Changes

==Review: Inputs to a Firm (Espec. Labor)==

==Review: Inputs to a Firm (Espec. Labor)==

For many students, the most additional points can be obtained by reviewing the "Inputs to a Firm" category.  It will be on 10% of the questions on the final exam and the CLEP exam.  That's a significant chunk of these exams.  Without review, these questions that look hard and are easy to miss.  But with some extra preparation, you should be able to answer nearly all of them correctly.  In maximizing your score and making the best use of your time, this category may result in the biggest increase in correct answers with the least amount of effort.  That's what maximizing marginal utility is all about.

For many students, the most additional points can be obtained by reviewing the "Inputs to a Firm" category.  It will be on 10% of the questions on the final exam and the CLEP exam.  That's a significant chunk of these exams.  Without review, these questions look hard and are easy to miss.  But with some extra preparation, you should be able to answer nearly all of them correctly.  In maximizing your score and making the best use of your time, this category may result in the biggest increase in correct answers with the least amount of effort.  That's what maximizing marginal utility is all about.

Accordingly, in economic terms, the greatest marginal utility from studying for the exam is probably obtaining by focusing on this topic first.  We've already covered the other two topics comprising 10% apiece of the exam (cost measures and government regulation), so there may not be many more points to pick up there.  Realize that you will probably get some exam questions right already without additional studying, and other questions you may get wrong no matter how much you study.  But in this category of "inputs to a firm," you can pick up some points that you would otherwise miss.  Let's review it now.

Accordingly, in economic terms, the greatest marginal utility from studying for the exam is probably obtaining by focusing on this topic first.  We've already covered the other two topics comprising 10% apiece of the exam (cost measures and government regulation), so there may not be many more points to pick up there.  Realize that you will probably get some exam questions right without additional studying, and other questions you may get wrong no matter how much you study.  But in this category of "inputs to a firm," you can pick up some points that you would otherwise miss.  Let's review it now.

Questions about inputs to a firm focus on what a firm will do with its inputs (usually labor, but sometimes capital) in order to maximize its profits.  The questions usually concern the following:

Questions about inputs to a firm focus on what a firm will do with its inputs (usually labor, but sometimes capital) in order to maximize its profits.  The questions usually concern the following:

#calculating overall costs (total cost and average variable cost) based on wages

#calculating overall costs (total cost and average variable cost) based on wages

Review the above list now.  How many of the above 9 topics do you know well enough to answer a question about them correctly?  Let's briefly review each of these concepts so you can maximize your score on this big chunk of the exam.

Review the above list now.  How many of the above 8 topics do you know well enough to answer a question about them correctly?  Let's briefly review each of these concepts so you can maximize your score on this big part of the exam.

1.  "the impact of an improvement in technology on the production by a firm"

1.  "the impact of an improvement in technology on the production by a firm"

:If technology improves, as in helpful new inventions or advances in communication (like the internet), then this helps shift the Production Possibilities Frontier (Curve) ''outward''.  A firm can produce more output now.  So an improvement in technology enables a firm ''to increase supply''.

:If technology improves, as in helpful new inventions or advances in communication (like the internet), then this helps shift the Production Possibilities Frontier (Curve) ''outward''.  A firm can produce more output now.  So an improvement in technology enables a firm ''to increase its output or its supply to the market''.

2.  "adjusting inputs to minimize the overall cost at a constant level of output"

2.  "adjusting inputs to minimize the overall cost at a constant level of output"

:How does a firm adjust its inputs (e.g., workers or equipment) so that it has reached the lowest possible overall cost?  By making sure that he is getting the most "bang for his buck" for each input.  In other words, that each input is producing the most marginal product per dollar spent on that input.  If one worker is producing more than another worker, and both are being paid the same, then the owner has not lowered his costs to a minimum.  He could fire the lazy worker and hire a part-time worker like his good one, and then produce the same output at less cost.

:How does a firm adjust its inputs (e.g., workers or equipment) so that it has reached the lowest possible overall cost?  By making sure that he is getting the most "bang for his buck" '''''for each input'''''.  In other words, the firm makes sure that each input is producing the most marginal product per dollar spent on that input.  If one worker is producing more than another worker, and both are being paid the same, then the owner has not lowered his costs to a minimum.  He could fire the lazy worker and hire a part-time worker like his good one, and then produce the same output at less cost.

:Summarizing the above, the firm minimizes his overall costs by making sure the marginal product per cost for each input is equal.  If one input (e.g., one worker) is producing more marginal product per cost than another, then the overall costs are not minimized.  The unproductive worker is wasting the firm's money.

:Summarizing the above, the firm minimizes its overall costs '''''by making sure the marginal product per cost for each input is equal'''''.  If one input (e.g., one worker) is producing more marginal product per cost than another, then the overall costs are not minimized.  The unproductive worker is wasting the firm's money.

3.  "the effect of the minimum wage on the competition for labor"

3.  "the effect of the minimum wage on the competition for labor"

:Also, although this will never be asked on a CLEP exam, raising the minimum wage causes more high school students to drop out and pursue jobs rather than stay in school, which would enable them to obtain higher-paying jobs in the future.

:Also, although this will never be asked on a CLEP exam, raising the minimum wage causes more high school students to drop out and pursue jobs rather than stay in school, which would enable them to obtain higher-paying jobs in the future.

:Sometimes the CLEP exam will twist the question about minimum wage to obscure its harmful effect, by asking what happens when the labor supply increases when there is a minimum wage.  The answer is the same:  unemployment increases.

