Week 7 - Exam notes - Guide of questions and answers from previous test on MyEconLab PDF

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Guide of questions and answers from previous test on MyEconLab...

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Quiz 6 Q1 6.1 1. What is the difference between technology and technological change? A firm's technology is the processes it uses to make goods and services out of inputs, while technological change is a change in the ability of a firm to produce a given level of output with a given quantity of input. 2. Is it possible for technological change to be negative? If so, give an example.

It is possible for technological change to be negative. An example is when a firm hires less dash skilled workers. 3. Technological change refers only to the introduction of new products, so it is not relevant to

the operations of most firms. The statement is incorrect. Technology includes firm operations such as the skill of its managers. The statement is incorrect. Technology includes firm operations such as the speed of its machinery. 4. Which of the following are examples of a firm experiencing positive technological change?

A firm is able to cut each worker's wage rate by 10 per cent and still produce the same level of output. This is not an example of positive technological change. A training program makes a firm's workers more productive. This is an example of positive technological change. An exercise program makes a firm's workers more healthy and productive. This is an example of positive technological change. A firm cuts its workforce and is able to maintain its initial level of output. This is an example of positive technological change. A firm rearranges the layout of its factory and finds that by using its initial set of inputs, it can produce exactly as much as before. This is not an example of positive technological change. 5. The 7-Eleven chain of convenience stores in Japan reorganised its system for supplying its

stores with food. This led to a sharp reduction in the number of trucks the company had to use, while increasing the amount of fresh food on store shelves. Someone discussing 7Eleven's new system argues: This is not an example of technological change because it did not require the use of new machinery or equipment. The argument is incorrect. Technology includes the speed of existing machinery and equipment. The argument is incorrect. Technology includes the efficiency of existing machinery and equipment.

Q2 6.2 1. What is the difference between the short run and the long run?

In the short run, at least one of a firm’s inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology. Is the amount of time that separates the short run from the long run the same for every firm? No

2. Any cost that remains unchanged as output changes represents a firm's

Fixed cost6 Any cost that changes as output changes represents a firm’s Variable cost Which of the following is most likely to be a fixed cost for a farmer? Insurance premiums on property Which of the following is most likely to a variable cost for a business firm? Cost of shipping products 3. What are implicit costs? A non-monetary opportunity cost How are implicit costs different from explicit costs? An explicit cost is a cost that involves spending money, while an implicit cost is a non-monetary cost.

4. A firm's production function is best described as Illustrating the relationship between inputs and the maximum amounts of output that the firm can produce with these inputs. What does the short-run production function hold constant? The short-run production function holds constant the amount of capital.

5. According to an article in Forbes magazine, the cost of materials in Apple's iPhone 6 with 16 gigabytes of memory was estimated to be US$227. Apple was selling the iPhone 6 for US$650 in the United States. Most phone carriers in the United States made payments to Apple that reduced the price to consumers to US$200. SOURCE: Chuck Jones (2014), 'Apple's iPhone 6 teardown and other costs analysis', Forbes, 24 September, at , viewed 28 March 2016. Can we conclude from this information that Apple is making a profit of about US$ 423 per iPhone? Briefly explain.

Apple's profit is likely less than US$423 per iPhone because Also has fixed costs of production.

6. Many firms consider wage costs to be variable costs. Why do publishers usually consider their wage and salary costs to be fixed costs? Employees work on several books simultaneously Is the cost of rent fixed, variable or can it be both? Briefly explain. Publishers typically consider the cost of rent to be fixed because it remains constant as output changes. 7. For Simon O'Brien's pizza restaurant, explain whether each of the following is a fixed cost or a variable cost. a. The payment he makes on his building insurance policy is a fixed cost b. The payment he makes to buy pizza dough is a variable cost. c.

The wages he pays his workers is a variable cost.

d. The lease payment he makes to the landlord who owns the building where his store is located is a fixed cost. e. The $300 per month payment he makes to his local newspaper for running his weekly advertisements is a fixed cost.

8. Suppose that Bill owns a vehicle smash repair shop. The table below shows how the quantity of cars Bill can repair per month depends on the number of workers that he hires. Assume that he pays each worker $4000 per month and his fixed costs are $8000 per month. Using the information provided, complete the table given below. (Enter your responses rounded to two decimal places.)

Q3 6.3

1. The graph to the right illustrates the average product of labour. Use the three-point curved line drawing tool to graph the marginal product of labour. Properly label this curve.

Why do the marginal product of labour and the average product of labour curves have the shapes illustrated in the graph? Whenever the marginal product of labour is greater than the average product of labour, it pulls the average product of labour up. The marginal product of labour initially increases due to division of labour and then decreases due to diminishing returns.

