Mr. Weiss

Mr. Weiss

APE/Honors Economics – Test Study Questions – Micro – Unit 4APE/Honors Economics – Test Study Questions – Micro – Unit 4

5. Which of the following would determine the marginal revenue 5. Which of the following would determine the marginal revenue product of an input used in a perfectly competitive output market?product of an input used in a perfectly competitive output market?

I. Dividing the change in total revenue by the change in the I. Dividing the change in total revenue by the change in the input.input.

II. Dividing the change in marginal revenue by the change II. Dividing the change in marginal revenue by the change in the in the output.output.

III. Multiplying the marginal revenue product by the III. Multiplying the marginal revenue product by the marginal marginal revenue of the output.revenue of the output.

IV. Multiplying marginal revenue by the price of the output.IV. Multiplying marginal revenue by the price of the output.

A. I onlyA. I only B. II onlyB. II onlyC. III onlyC. III only D. I and III onlyD. I and III onlyE. II and IV onlyE. II and IV only

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5. Which of the following would determine the marginal revenue product 5. Which of the following would determine the marginal revenue product of an input used in a perfectly competitive output market?of an input used in a perfectly competitive output market?

I. Dividing the change in total revenue by the change in the input.I. Dividing the change in total revenue by the change in the input.II. Dividing the change in marginal revenue by the change in the II. Dividing the change in marginal revenue by the change in the output.output.III. Multiplying the marginal revenue product by the marginal III. Multiplying the marginal revenue product by the marginal revenue of the output.revenue of the output.IV. Multiplying marginal revenue by the price of the output.IV. Multiplying marginal revenue by the price of the output.

A. I onlyA. I only B. II onlyB. II onlyC. III onlyC. III only D. D. I and III onlyI and III onlyE. II and IV onlyE. II and IV only MARGINAL REVENUE PRODUCT: The MARGINAL REVENUE PRODUCT: The

change in total revenue resulting from change in total revenue resulting from a unit change in a variable input, a unit change in a variable input,

keeping all other inputs unchanged.keeping all other inputs unchanged.

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6. Which of the following explains why the marginal revenue product 6. Which of the following explains why the marginal revenue product of an input in a perfectly competitive market decreases as a firm of an input in a perfectly competitive market decreases as a firm increases the quantity of an input used?increases the quantity of an input used?

A. The law of diminishing marginal returns.A. The law of diminishing marginal returns.

B. The law of diminishing marginal utility.B. The law of diminishing marginal utility.

C. The homogeneity of the product.C. The homogeneity of the product.

D. The free mobility of resources.D. The free mobility of resources.

E. The total immobility of resources.E. The total immobility of resources.

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6. Which of the following explains why the marginal revenue product of an 6. Which of the following explains why the marginal revenue product of an input in a perfectly competitive market decreases as a firm increases the input in a perfectly competitive market decreases as a firm increases the quantity of an input used?quantity of an input used?

AA. The law of diminishing marginal returns.. The law of diminishing marginal returns.

B. The law of diminishing marginal utility.B. The law of diminishing marginal utility.

C. The homogeneity of the product.C. The homogeneity of the product.

D. The free mobility of resources.D. The free mobility of resources.

E. The total immobility of resources.E. The total immobility of resources.

LAW OF DIMINISHING MARGINAL RETURNS: A principle stating that as more and more of a variable input is

combined with a fixed input in short-run production, the marginal product of the

variable input eventually declines.

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15.15. A firm requires labor & capital to produce a given output. Labor costs $8 per A firm requires labor & capital to produce a given output. Labor costs $8 per hour, & capital costs $12 per hour. At the current output level, the marginal hour, & capital costs $12 per hour. At the current output level, the marginal physical product of labor is 40 units, & the marginal physical product of capital physical product of labor is 40 units, & the marginal physical product of capital is 60 units. To minimize its production costs at the current level of output, in is 60 units. To minimize its production costs at the current level of output, in which of the following ways should the firm change the amount of labor & which of the following ways should the firm change the amount of labor & capital?capital?

LaborLabor CapitalCapital

A.A. IncreaseIncrease IncreaseIncrease

B.B. IncreaseIncrease DecreaseDecrease

C.C. DecreaseDecrease IncreaseIncrease

D.D. DecreaseDecrease No ChangeNo Change

E.E. No ChangeNo Change No ChangeNo Change

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15.15. A firm requires labor & capital to produce a given output. Labor costs $8 per A firm requires labor & capital to produce a given output. Labor costs $8 per hour, & capital costs $12 per hour. At the current output level, the marginal hour, & capital costs $12 per hour. At the current output level, the marginal physical product of labor is 40 units, & the marginal physical product of capital physical product of labor is 40 units, & the marginal physical product of capital is 60 units. To minimize its production costs at the current level of output, in is 60 units. To minimize its production costs at the current level of output, in which of the following ways should the firm change the amount of labor & which of the following ways should the firm change the amount of labor & capital?capital?