:Sometimes the CLEP exam will twist the question about minimum wage to obscure its harmful effect, by asking what happens when the labor supply increases when there already is a minimum wage.  This makes it look like the fault is an increase in the labor supply rather than the minimum wage law.  The correct answer is the same in both cases:  unemployment increases.

4.  "comparing the cost of an input (usually labor) relative to the additional revenue that results"

4.  "comparing the cost of an input (usually labor) relative to the additional revenue that results"

:This type of question probes how a firm increases its inputs in relation to the additional revenue that results from such an increase.  The key here is to be very careful and very logical.  A firm will increase an input (such as labor) until the ''value'' of the marginal product of that input equals the marginal cost of that input.  Read that sentence over and over until you understand it.  It simply means that the firm will equate the marginal cost of the additional input (such as an additional worker) to the marginal revenue that the additional input produces.

:This type of question probes how a firm increases its inputs in relation to the additional revenue that results from such an increase.  The key here is to be very careful and very logical.  A firm will increase an input (such as labor) until the ''value'' of the marginal product of that input equals the marginal cost of that input.  Read that sentence over and over until you understand it.  It simply means that the firm will equate the marginal cost of the additional input (such as an additional worker) to the marginal revenue that the additional input produces.

:Often students miss this type of question because they are not careful to compare dollars to dollars.  If you have the marginal cost in terms of dollars (such as a wage rage for the additional worker), then you need to equate it to the marginal value of the marginal product of the labor (dollar units), not the marginal product itself (which is a quantity itself).

:Often students miss this type of question because they are not careful to compare dollars to dollars.  If you have the marginal cost in terms of dollars (such as a wage rage for the additional worker), then you need to equate it to the marginal value of the marginal product of the labor (value is in dollar units), not the marginal product itself (which is a unit quantity).

5.  "why a firm's "demand for labor" is called a "derived demand"

5.  "why a firm's "demand for labor" is called a "derived demand"

:Accordingly, if you are told how many additional units are produced by each additional worker, then calculating the marginal cost requires dividing the cost of the additional worker by the additional number of units he produces.  The more units an additional worker produces, the lower the marginal cost that results from adding that worker.

:Accordingly, if you are told how many additional units are produced by each additional worker, then calculating the marginal cost requires dividing the cost of the additional worker by the additional number of units he produces.  The more units an additional worker produces, the lower the marginal cost that results from adding that worker.

:Example:  suppose a firm hires Tom and sees the output increase by 20 units, and then hires Mary at the same wage and sees the output increase by 15 units.  When is the marginal cost of the firm the lowest?  After it hires Tom, but before it hires Mary.  That's because the marginal cost of hiring Tom is his wage divided by 20, while the marginal cost of hiring Mary is the same wave divided by 15.  A wage divided by 20 is less than the same wage divided by 15, so the marginal cost to the firm after hiring Tom is less than after hiring Mary.

:''Example'':  suppose a firm hires Tom and sees the output increase by 20 units, and then hires Mary at the same wage and sees the output increase by 15 units.  When is the marginal cost of the firm the lowest?  After it hires Tom, but ''before'' it hires Mary.  That's because the marginal cost of hiring Tom is his wages divided by 20, while the marginal cost of hiring Mary is the same wage divided by 15.  A wage divided by 20 is less than the same wage divided by 15, so the marginal cost to the firm after hiring Tom is less than after hiring Mary.

8.  "calculating overall costs (total cost and average variable cost) based on wages"

8.  "calculating overall costs (total cost and average variable cost) based on wages"

:The key here is simply to be careful in doing the calculations, and then double-check your answer.  You have to be sure you are using the correct level of output before you calculate the total cost (TC) and average variable cost (AVC) at that level of output.  To find the total cost, add the fixed cost (FC) to the labor cost (total wages times the number of workers), ''for a given level of output''.  Then, to find the average variable cost, find the total variable cost (TVC=TC-FC) and divide by that level of output.

:The key here is simply to be careful in doing the calculations, and then double-check your answer.  '''''You need to be sure you are using the correct level of output before you calculate the total cost (TC) and average variable cost (AVC) at that level of output'''''.  To find the total cost, add the fixed cost (FC) to the labor cost (total wages times the number of workers), '''''for a given level of output'''''.  Then, to find the average variable cost, find the total variable cost (TVC=TC-FC) and divide by that level of output.

:Example:  a firm can produce 100 units with 5 workers and 200 units with 10 workers.  Its fixed cost is $50 and its wage rate is $20 per day.  What is its total cost and average variable cost to produce 100 units?

:''Example'':  a firm can produce 100 units with 5 workers and 200 units with 10 workers.  Its fixed cost is $50 and its wage rate is $20 per worker.  What is its total cost and average variable cost to produce 100 units?

::Answer:  note first that the question asks about the costs at 100 units in output, not 200 units.  Total cost at 100 units is the fixed cost ($50) plus the labor cost ($20 times 5 workers, or $100), for a total of $150.  The average variable cost is the total cost ($150) minus the fixed cost ($50), divided by the output (100), for a total of $1 per unit.

::''Answer'':  note first that the question asks about the costs at 100 units in output, not 200 units.  Total cost at 100 units is the fixed cost ($50) plus the labor cost ($20 times 5 workers, or $100), for a total of $150.  The average variable cost is the total cost ($150) minus the fixed cost ($50), divided by the output (100), for a total of $1 per unit.

Master the above eight issues, and you'll convert 10% of the exam from wrong answers to correct ones.  That could easily put you over the top in order to earn college credit.

Master the above eight issues, and you'll convert 10% of the exam from wrong answers to correct ones.  That could enable you to earn college credit.

== Review: Different Types of Markets ==

== Review: Different Types of Markets ==