BIOM 121 1nd EditionExam # 3 Study GuideWhat causes constraint? Provide examples.Input: time of workers, raw materials, services from equipment.Technology: limits of how much can be produced.Competition: other firms exist & sell same product.What is an example of input?Labor, raw materials.What is an example of fixed output?Capital.What is key in short-run?At least 1 input is fixed, use what you’ve got until you get more/new, can’t enter/exit market.What is key in long-run?All inputs are variable.What is marginal product of labor?Extra labor (output) for each extra worker (input).What is law of diminishing return?In short run, @ same level of input, MP of variable input starts to decrease.What is accounting profit?Revenue – costs (explicit).What are explicit costs? Provide examples.Something that you need to pay out of your own pocket. Worker’s wages, material cost, interestor debt.What is economic profit?Revenue – explicit costs – implicit costs.What are implicit costs? Provide examples.Opportunity cost of company owned assets, owner’s time, financial capitalWhat is the difference between 0 economic and 0 accounting profit?0 economic is sustainable whereas 0 accounting means you’re out of business and achieving greater losses.What is encompassed in short run total cost?Sum of total fixed and total variable costs.What is marginal cost?Change in total costs that results from 1 unit in change in output.What is the result if MC>ATC & MC<ATC?If MC> then ATC increases.If MC< then ATC decreases. What are the characteristics of a perfectly competitive industry?Many buyers (consumers) & many sellers (producers).Good/service for sale is the same (homogeneous).Complete information in market place (no secrets, restrictions, everyone knows prices, know what you’re buying, producers & consumers have same about of info available).Firms act as price-takers (firms producing product can’t set price, if leave competitive market then can set price).What is the theory of the firm?Firms make choices seeking to maximize profits.Label the graph: A – supplyB – demandC – marginal costD – average total costE – demand = price = marginal revenue Should you produce more/less when P>MC & P<MC?P>MC means need to produce more.P<MC means need to produce less.Do you make a profit or encounter a loss when the ATC is below/above the P*?When ATC is below the P* then you will make a profit.When ATC is above the P* then you will encounter a loss.When should a firm shut down?Shut down when operating profit is <0.What happens to the overhead as a firm produces more?It is spread thinner.What is overhead?AFC = TFC/q.What are economies of scale vs. diseconomies of scale?Economies: when small firm’s price is large and large firm’s price is small.Diseconomies: opposite of economies, large has large price, whereas small has small price.Why do firms choose the size of their firm at the bottom of a LRATCcurve as in this graph?Because costs are lower, it is the minimum efficient scale. What are the barriers to entry in competitive market?None.Why are there shifts in the supply curve?They are due to the firms entering and old firms exiting.What happens to the price when new firms enter/old firms exit?With new, the price decreases; with old, the price increases.What is constant cost industry?The cost curves don’t’ shift as industry expands/contracts. What questions does the allocation of resources answer?What, how, for whom.Describe a win-win or win-tie situation, as well as win-lose.Win-win/ win-tie: change in allocation of resources is a Pareto-improvement if at least one person is better off and no one is worse off after change. Good, or don’t careWin-lose: change in allocation is a potential Pareto-improvement if gain to winners (in $ terms) is greater than losses to injured ($ terms). Winners gain > losers loss. What is the marginal benefit?A person’s maximal wiliness to pay.What is the marginal cost?How much you have to pay a person to give up resources. What are the costs & benefits of society?They are those of the people, can’t be above them.What two things does a Pareto improvement require?SMB > 0 and SMC = 0.What does a potential Pareto improvement require?SMB > SMC.How much/for how long do firms produce?Competitive firms produce until P=MC.Explain SMB = (MUi = P = MCj) = SMC; what is the market & the meaning of the equal signs.The (…) is what the market wants, SMB = SMC.The = between MU & P is the consumer utility max.The = between P & MC is the firm profit max.What do MB=SMB and MB>SMB mean?MB = SMB means no external benefit.MB > SMB means external benefit is present.What do MC=SMC and MC<SMC mean?MC = SMC means no external cost.MC < SMC means external cost is present.What happens if one of the links of SMB = (MUi = P = MCj) = SMC is brokenThen a competitive market is no longer there.What conditions need to be present for a market solution to be efficient?Competition, no external benefits, no external costs. Other key things to knowChapter 7Be able to define: production, profit, normal rate of profit/return, law of diminishing returns.Differentiate between: short & long run, fixed & variable input, total, marginal & average product, accounting & economic profit.3 decisions all competitive firms must make.Chapter 8Be able to define: marginal cost, marginal revenue.Differentiate between: fixed & average fixed costs, variable & average variable costs, total & average total costs.Understand figures in book: 8.2, 8.7, 8.8, 8.9, & 8.10.Relationship between ATC & MC.Relationship between firm’s MC curve & short-run supply curve.Chapter 9Differentiate between: increasing, constant & decreasing returns to scale.Understand figures in book: 9.2.Be able to determine profits & losses.2 decisions firm can make in long-run but not short-run.3 things that must equal price in long-run competitive equilibrium. Chapter 12Be able to define: Pareto efficient, market failure.Differentiate between: general & partial equilibrium analysis, efficient & potentially efficient trade/change.4 sources of market failure.Effects of change in one market upon another.Economist’s argument in support of competitive market