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:''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?

:''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'':  notice 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 enable you 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.

The key to answering these questions correctly is to realize that the more competition there is, the lower the price of the goods and services and the lower the profits for the firms.  Some of these questions are special cases and should simply be memorized:  a cartel is an oligopoly that illegally agrees to fix (set) its prices, and an oligopoly is an industry where just a few firms dominate the market.  When given a grid about where an oligopoly ends up selling its goods (its Nash Equilibrium), the answer is always symmetric (all firms sell at the same price) and usually not the highest price that a monopoly could sell at.

The key to answering these questions correctly is to realize that the more competition there is, the lower the price of the goods and services and the lower the profits for the firms.  Some of these questions are special cases and should simply be memorized:  a cartel is an oligopoly that illegally agrees to fix (set) its prices, and an oligopoly is an industry where just a few firms dominate the market.  When given a grid about where an oligopoly ends up selling its goods (its Nash Equilibrium), the answer is always symmetric (all firms sell at the same price) and usually not the highest price that a monopoly could sell at.

The monopoly questions look harder than they really are.  The monopolist sets his price higher than marginal cost, which would be the optimal price from the standpoint of the public (or government).  Instead, the monopolist price sets his price where marginal revenue equals marginal cost (MR=MC).  If shown a graph, you may have to find the quantity where MR=MC, and then find the corresponding price on the demand curve.  Note that a monopolist has no supply curve, because a supply curve represents many firms in an industry and a monopolist is the only firm in the industry.

The monopoly questions look harder than they really are.  The monopolist sets his price higher than marginal cost, which would be the optimal price from the standpoint of the public (or government).  Instead, the monopolist price sets his price where marginal revenue equals marginal cost (MR=MC).  If shown a graph, you may have to find the quantity where MR=MC, and then find the corresponding price on the demand curve.  Notice that a monopolist has no supply curve, because a supply curve represents many firms in an industry and a monopolist is the only firm in the industry.

There can be general questions about these markets.  A perfectly competitive market uses resources in a perfectly efficient way.  At the other end of the spectrum, a monopoly uses resources the least efficiently of all.  Its high pricing causes a huge social loss ("deadweight loss") by eliminating consumer surplus.  The monopoly reduces output in order to cause a scarcity that increases the price to an artificially high level.  This is bad for everyone, except the owner of the monopoly, who enriches himself.  This is how Bill Gates became the wealthiest person in the world.

There can be general questions about these markets.  A perfectly competitive market uses resources in a perfectly efficient way.  At the other end of the spectrum, a monopoly uses resources the least efficiently of all.  Its high pricing causes a huge social loss ("deadweight loss") by eliminating consumer surplus.  The monopoly reduces output in order to cause a scarcity that increases the price to an artificially high level.  This is bad for everyone, except the owner of the monopoly, who enriches himself.  This is how Bill Gates became the wealthiest person in the world.