Wednesday, January 18, 2017

2012 Multiple Choice (Output & Costs)

2012 Multiple Choice (Output & Costs)

Answer - (B) rise initially, but eventually fall

Answer - (D) Average fixed costs

Understand that AFC = FC/Q

Example - FC = $100 and we produce 10 units then AFC = $100/10 = $10 meaning that each unit we produce covers $10 of the fixed costs.
FC = $100 and we produce 1000 units then AFC = $100/1000 = $.1 or 10 cents. meaning that each unit produced covers $.1 or 10 cents of the fixed costs.

Answer -(E) Its marginal cost is $6, and its average variable cost is $5.50

Understand that this is a perfectly competitive firm in long-run equilibrium,
this means that P=MC & P = min ATC
Total revenue is $600 and TR = P x Q
Quantity = 100 so Price must be $6
So if P = $6 then MC must equal $6 as P=MC
If P = min ATC then ATC at this level of production = $6
So, AFC = $50/100 = $.50 or 50 cents each unit
ATC $(6) = AFC$(.50)
and ATC - AFC = AVC
Then AVC = $6 - $.50 = $5.50

Answer - (D) $400

Q = 5
 then ?/5 = an AVC of $100
VC = 500
500/5 = AVC $(100)
now,, with output of one more unit #6, AVC increases to $150
Q = 6
AVC = $150
so, ?/6 = $150
900/6 = AVC $(150)
900 = VC at output of 6 units
500 = VC at output of 5 units
MC = change in VC/ change in Q (output)
Change in VC = 400/ change in output  = 1 unit
400/1 = 400

Answer - (D) Output increases at an decreasing rate, 
and the cost of producing each additional unit of output increases

Understand that the College Board is trying to see if you recognise the effect of adding more labor (variable costs) to a fixed factor of production (factory)
Diminishing Returns/Productivity
As you add more inputs (labor, variable costs) 
to a fixed factor of production (factory, machinery)
revenues/output increase at a increasing rate initially, but at some point revenues/output decrease decrease the rate of increase, and will eventually decrease.

Answer - (E) Economic profits are zero because price equals average total cost

AVC = $35
AFC = $30
ATC = $65 & P = $65 & MC = $65
Long-Run Equilibrium = P=MC=ATC
at LR Equilibrium a firm is making zero economic profit

Answer - (D) Average revenue is less than average variable cost

Understand and draw your graphs with your Demand curve labelled the AR curve.
IT is,,, and therefore will make sense once drawn.

Answer - (E) greater than zero

Understand that if total revenue is increasing as output increases we must be operating in the elastic section of the demand curve.
As the lower section of the demand curve (that is where MR is negative) is inelastic

2012 Multiple Choice (Elasticity)

2012 Multiple Choice (Elasticity)

Answer - (C) The demand for peanuts must be price inelastic

Understand - If a portion of the peanut crop is destroyed then the price of peanuts will rise. If even with the rise of the price for peanuts, total revenue increases then the demand for peanuts must have been in the inelastic section of the demand curve.
from the Elasticity Cheat Sheet here.

Answer - (D) relatively inelastic (demand for labor)

This one tricked me.....

Understand - (((What they are saying!!))
The change in the price of labor is larger than the change in the quantity fired.

Answer - (C) Unit elastic

P x Q = TR (total revenue)

$8 x 400 = $3200(TR)

$4 x 800 = $3200(TR)

Therefore - Unit Elastic

2012 Multiple Choice (Public Goods)

2012 Multiple Choice (Public Goods)

Answer - (D) National Defense

Understand: public good - An item whose consumption is not decided by the individual consumer but by the society as a whole, and which is financed by taxation.

A public good (or service) may be consumed without reducing the amount available for others, and cannot be withheld from those who do not pay for it. 

From the Market Failure cheat sheet here.

One more thing - often the questions ask about the marginal cost of public goods.
The marginal cost of a public good is zero.
Adding one more person to our National Defense is zero.