LaborLabor CapitalCapital

A.A. IncreaseIncrease IncreaseIncrease

B.B. IncreaseIncrease DecreaseDecrease

C.C. DecreaseDecrease IncreaseIncrease

D.D. DecreaseDecrease No ChangeNo Change

E.E. No ChangeNo Change No ChangeNo Change

Labor – 40/$8 = $5Labor – 40/$8 = $5

Capital – 60/$12 = $5Capital – 60/$12 = $5

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16.16. In a competitive industry, suppose the marginal revenue product of the In a competitive industry, suppose the marginal revenue product of the last donut baker hired is $35 and the marginal revenue product of the last last donut baker hired is $35 and the marginal revenue product of the last bagel maker hired is $15. A bakery must pay donut bakers $40 a day and bagel maker hired is $15. A bakery must pay donut bakers $40 a day and bagel makers $10 a day. Which of the following should the bakery hire to bagel makers $10 a day. Which of the following should the bakery hire to maximize profits?maximize profits?

A. More donut bakers and fewer bagel makers.A. More donut bakers and fewer bagel makers.

B. Fewer donut bakers and more bagel makers.B. Fewer donut bakers and more bagel makers.

C. Fewer of both donut bakers and bagel makers.C. Fewer of both donut bakers and bagel makers.

D. More of both donut bakers and bagel makers.D. More of both donut bakers and bagel makers.

E. Neither more nor fewer donut bakers or bagel makers.E. Neither more nor fewer donut bakers or bagel makers.

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16.16. In a competitive industry, suppose the marginal revenue product of the In a competitive industry, suppose the marginal revenue product of the last donut baker hired is $35 and the marginal revenue product of the last last donut baker hired is $35 and the marginal revenue product of the last bagel maker hired is $15. A bakery must pay donut bakers $40 a day and bagel maker hired is $15. A bakery must pay donut bakers $40 a day and bagel makers $10 a day. Which of the following should the bakery hire to bagel makers $10 a day. Which of the following should the bakery hire to maximize profits?maximize profits?

A. More donut bakers and fewer bagel makers.A. More donut bakers and fewer bagel makers.

B. B. Fewer donut bakers and more bagel makers.Fewer donut bakers and more bagel makers.

C. Fewer of both donut bakers and bagel makers.C. Fewer of both donut bakers and bagel makers.

D. More of both donut bakers and bagel makers.D. More of both donut bakers and bagel makers.

E. Neither more nor fewer donut bakers or bagel makers.E. Neither more nor fewer donut bakers or bagel makers.

Donut: 35 – 40 = -5Donut: 35 – 40 = -5

Bagel: 15 – 5 = 5Bagel: 15 – 5 = 5

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1. What determines the demand for a resource (factor of 1. What determines the demand for a resource (factor of production)? Why is the demand for a resource downward production)? Why is the demand for a resource downward sloping? What determines the elasticity of demand for a resource sloping? What determines the elasticity of demand for a resource (factor of production)?(factor of production)?

Short

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1.1. What determines the demand for a resource (factor of production)? What determines the demand for a resource (factor of production)? Why is the demand for a resource downward sloping? What Why is the demand for a resource downward sloping? What determines the elasticity of demand for a resource (factor of determines the elasticity of demand for a resource (factor of production)?production)?

The demand for a resource is derived from the demand for a good or The demand for a resource is derived from the demand for a good or service that is produced with the resource. The demand for service that is produced with the resource. The demand for resources is affected by the price of the good or service and the resources is affected by the price of the good or service and the marginal productivity of labor. Because marginal productivity marginal productivity of labor. Because marginal productivity decreases as out put increases, marginal revenue product decreases. decreases as out put increases, marginal revenue product decreases. MRP is the demand for the resource. In addition, if the firm is MRP is the demand for the resource. In addition, if the firm is operating in an imperfect product market, the price of the product will operating in an imperfect product market, the price of the product will decrease as out decreases. This also decreases MRP. The elasticity decrease as out decreases. This also decreases MRP. The elasticity of demand for the factor depends on the rate of decline of MRP, the of demand for the factor depends on the rate of decline of MRP, the elasticity of the demand for the product, ease of resource elasticity of the demand for the product, ease of resource substitutability and proportion of total costs that the factor substitutability and proportion of total costs that the factor represents.represents.

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2. List three factors that would increase the demand for a resource, 2. List three factors that would increase the demand for a resource, and explain why the factors would increase demand.and explain why the factors would increase demand.

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2. List three factors that would increase the demand for a resource, 2. List three factors that would increase the demand for a resource, and explain why the factors would increase demand.and explain why the factors would increase demand.

