MICRO Exam 2 questions

question

What is a factor of production

answer

inputs to production
land, labor, capital, raw materials

question

What is an "isocost line?"

answer

illustrates all the possible combinations of two factors that can be used at given costs and for a given producer's budget

question

What is a "return to scale?"

answer

describes what happens when you increase all inputs

increasing returns to scale implies decreasing average cost - An increasing returns to scale occurs when the output increases by a larger proportion than the increase in inputs during the production process. For example, if input is

decreasing returns to scale implies increasing average costs - This occurs when an increase in all inputs leads to a less than proportional increase in output.

constant returns to scale implies constant average cost

question

What is an "isoprofit line?"

answer

all combinations of the input goods and the output good that give a constant level of profit

question

How does the "short run" relate to the "long run" in the context of production?

answer

in the short run some factors of production are fixed (firm size); in the long run all factors of production are variable (firm size)

question

Define "barrier to entry."

answer

license or legal restrictions on how many firms can be in the industry
ex. liquor license

question

Why do firms tend to make zero profits in the long run?

answer

relates to entry and exit
- In the short run firms choose quantities to maximize profits
- If firms are making profits in the short run then it is profitable to enter the industry by starting a firm or investing in a firm
- so there ends up being more supply in an industry, which lowers prices
- profits go down and eventually in long term they move toward zero

question

returns to scale and determining size of a firm

answer

decreasing rate of scale -- do not expand firm b/c new firm will enter

question

What is the difference between "technological" and "economic" constraints?

answer

technological constraint - only certain combinations of inputs are feasible ways to produce a given amount of output and the firm must limit itself to technologically feasible production plans
BASED ON PRODUCTION FUNCTION - how much can you produce

economic constraints - a type of external constraint - some factor in a company's external environment that is usually out of the company's control
ex. anything from changes in level of supply/demand in a market for a particular product OR tax rates
BASED ON DEMAND FUNCTION - what consumers are willing to pay

question

In the short run, if price of the fixed factor is increased what happens to profits?

answer

decrease profits

question

If a firm had everywhere increasing returns to scale, what would happen to its profits if prices remained fixed and if it doubled its scale of operation?

answer

profits would increase bc output would go up more than prices

question

If a firm had decreasing returns to scale at all levels of output and it divided up into two equal-size smaller firms, what would happen to its overall profits?

answer

if a firm really had decreasing returns to scale, dividing up the scale of all inputs by two would produce more than half as much output -- thus the subdivided firm would make more profits than the big firm
implausible

question

If pMP1 > w1, then should the firm increase or decrease the amount of factor 1 in order to increase profits?

answer

INCREASE

MP is marginal product - the change in output resulting from employing one more unit of a particular input

question

Suppose a firm is maximizing profits in the short run with variable factor x1 and fixed factor x2.
If the price of x2 goes down, what happens to the firms use of x1? What happens to the firm's profit levels?

answer

use of x1 does not change
profits will increase

question

If a firm is producing where MP1/w1 > MP2/w2 what can it do to reduce costs but maintain the same output

answer

increase the use of factor 1 and decrease the use of factor 2

question

the price of paper used by a cost-minimizing firm increases. the firm responds to this price change by changing its demand for certain inputs, but it keeps its output constant. What happens to the firm's use of paper?

answer

the demand for paper either goes down or stays constant

question

A firm produces identical outputs at two different plants. If the marginal cost at the first plant exceeds the marginal cost at the second plant, how can the firm reduce costs and maintain the same level of output?

answer

by producing more output at the second plant and less at the first the firm can reduce costs

question

In the short run the demand for cigarettes is totally inelastic. In the long run, suppose that it is perfectly elastic. What is the impact of a cigarette tax on the price that consumers pay in the short run and in the long run?

answer

in the short run the consumers pay the entire amount of tax

in the long run it is paid by the producers

question

why can we assume firms are maximizing

answer

1 bc people want to...money is an incentive
2 bc you have to make a profit in order for your firm to exist and function
have to turn a profit to survive - may not be maximizing

you have to meet the bar to stay in business - and the bar gets higher every time a firm enters the industry

1 of 19

question

What is a factor of production

answer

inputs to production
land, labor, capital, raw materials

question

What is an "isocost line?"

answer

illustrates all the possible combinations of two factors that can be used at given costs and for a given producer's budget

question

What is a "return to scale?"

answer

question

What is an "isoprofit line?"

answer

all combinations of the input goods and the output good that give a constant level of profit

question

How does the "short run" relate to the "long run" in the context of production?

answer

in the short run some factors of production are fixed (firm size); in the long run all factors of production are variable (firm size)

question

Define "barrier to entry."

answer

license or legal restrictions on how many firms can be in the industry
ex. liquor license

question

Why do firms tend to make zero profits in the long run?

answer

question

returns to scale and determining size of a firm

answer

decreasing rate of scale -- do not expand firm b/c new firm will enter

question

What is the difference between "technological" and "economic" constraints?

answer

question

In the short run, if price of the fixed factor is increased what happens to profits?

answer

decrease profits

question

If a firm had everywhere increasing returns to scale, what would happen to its profits if prices remained fixed and if it doubled its scale of operation?

answer

profits would increase bc output would go up more than prices

question

If a firm had decreasing returns to scale at all levels of output and it divided up into two equal-size smaller firms, what would happen to its overall profits?

answer

question

If pMP1 > w1, then should the firm increase or decrease the amount of factor 1 in order to increase profits?

answer

INCREASE

MP is marginal product - the change in output resulting from employing one more unit of a particular input

question

answer

use of x1 does not change
profits will increase

question

If a firm is producing where MP1/w1 > MP2/w2 what can it do to reduce costs but maintain the same output

answer

increase the use of factor 1 and decrease the use of factor 2

question

answer

the demand for paper either goes down or stays constant

question

answer

by producing more output at the second plant and less at the first the firm can reduce costs

question

answer

in the short run the consumers pay the entire amount of tax

in the long run it is paid by the producers

question

why can we assume firms are maximizing

answer

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MICRO Exam 2 questions

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