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Economics Lecture Eight (view source)
Revision as of 00:36, October 28, 2009
, 00:36, October 28, 2009→Sample problems and answers: added example
'''''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 and answers==
== Sample problems and solutions==
1. Imagine a firm in perfect competition, and in long-run equilibrium. Which of the following statements is true?
1. The term "scarcity" in economics would include all of the following EXCEPT:
(a) gold
<br>(b) pennies
<br>(c) paper clips
<br>(d) salt water at the ocean
<br>(e) pencils
''Answer'': Our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer. Gold is not scarce under any meaning of the word. Knock it out as an answer.
Pennies, paper clips and pencils are all inexpensive, but they do cost something. A penny is not worth much, but it is worth something. If you had a hundred of them, you could buy a chocolate bar. But it doesn't matter how much salt water you might have at the ocean. That's worthless. Nobody would pay anything for it, not even a penny. The correct answer is (d).
2. Imagine a firm in perfect competition, and in long-run equilibrium. Which of the following statements is true?
(a) the total revenue of the firm cannot be increased
(a) the total revenue of the firm cannot be increased
<br>(e) the average total cost is at its minimum
<br>(e) the average total cost is at its minimum
''Answer'': Our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer. Let's look at answer choice (a): the total revenue of the firm cannot be increased. That is wrong because if we increase our output, we could increase our total revenue, even though we may lose money on that additional unit. For example, if we sold chocolate candy bars for $1, we could always increase revenue by selling another one for the below-market-price of 50 cents. We'd lose money on that additional bar, but we'd increase our overall revenue.
''Answer'': Again, our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer. Let's look at answer choice (a): the total revenue of the firm cannot be increased. That is wrong because if we increase our output, we could increase our total revenue, even though we may lose money on that additional unit. For example, if we sold chocolate candy bars for $1, we could always increase revenue by selling another one for the below-market-price of 50 cents. We'd lose money on that additional bar, but we'd increase our overall revenue.
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.
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.
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.
3. Suppose a firm has "economies of scale"? What happens when it increases output?
(a) its average total costs increase
(a) its average total costs increase