2. How do specialisation and division of labour typically affect the marginal product of labour? In the initial stages of production, specialisation and division of labour lead to an increasing marginal product for workers by allowing workers to concentrate on a few tasks so that they become more skilled at doing them quickly and efficiently. 3. What is the law of diminishing returns? The law of diminishing returns states that adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline. Dees it applies to long run? No

4. Consider the table below, which describes the amount of output produced by various quantities of workers.

Use the numbers from the table above to draw a graph showing the marginal product of labour and the average product of labour. (Note that your plotting does not have to be exact.) 1) Use the multipoint curve drawing tool to plot the marginal product of labour (for workers 1 to 7). Properly label this curve. 2) Use the multipoint curve drawing tool to plot the average product of labour (for workers 1 to 7). Properly label this curve.

5. A student looks at the data in the table to the right and draws this conclusion: 'The marginal product of labour is increasing for the first three workers hired, then it declines for the next three workers. I guess each of the first three workers must have been a hard worker. Then Julie must have had to settle for increasingly poor workers.'

Do you agree with the student's analysis? Briefly explain. No. The marginal product initially increases due to division of labour and then decreases due to the law of diminishing returns. 6. Briefly explain whether you agree or disagree with the following argument. Adam Smith's idea of the gains to firms from the division of labour makes a lot of sense when the good being manufactured is something complex like automobiles or computers. However, it doesn't apply in the manufacture of less complex goods or in other sectors of the economy, such as retail sales.

The argument is incorrect. Gains from division of labour will occur whenever production of a good or provision of a service has multiple tasks.

7. Is it possible for a firm to experience a technological change that would increase the marginal product of labour while leaving the average product of labour unchanged? Explain. No. An increase in the marginal product of labour will increase the average product of labour.

8. Fill in the marginal product and average product of labour in the following table. (Enter numeric responses using real numbers rounded to two decimal places.)

Q4 6.4

1. What is the difference between the average cost of production (ATC) and marginal cost of production (MC)?

2. If the marginal product of labour is rising, is the marginal cost of production rising or falling? Briefly explain. If the additional output from each new worker is rising, the marginal cost of that output is falling because the only additional cost to producing more output is the additional wages paid to hire more workers. 3. Explain why the marginal cost curve intersects the average total cost curve at the level of output where average total cost is at a minimum. The marginal cost curve intersects the average total cost curve at the level of output where average total cost is at a minimum because when the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the average, it pulls the average up. 4. Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain. Yes. If marginal cost is less than average total cost, then average total cost will be decreasing. 5. Suppose a firm has no fixed costs, so all of its costs are variable, even in the short run. If the firm's marginal costs are continually increasing (that is, marginal cost is increasing from the first unit of output produced), will the firm's average total cost curve have a U-shape? No. The average total cost curve will be continually increasing. If the firm's marginal costs are $5 at every level of output, what shape will the firm's average total cost have? The firm's average total cost curve will be horizontal 6. Is Julie Johnson right or wrong when she says the following: 'Currently, I am producing 17500 copies per day at a total cost of $800.00. If I produce 17 501 copies my total cost will rise to $800.03, therefore my average cost of producing copies must be increasing.' Julie is wrong. Since marginal cost is less than average total cost, her average total cost must be

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Q5 6.5 1. As the level of output increases, what happens to the value of average fixed cost? Average fixed cost decreases 2. As the level of output increases, what happens to the difference between the value of average total cost and average variable cost? As the level of output increases, the difference between the value of average total cost and average variable cost decreases because average fixed cost decreases as output increases 3. Suppose the total cost of producing 15000 tennis balls is $30000, and the fixed cost is $10000. What is the total variable cost? $20000 (Enter a numeric response using an integer.) When output is 15 000, what is the average variable cost? $1.33 (Enter a numeric response using a real number rounded to two decimal places.) When output is 15 000, what is the average fixed cost? $0.67 (Enter a numeric response using a real number rounded to two decimal places.) Assuming that the cost curves have the usual shape, the dollar difference between average total costs and average variable costs decreases as output increases. 4. Use the information in the graph to the right to find the values for the following at an output level of 45 Use the information in the graph to the right to find the values for the following at an output level of 65. a. The marginal cost is $50. (Enter a numeric response using an integer.) b. The total cost is $2600. (Enter a numeric response using an integer.) c. The variable cost is $2080. (Enter a numeric response using an integer.) d. The fixed cost is $520. (Enter a numeric response using an integer.)

