EC102: CLASS 5Christina Ammon

Overview

Collect Problem Set Can also leave in pigeon hole until 5pm sharp (or email) Will go over parts next week in class

Today: Quiz 5• Continue with cost minimisation• Start on the price taking firm

Question 1 Consider a firm that employs robots and workers. If the wage

increases and the firm wants to keep the level of production unchanged, it will hire:• More workers and more robots • More workers and fewer robots • Fewer workers and fewer robots• Fewer workers and more robots

Question 1

Question 2 A car company employs robots and workers to produce 200

cars per day. Its R&D department invents a new technology that makes both robots and workers more efficient. As a result, the x200-isoquant:• Shifts towards the origin • Shifts away from the origin• Is unaffected• Is affected in an unpredictable way

Question 2

Question 3 Point e1 corresponds the

efficient combination of workers and robots because it entails:• the lowest opportunity cost of all

input combinations• the lowest marginal cost of all

input combinations • the lowest opportunity cost of

those input combinations that can be used to produce 200 cars

• the lowest marginal revenue of those input combinations that can be used to produce 200 cars

Question 3

Isoquant=• All combination of inputs that yield the same output

Isocosts• All combination of inputs that yield the same economic costs

Point e1 – the combination of inputs on the isoquant that costs the least in economic terms

i.e. the combination of inputs that yield output of 200 and has the lowest opportunity cost

What is the optimality condition again? • MRTS=w/r• MPL/MPK=w/r

Question 4

In the long run, if the total cost function exhibits economies, diseconomies or no effect of scale, the associated long run average cost curve is respectively: • Upward sloping, downward sloping or flat• Flat, upward sloping or downward sloping • Downward sloping, upward sloping or flat• Upward sloping, flat or downward sloping

Question 4

The price taking firm What determines a firm’s optimal choice of output? • MR=MC

What is market power• Market power is the firm’s ability to affect the price at which it sells its

output or buys its inputs• Price taking firm = no market power

How is a firm’s market power related to the elasticity of demand?• How does elasticity affect the shape of the demand curve? • What is the relationship between MR and elasticity? • MR=(1-1/e)*p • What happens to MR=MC if e goes towards infinity?

Question 5

A price-taking firm chooses its actions under the assumption that:• it can influence the prices of the output that it sells or the inputs that it

buys • it cannot influence the prices of the output that it sells or the inputs that

it buys• it cannot influence the prices of the output that it sells but can influence

the prices of the inputs that it buys• it can influence the prices of the output that it sells but cannot influence

the prices of the inputs that it buys

Question 6

The shutdown rule implies that a price-taking firm is better off discontinuing its operations if for all output levels:• Marginal revenue is below total cost • Marginal cost is below marginal revenue• Average cost is below average revenue• Average revenue is below average cost

Question 6

Question 7

A price-taking firm’s long-run supply curve coincides with: • its long-run marginal cost curve below its long-run average cost curve• its long-run average cost curve above its long-run marginal cost curve• its long-run average cost curve below its long-run marginal cost curve• its long-run marginal cost curve above its long-run average cost curve

Question 7

Question 8

“The marginal output rule provides one way of calculating the profit-maximising output level, but the factor-hiring rule provides another. Thus, they lead to inconsistent levels of output be produced.” This statement is: • False • True

Question 8

What is the marginal output rule? What is the marginal factor rule? Are they equivalent? - YES

The factor-hiring rule: MRP = MFC. And we know that MRP = MPP × MR,   => MPP × MR = MFC

The marginal output rule: MR = MC. And MC = MFC/MPP => MR = MFC/MPP

Question 9

“No one was responsible for the great Wall Street crash. No one engineered the speculation that preceded it. Both were the

product of free choice and decision of hundreds of thousands of individuals.” (John Kenneth Galbraith)