024.0055.5027.5065.0030.00Remember that there is no price effect in perfectly competitive markets because the price does not change.
Question 7What is profit-maximizing quantity, productive efficiency and allocative efficiency quantity? •Profit-maximizing quantity: MR = MC = Q2•Allocative efficiency: P=MC = Q3•Productive efficiency: min of ATC (where MC = ATC) = Q4
Question 8Perfect Competition operates at Q2and P2. Consumer Surplus: P0P2EProducer Surplus: P2E0Total Surplus: 0P0E
Question 8Perfect Competition operates at Q2and P2. Consumer Surplus: P0P2EProducer Surplus: P2E0Total Surplus: 0P0EMonopoly operates at Q1and P1Consumer Surplus: P0P1F (blue triangle)Producer Surplus: P1FH0 (red area)Total Surplus: P0FH0 (blue + red)Deadweight Loss: FHE (green triangle)The gain in producer surplus: P1P2GF (red striped box)Deadweight loss is due to P > MC in monopoly. The difference between P and MC is called the mark-up price
Question 9: Price Discrimination (Single Price Monopoly)For a single-price monopoly – the monopolist charges the same price to everyone. There’s no price discrimination. The profit-maximizing quantity is at MR = MC: Q = 250 The price at the profit-maximizing quantity is $22.50 The ATC at the profit-maximizing quantity is $10 If the monopoly firm is not allowed to price discriminate, what is consumer surplus equal to?•Consumer surplus is the area above the price, below the demand curve, until the quantity, i.e., the blue-shaded region: CS = ½ * (35-22.5) (250-0) = $1562.50 If the monopoly firm is not allowed to price discriminate, what is profit equal to?•Profit = (P-ATC) *Q = (22.50-10)*250 = $3125 (yellow region) If the monopoly firm is not allowed to price •DWL = ½ * (22.5-10) * (500-250) = $1562.50 (pink
Question 9: Perfect Price DiscriminationUnder perfect price discrimination, the seller charges the consumers their willingness to pay. For example, if I reveal that my WTP for a certain product is $10, the seller charges me $10. The seller does this for every buyer. What is consumer surplus equal to if the monopoly firm perfectly price discriminates? •Consumer surplus is P – WTP for the individual buyer. If the P = WTP, then CS = 0. Thus under perfect price discrimination, CS = $0. If the monopoly firm perfectly price discriminates, what is profit equal to? •Profit = (P-ATC) * Q = ½ * (35-10) * (500-0) = $6250If the monopoly firm perfectly price discriminates, what is the deadweight loss equal to? •Since it is at the efficient point, DWL = 0 •Remember that P = MC is the allocative