| Line 218: |
Line 218: |
| | '''''Perhaps you would like to show initiative and organize the next homeschool dinner! Perhaps a Christmas event?''''' | | '''''Perhaps you would like to show initiative and organize the next homeschool dinner! Perhaps a Christmas event?''''' |
| | | | |
| − | == Sample problems == | + | == Sample problems and answers== |
| | | | |
| | 1. Imagine a firm in perfect competition, and in long-run equilibrium. Which of the following statements is true? | | 1. Imagine a firm in perfect competition, and in long-run equilibrium. Which of the following statements is true? |
| Line 224: |
Line 224: |
| | (a) the total revenue of the firm cannot be increased | | (a) the total revenue of the firm cannot be increased |
| | <br>(b) AVC > MC | | <br>(b) AVC > MC |
| − | <br>(c) MC is at a minimum | + | <br>(c) MC is at its average |
| − | <br>(d) marginal revenue is at a maximum | + | <br>(d) marginal revenue is at its maximum |
| | <br>(e) the average total cost is at a minimum | | <br>(e) the average total cost is at a minimum |
| | | | |
| Line 232: |
Line 232: |
| | Similarly, answer choice (d) must be wrong because we know that we would continue selling until MR (marginal revenue) declines to where it equals MC (marginal cost). That point were MR=MC is not where MR is the maximum. | | Similarly, answer choice (d) must be wrong because we know that we would continue selling until MR (marginal revenue) declines to where it equals MC (marginal cost). That point were MR=MC is not where MR is the maximum. |
| | | | |
| − | That leaves us with the possible answer choices of (b), (c) and (e). Can we eliminate one of these to improve our chances of selecting the correct one? | + | Would marginal cost (MC) be at its average (choice (c))? No reason to think so. Marginal cost would be higher for the first few units produced by the firm, and lower as volume increases. Most likely MC is below its average as the last unit is produced. |
| | + | |
| | + | That leaves us with the possible answer choices of (b) and (e). We should try to eliminate one of these to improve our chances of selecting the correct one. To do so, let's reread the question. It says the firm is perfectly competitive and in long-run equilibrium. That means it has done everything possible to lower its costs, and has all the time it needs to get its costs as low as possible. It does not have to pay for overtime workers; it can hire precisely the optimal number of workers needed without incurring overtime costs. Using the fact that we are in the "long run" for a perfectly competitive firm, we know that its costs are as low as they can be. Answer (e) best fits those conditions in the question: "the average total cost is at a minimum." |
| | + | |
| | + | See how the correct answer fits the question as a key fits a lock. The question asked about the "long run" equilibrium of a perfectly competitive firm, which suggests the fact that costs are low. Only answer (e) conveyed how costs are low. That "unlocks" the question. |
| | + | |
| | + | 2. Imagine a firm in perfect competition, and in long-run equilibrium. Which of the following statements is true? |
| | + | |
| | + | (a) |
| | + | <br>(b) |
| | + | <br>(c) |
| | + | <br>(d) |
| | + | <br>(e) |
| | + | |
| | + | == Assignment == |
| | + | |
| | + | '''Study for the midterm exam next week.''' |
| | [[Category:Economics lectures]] | | [[Category:Economics lectures]] |
| | {{DEFAULTSORT: Economics Lecture 08}} | | {{DEFAULTSORT: Economics Lecture 08}} |