Ec1Extra PSET 2 - Econ 1 Extra Practice Exam Questions PDF

Preview

Summary

Econ 1 Extra Practice Exam Questions...

Description

Econ 1Extra P Set #2 – Perfect Competition in the Short and Long Run, Factor Markets 1. A perfectly competitive industry currently has 100 firms, all of which have fixed costs of $16 and average variable cost as follows: Quantity

Average Variable Cost

1

$1

2

2

3

3

4

4

5

5

6

6

Marginal Cost

Average Total Cost

a) Compute MC and ATC and fill in columns above. Hint: this is done most easily by calculating TC first, right? b) The price is currently $10. Would this profit-maximizing firm shut down in the short run, or continue to produce? If it continues to produce, how much would this firm produce?

c)

As the market that this firm belongs to makes the transition to its long-run equilibrium, will the price rise or fall? Will the quantity demanded rise or fall? Will the quantity supplied by each firm rise or fall? Briefly explain why these changes occur in transition to the long run. Try to illustrate this with a graph of the firm and market it belongs to!

2. Suppose that ABC Corporation sells CDs in a perfectly competitive market at a price of $1 per CD and that the wage rate is $15 per worker per day. All of the data below are per day. LABOR (L)

1

MARGINAL PRODUCT (MP, #CD) 10

2

20

3

25

4

23

5

20

6

18

7

15

8

12

TOTAL PRODUCT (TP, #CD)

TOTAL REVENUE (TR) $

VALUE OF THE MARGINAL PRODUCT OF LABOR (VMPL, $)

a) Calculate TP, TR and VMPL and fill in the table above. b) Draw the VMPL schedule (=firm’s Labor Demand) below and plot the wage too.

c) Note that VMPL rises initially. Can you give a possible explanation for this?

d) Would you hire the first worker? Choose the best answer below. i) Yes, since this worker has MP>0 and her wage > her VMPL ii) Yes, since this worker has MP>0 and even though her wage > her VMPL, hiring her and several more workers will increase MP and therefore increase profit iii) No, since this worker’s VMPL...