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Microeconomic Concepts
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Microeconomic Concepts
Microeconomic Concepts
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1
Question
What is the difference between explicit and implicit costs?
Answer
Explicit costs are the money costs of employing resources owned by others, in the form of wages, rent, and interest. Implicit costs are the opportunity cost of employing self-owned resources toward one activity rather than another.
2
Question
Define the short run and long run in terms of production inputs.
Answer
The short run is the period of time over which at least one input (physical capital, K) is fixed. The long run is the period of time over which all inputs are variable.
3
Question
What is the Total Physical Product of Labor (TPPL)?
Answer
The Total Physical Product of Labor (TPPL) is the total output produced by labor. Output changes only when the amount of the variable input changes.
4
Question
What is the Marginal Physical Product (MPP)?
Answer
Marginal Physical Product (MPP) equals the change in Total Physical Product of Labor (TPPL) divided by the change in quantity of labor.
5
Question
What is the Law of Diminishing Returns?
Answer
The Law of Diminishing Returns states that, in the short run, as more units of a variable input are added to fixed inputs, the additional output produced will eventually decrease.
6
Question
What are the main cost categories in the short run?
Answer
Total Cost (TC), Total Fixed Costs (TFC), Total Variable Costs (TVC), Marginal Cost (MC).
7
Question
How is Average Total Cost (ATC) calculated?
Answer
Average Total Cost (ATC) is calculated as Total Costs divided by Quantity of output.
8
Question
What is the relationship between ATC, AVC, and AFC?
Answer
Average Total Cost (ATC) is equal to Average Variable Cost (AVC) plus Average Fixed Costs (AFC). The distance between ATC and AVC represents AFC, which always declines as output increases because costs are spread out.
9
Question
What happens if price falls below Average Variable Cost (AVC)?
Answer
If price falls below AVC, the firm's best option is to shut down, since it is no longer covering its fixed costs.
10
Question
What can cause cost curves to shift?
Answer
A change in any variable cost (e.g., wages, rent, interest) will shift the Marginal Cost (MC), Average Variable Cost (AVC), and Average Total Cost (ATC) curves. Also, an improvement in technology or productivity can cause the curves to shift down.
11
Question
What are Returns to Scale?
Answer
Returns to Scale refer to how output responds to a proportional increase in all inputs. There are three types: Increasing Returns to Scale, Constant Returns to Scale, and Decreasing Returns to Scale.
12
Question
What does the Long-run Average Total Cost (LRATC) curve represent?
Answer
The Long-run Average Total Cost (LRATC) gives the minimum ATC for producing each amount of output.
13
Question
What are the characteristics of a perfectly competitive (PC) market?
Answer
No barriers to entry, homogeneous product, low start-up costs.
14
Question
How does a firm in perfect competition respond to price changes?
Answer
A firm will respond to price increases by increasing output as long as price is above AVC.
15
Question
What is the minimum efficient scale?
Answer
The minimum efficient scale is the lowest level of output at which a firm can achieve the lowest average total cost.
16
Question
What happens in the long run in a perfectly competitive market when economic profits are earned?
Answer
In the long run, new firms enter the market due to no barriers to entry, which shifts the market supply curve outward, lowering the market price until economic profits are eliminated.
17
Question
What is a monopoly without price discrimination?
Answer
A pure monopoly is characterized by a single seller, barriers to entry, and a downward-sloping Marginal Revenue Curve that lies below its Demand Curve.
18
Question
What is the profit-maximizing condition for a monopolist?
Answer
The monopolist maximizes profit by producing where Marginal Revenue equals Marginal Cost (MR = MC).
19
Question
How does a monopolist determine its price?
Answer
Once the quantity is determined, the monopolist obtains its price from the demand curve.
20
Question
What is the economic profit for a monopoly?
Answer
Economic profit for a monopoly is calculated as Total Revenue (TR) minus Total Cost (TC). If Price (P) is greater than Average Total Cost (ATC), the monopolist achieves economic profit.
21
Question
What is the relationship between Marginal Cost (MC) and Average Total Cost (ATC) in terms of production?
Answer
The Marginal Cost (MC) intersects the Average Total Cost (ATC) curve at its lowest point.
22
Question
What is the shutdown rule in a monopoly?
Answer
In the short run, if price (P) falls below Average Variable Cost (AVC), the firm will produce where Marginal Cost (MC) equals Marginal Revenue (MR) to minimize losses.