Unit 3 Costs, Production, and Perfect Competition

1. marginal product of labor

2. Increasing marginal returns of labor

3. Decreasing marginal returns of labor

4. Show typical marginal and total product of labor curves on a graph together 

5. Production function

6. Long-run production function

7. short run production function

8. Economies of scale production 

9. Diseconomies of scale 

10. Constant returns to scale 

11. Minimum efficient scale 

12. Variable cost 

13. Marginal cost

14. Fixed cost

15. Total cost 

16. Average cost 

17. Revenue

18. Explicit costs (and examples)

19. Implicit costs (and examples)

20. Accounting profit

21. Economic profit 

22. Normal profit 

23. Marginal revenue

24. Profit max point 

25. A. Draw perfectly competitive market and firm curves with marginal revenue, marginal cost, average total cost labeled 

I. showing an economic profit

II.  showing normal profit

III.  showing an economic loss

B.  For all of the above graphs label 

1. Market Price, Pm and  Market Quantity Qm

2. Firm Price, Pf  and Firm Quantity Qf

3. Shade in the area of economic loss/profit 

26. Which of the above graphs (question 25)  shows a market in long-run equilibrium?  Explain.

27.  Which of the above would attract entrants into the market?  Explain.  What would be the long-term impact on Pm, Pf, Qm, Qf?

28. Which of the above would lead to firms exiting the market?  Explain.  What would be the long-term impact on Pm, Pf, Qm, Qf?

29.  In what scenario would a firm immediately shut down production?

30.  Characteristics of a perfectly competitive market

31.  Commodity

32.  Barriers to entry 

33.  Allocative efficiency 

34.  Productive efficiency 

Sample FRQ 3.2  Production Costs

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,” you must show how you arrived at your final answer.

A firm’s short-run production function shows the relationship between the firm’s input and output. Assume the firm uses one variable input, labor, and one fixed input, capital. The following table shows short-run production function for a firm that produces widgets.

(a) Calculate the marginal product of the sixth worker. Show your work.

(b) Does the production function exhibit diminishing returns to labor? Explain.

(c) When marginal product is falling, what happens to marginal cost?

(d) On a single correctly labeled graph, draw the firm’s short-run average total cost curve  (ATC), average variable cost curve (AVC), and marginal cost curve (MC).

Unit 3 FRQ Profit Max and Perfect Competition

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,” you must show how you arrived at your final answer.

Assume that Jasmine is a typical firm that produces and sells T-shirts in a perfectly competitive constant-cost industry. The market is currently in long-run equilibrium. The market price is $5, and Jasmine’s marginal cost at each level of output is listed in the table below.

(a) What is Jasmine’s profit-maximizing quantity of output? Explain.

(b) Draw a correctly labeled graph for Jasmine, and show Jasmine’s total revenue at the profit-maximizing quantity, shaded completely.

(c) Now assume consumer demand for T-shirts increases. What will happen to the number of firms in the market in the long run? Explain.

Unit 3 FRQ:  Perfect Competition

A typical profit-maximizing firm in a perfectly competitive constant-cost industry is earning positive economic profit selling widgets.

(a) Is the market price for widgets greater than, less than, or equal to the firm’s price?  Explain.

(b) Draw correctly labeled side-by-side graphs for both the market and a typical firm in the widget market and show each of the following.

(i) Market Price and quantity, labeled Pm and Qm

(ii) The firm’s Price and quantity, labeled Pf and Qf

(iii)The firm’s average revenue curve, labeled AR

(iv) The firm’s average total cost curve, labeled ATC

(v) The area  representing total economic profit, shaded completely 

(c) What would happen to the total revenue of a firm in the above industry, if they raised their price?  Explain.

(d) Based on the information in the above market, what will happen In the long-run?

(i) The number of firms in the industry?  Explain.

(ii)Equilibrium price in the market?