Several examples:Several examples:A.A.The demand for, and therefore the price of, the product produced The demand for, and therefore the price of, the product produced by the resource increasesby the resource increasesB.B.The productivity of the resource increasesThe productivity of the resource increasesC.C.The price of a substitute resource decreases, as long as the output The price of a substitute resource decreases, as long as the output effect is greater than the substitution effecteffect is greater than the substitution effectD.D.The price of a substitute resource increases, as long as the The price of a substitute resource increases, as long as the substitution effect is greater than the output effectsubstitution effect is greater than the output effectE.E.The price of a complementary resource decreasesThe price of a complementary resource decreases

Mr. Weiss

APE/Honors Economics – Test Study Questions – Micro – Unit 4APE/Honors Economics – Test Study Questions – Micro – Unit 4Long3. In the United States, textiles are sold in two separate and perfectly 3. In the United States, textiles are sold in two separate and perfectly

competitive markets. The textiles produced in the United States are sold competitive markets. The textiles produced in the United States are sold in Market A, and imported textiles are sold in Market B.in Market A, and imported textiles are sold in Market B.

A.A.Explain how the supply curve for textiles produced in the U.S. will be Explain how the supply curve for textiles produced in the U.S. will be affected by each of the following:affected by each of the following:

i.i. A decrease in the number of firms in the U.S. producing textilesA decrease in the number of firms in the U.S. producing textilesii.ii. An increase in the price of textilesAn increase in the price of textiles

Assume textiles produced in Market A & Market B are close substitutes.Assume textiles produced in Market A & Market B are close substitutes.B. Using one graph for Market A and another for Market B, show and B. Using one graph for Market A and another for Market B, show and explain how a substantial increase in the tariff on textiles imported into explain how a substantial increase in the tariff on textiles imported into the United States will affect each of the following:the United States will affect each of the following:

i. equilibrium price & quantity of textiles sold in Market B i. equilibrium price & quantity of textiles sold in Market B (imported textiles)(imported textiles)

ii. Equilibrium price & quantity of textiles sold in Market A (textiles ii. Equilibrium price & quantity of textiles sold in Market A (textiles produced in the U.S.)produced in the U.S.)

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3. In the United States, textiles are sold in two separate and perfectly competitive 3. In the United States, textiles are sold in two separate and perfectly competitive markets. The textiles produced in the United States are sold in Market A, and markets. The textiles produced in the United States are sold in Market A, and imported textiles are sold in Market B.imported textiles are sold in Market B.

A.A.Explain how the supply curve for textiles produced in the U.S. will be affected Explain how the supply curve for textiles produced in the U.S. will be affected by each of the following:by each of the following:

i.i. A decrease in the number of firms in the U.S. producing textilesA decrease in the number of firms in the U.S. producing textilesii.ii. An increase in the price of textilesAn increase in the price of textiles

With few firms producing textiles, the supply of textiles is reduced; the With few firms producing textiles, the supply of textiles is reduced; the supply curve shifts to the left (inward). With a high price for textiles, the supply curve shifts to the left (inward). With a high price for textiles, the quantity supplied increased along an unchanged supply curve.quantity supplied increased along an unchanged supply curve.

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3. In the United States, textiles are sold in two separate and perfectly competitive markets. The 3. In the United States, textiles are sold in two separate and perfectly competitive markets. The textiles produced in the United States are sold in Market A, and imported textiles are sold in textiles produced in the United States are sold in Market A, and imported textiles are sold in Market B.Market B.

Assume textiles produced in Market A & Market B are close substitutes.Assume textiles produced in Market A & Market B are close substitutes.B. Using one graph for Market A and another for Market B, show and explain how a substantial B. Using one graph for Market A and another for Market B, show and explain how a substantial increase in the tariff on textiles imported into the United States will affect each of the following:increase in the tariff on textiles imported into the United States will affect each of the following:

i. equilibrium price & quantity of textiles sold in Market B (imported textiles)i. equilibrium price & quantity of textiles sold in Market B (imported textiles)ii. Equilibrium price & quantity of textiles sold in Market A (textiles produced in the U.S.)ii. Equilibrium price & quantity of textiles sold in Market A (textiles produced in the U.S.)

The tariff raises the per unit supply price of all units of imported textiles; The tariff raises the per unit supply price of all units of imported textiles; the supply curve in Market B shifts to the left (inward), leading to a higher the supply curve in Market B shifts to the left (inward), leading to a higher equilibrium price and a lower equilibrium quantity of imported textiles. equilibrium price and a lower equilibrium quantity of imported textiles. Since imported and domestically produced textiles are close substitutes, Since imported and domestically produced textiles are close substitutes, the increase in the price of imported textiles leads to an increase in the the increase in the price of imported textiles leads to an increase in the demand for domestically produced textiles (Market A). The Market A demand for domestically produced textiles (Market A). The Market A demand curve shifts outward. Both the equilibrium price and quantity demand curve shifts outward. Both the equilibrium price and quantity increase in Market A.increase in Market A.

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