5. List the errors in the graph to the right (where AFC is average fixed

cost, AVC is average variable cost, ATC is average total cost and MC is marginal cost).

AFC should be MC, ATC should be AVC and AVC should be ATC.

6. Explain how the listed events would affect the following at Qantas Airways: Marginal cost, Average variable cost, Average fixed cost, Average total cost a. Qantas signs a new contract with the unions that requires the company to pay higher wages. Marginal cost would increase, average variable cost would increase, average fixed cost would remain unchanged and average total cost would increase. b. The federal government starts to levy a $20 per passenger carbon emissions tax on all air travel. Marginal cost would increase, average variable cost would increase, average fixed cost would remain unchanged and average total cost would increase.

c. The company decides to give its senior executives a one-time $100 000 bonus. Marginal cost would remain unchanged, average variable cost would remain unchanged, average fixed cost would increase, and average total cost would increase. d. Qantas decides to decrease the amount it spends on advertising. Marginal cost would remain unchanged, average variable cost would remain unchanged, average fixed cost would decrease, and average total cost would decrease

Q6 6.6 1. What is the difference between total cost and variable cost in the long run? In the long run, the total cost of production equals the variable cost of production. 2. What is minimum efficient scale? Minimum efficient scale is the level of output at which the long run average cost of production no longer decreases with output. What is likely to happen to firms that do not reach minimum efficient scale? A firm that does not reach minimum efficient scale will likely earn less profit than other firms in the industry in the long run. 3. What are economies of scale? What are four reasons firms may experience economies of scale? Economies of scale exist when a firm's long-run average costs decrease with output. What are four reasons firms may experience economies of scale? (Select all that apply.) As output expands, workers and managers can become more specialised, enabling them to be more productive. Large firms are able to purchase inputs at lower costs than smaller competitors. A firm is able to borrow money more cheaply as it expands. A firm's technology makes it possible to increase production with a smaller proportional increase in at least one input. 4. What are diseconomies of scale? Diseconomies of scale occur when a firm's long-run average costs increase with output. What is the main reason that firms may eventually encounter diseconomies of scale as they keep increasing the size of their store or factory? Firms have difficulty coordinating production. 5. Short-run average cost can never be less than the long-run average cost for a given level of output because in the long run, all inputs are variable, including the ones that are fixed in the short run. 6. An article in The Wall Street Journal described the Chinese car industry as 'a hodgepodge of companies', most of which produce fewer than 100 000 cars per year. Ford Chief Executive Alan Mulally commented on the situation by saying, 'If you don't have scale, you just won't be able to be competitive.' Mulally meant that Chinese firms that aren't producing at minimum efficient scale will have higher costs than their competitors. We can predict that, as the Chinese automobile industry develops over the next 10 years, there should be fewer firms in the industry and the remaining firms will likely be larger. 7. Suppose that Henry Ford had continued to experience economies of scale, no matter how large a car factory he built. Discuss what the implications of this would have been for the motor vehicle industry. Ford could have profitably sold his motor vehicles at a lower price than smaller competitors. In the long run, motor vehicles would be produced at the lowest cost if all motor vehicles were produced in a single factory by Ford. 8. Online booksellers have captured a very large portion of the retail book market over the past several years. Companies that have a large online presence, such as Amazon (which also owns the popular The Book Depository) and Barnes & Noble, now dominate this market. Over the past 15 years, the number of independent 'bricks and mortar' bookstores has fallen. Briefly explain what role costs may have played in explaining the large decline in independent

booksellers. The number of independent booksellers may have declined because the long dash run average cost of production for booksellers decreases with increased input. 9. Explain whether you agree or disagree with the following statement: Henry Ford expected to be able to produce cars at a lower average cost at his River Rouge plant. Unfortunately, because of diminishing returns, his costs were actually higher. The statement is incorrect. Ford was not able to produce cars at a lower average cost due to diseconomies of scale. 10. In recent decades, agricultural production in many countries has shifted to much larger enterprises. What would economies of scale have to do with agricultural production shifting to much larger operations? What are economies of scale? Economies of scale exist when a firm's long-run average costs fall as it increases output. What would economies of scale have to do with agricultural production shifting to much larger operations?

Economies of scale have prompted agricultural producers to shift to larger operations to produce more efficiently. 11. An account of the difficulties of Japanese mobile-phone manufacturers argues that these

firms made a mistake by concentrating on selling in high-income countries, while making little effort to sell in low-income countries. Why would the price of Japanese mobile phones be high because Japanese firms are producing these phones in low volumes? The price of Japanese phones might be high with low volumes because the production of mobile phones exhibits economies of scale. Use a long-run average cost curve graph to illustrate your answer....