Principles of Economics Problem Set 3 (Chapters 6 and 7) 1

```Izmir University of Economics
Department of Economics,
ECON 100 – Principles of Economics
Problem Set 3 (Chapters 6 and 7)
1) Economists assume that a perfectly competitive firm's objective is to maximize its
A) output price.
B) economic profit.
C) quantity sold.
D) revenue.
2) A firm has fixed costs
A) in the short run but not in the long run.
B) neither in the long run nor in the short run.
C) in the short run and in the long run.
D) in the long run but not in the short run.
3) Total cost is the sum of fixed costs and
A) variable costs.
B) implicit costs.
C) accounting costs.
D) explicit costs.
4) When the marginal product equals the average product, the
A) average product curve is downward sloping.
B) average product is at its maximum.
C) average product curve is upward sloping.
D) marginal product is at its maximum.
5) If the marginal product of labour equals 8 and the average product of labour equals 6, then when one
more worker is hired, definitely the
A) average product falls.
B) average product rises.
C) marginal product rises.
D) marginal product falls.
6) The long run distinguished from the short run in that, in the long run
A) output prices can vary
B) the firm no longer maximizes its profit
C) resource prices can vary
D) the quantities of all resources can be varied
Essay Questions
1) The table gives the product schedule for Tracey’s Pencil Factory:
Labour
(workers)
0
1
2
3
4
5
6
7
8
9
Total product
(units per hour)
0
8
20
34
46
56
64
70
74
75
Marginal Product
(MP)
0
8
12
14
12
10
8
6
4
1
Average Product
(AP)
0
8
10
11,333
11,5
11,2
10,667
10
9,25
8,33
a) Fill the blank columns for Marginal Product and Average Product.
b) Does this example reflect or show the law of diminishing returns? Explain briefly.
The law of diminishing returns states that as a firm uses more of a variable input, given the quantity of fixed
inputs, the marginal product of the variable input eventually diminishes. Therefore, the Marginal Product of
Labor (variable input) is increasing until the 3rd Labor, then it starts to diminish (fall) if 4th labor is used
2) Aylin’s Cake Shop faces the following schedule for producing cakes.
Output
Total Revenue
(TL)
Total Cost
(TL)
0
1
2
3
4
5
6
0
30
60
90
120
150
180
25
49
69
91
117
147
180
Output
Total Revenue
(TL)
Total Cost
(TL)
0
1
2
3
4
5
6
0
30
60
90
120
150
180
25
49
69
91
117
147
180
Total Fixed
Costs
(TFC)
25
25
25
25
25
25
25
Total Variable
Marginal Costs
Costs
(MC)
(TVC)
0
24
24
44
20
66
22
92
26
122
30
155
33
Average Total
Costs
(AC)
49
34,5
30,33
29,25
29,4
30
Average Fixed
Average
Costs
Variable Costs
(AFC)
(AVC)
25
24
12,5
22
8,33
22
6,25
23
5
24,4
4,17
25,83
a)Find Total Fixed Costs (TFC), Total Variable Costs (TVC), Marginal Costs (MC), Average Total Costs
(AC), Average Fixed Costs (AFC), and Average Variable Costs (AVC).
b) What is the market price of the product? What is the profit maximizing output? Calculate economic
profit/loss for this shop.
Output
Total Revenue
(TL)
0
1
2
3
4
5*
6
0
30
60
90
120
150
180
Marginal
Revenue
(MR)
Marginal Costs
(MC)
30
30
30
30
30
30
24
20
22
26
30
33
In a perfectly competitive market, market price is equal to the Marginal Revenue, thus market price of a cake
is 30 TL.
This shop will maximize its profit when its marginal revenue is equal to its marginal cost.
MR=MC
Therefore, 5 cakes will maximize the profit of Aylin’s Cake Shop. Economic Profit at 5th output level:
Total Profit = Total Revenue - Total cost = 150 – 147= 3 TL
The maximum profit of this shop will be 3 TL
c) Will the firm choose to operate in the short run? Will the firm choose to operate in the long run?
Since its Total Revenue is 150 TL at the optimum output level, it will cover its Total Variable Cost
which is 122 TL, so it will operate in the short run.
If the firm is making a loss it will exit from the market in the long run. However, this firm will also operate in
the long run since its revenue will cover its Total Cost, which is 147 TL.
```