Econ 315 Exam 2

What is the general form of a production function?

Q = f(K, L), where Q is output, K is capital, and L is labor.

Increasing Returns to Scale (IRTS)

When adding a unit of labor produces more MP

Diminishing Returns to Scale (DRTS)

When adding a unit of labor begins to contribute less to MP than the previous addition, but output is still positive

Negative Returns to Scale (NRTS)

When adding a unit of labor decreases MP

How do you determine the marginal product of labor (MPL) from a production function?

By finding the partial derivative of the production function with respect to L.

What does MPL/W = MPK/r mean?

Labor and capital investments are optimal

What does MPL/W > MPK/r mean?

The firm should invest more in labor as it yields more output per dollar spent.

What does MPL/W < MPK/r mean?

The firm should invest more in capital as it yields more output per dollar spent.

What is the relationship between price and average total cost (ATC) for profit, breakeven, and loss?

P > ATC indicates profit

P = ATC indicates breakeven

P < ATC indicates loss.

What is the formula for total cost (TC)?

TC = TFC + TVC, where TFC is total fixed cost and TVC is total variable cost.

What is the formula for average total cost (ATC)?

ATC = TC/Q, where Q is the quantity of output.

How do you find the MC function?

MC is the derivative of total cost (TC) with respect to quantity (Q).

What is the Lerner index formula and what does it measure?

L = (P - MC) / P

Markup = 1/(1-L)

The Lerner index measures a firm's pricing power

What is the Rothschild index?

R = Et/Ef

The Rothschild index measures the sensitivity of total market demand compared to a single firm's demand, with values ranging from 0 (perfect competition) to 1 (monopoly).

What are the characteristics of perfect competition?

Many buyers and sellers, homogeneous products, easy entry and exit, and price takers.

What distinguishes monopolistic competition from perfect competition?

Monopolistic competition has heterogeneous products and firms have some control over pricing.

What are the key features of an oligopoly?

Few sellers, interdependence among firms, and potential for collusion.

What is a monopoly?

A market structure with many buyers and one seller, where the seller has significant control over the market.

What is horizontal integration?

A strategy where a company absorbs a competitor to increase market share.

What is vertical integration?

A strategy where a company absorbs suppliers or distributors to control the supply chain.

What is conglomerate integration?

A strategy where a company absorbs another company from an unrelated industry.

What is the formula for calculating the C4 concentration ratio?

C4 = (S1 + S2 + S3 + S4) / ST, where S1 to S4 are the market shares of the four largest firms and ST is the total market share.

How is the Herfindahl-Hirschman Index (HHI) calculated?

HHI = [sum of (market shares of each firm)^2] x 10,000.

What is the significance of the HHI in market analysis?

It measures market concentration; higher HHI indicates less competition.

What is the shut-down rule in economics?

A firm should continue to operate if it can cover its variable costs; if not, it should shut down in the short run.

What is the profit-maximizing condition for a firm?

A firm maximizes profit where marginal revenue (MR) equals marginal cost (MC).

How do you find the profit-maximizing output in a perfectly competitive market?

Set MR equal to MC to determine the quantity of output.

What are the economic implications of a firm's demand curve in perfect competition?

The demand curve is horizontal, indicating that firms are price takers.

What is the demand curve shape for a monopolistic firm?

The demand curve is downward sloping, indicating that the firm can set prices above marginal cost.