1. MC and ATC Relationship (6 points)

What is the three-part relationship that exists between the marginal cost (MC) and average total cost (ATC)?

2. Production Decisions

Finish parts a and b.

A. When deciding whether to produce or shut down, besides comparing the

profits/losses earned from producing versus the losses suffered by shutting down,

what two other measures are compared?

B. How does a monopoly or monopolistic competitor determine graphically that the demand for its product is elastic? Specify what curve they use to make this determination and how it shows whether the demand is elastic or inelastic.

Do either parts c and d together OR parts e and f together.

C. When the demand is elastic, why will firms in these forms of competitive models choose to produce?

D. Why is the decision to produce or shutdown only made in the short-run?

E. How does a firm know, graphically, when it is producing above cost?

F. Why would a firm choose to decrease production when marginal cost is greater

than marginal revenue?

3. Long-Run Status (4 points)

Complete either part a OR part b.

A. A firm strives to achieve economies of scale in the long run. Explain what occurs

to both average costs and worker productivity in this long run cost region.

B. State the two ways that a purely competitive or a monopolistically competitive

firm will know that it is operating in the long-run?

4. Competition (8 points)

Complete part a.

A. Why is a purely competitive firm said to be a price taker?

Complete either part b OR part c OR part d OR part e.

B. Which of the four forms of market/industry competition, of the four studied, displayed productive efficiency? Does productive efficiency exist in the short-run, long-run, or both?

C. Which of the four forms of market/industry competition have advertising? Why

is advertising experienced in this/these form(s) of competition and not

experienced in the other form(s) of competition?

D. Which of the four forms of market/industry competition exhibits mutual interdependence? Why is it experienced in this type(s) of market/industry competition and not the other type(s)?

E. Which of the four forms of market/industry competition exhibits excess capacity? Why is it experienced in this type(s) of market/industry competition and not the other type(s)?

5. Firm Measures: Productivity, Costs, Revenues, and Profits (55 points)

Labor Total Product (TP) Fixed Cost (TFC) Variable Cost (TVC) Price

0 0 $75000 $ 0 $20

1 30000 $75000 $ 900,000 $20

2 80000 $75000 $1,600,000 $20

3 120000 $75000 $2,100,000 $20

4 140000 $75000 $2,500,000 $20

5 150000 $75000 $2,950,000 $20

Complete parts a, b, c, d, e, f, g, h, i, j, k, and l.

A. Solve for marginal product (MP) in each row, except for where labor = 0.

B. After which worker does the region of diminishing marginal returns begin?

C. Of the three regions (increasing, diminishing, and negative) marginal returns, state in which region(s) the firm will not choose to produce.

D. Solve for total cost (TC) in each row.

E. Solve for average variable cost (AVC) in each row, except for where labor = 0.

F. Solve for marginal cost (MC) in each row, except for where labor = 0.

G. Why are the MC and MP inversely related to one another? While it is because as one increases, the other decreases, please explain the meaning behind the inverse relationship that exists between worker productivity and cost, in general.

H. Solve for total revenue (TR) in each row.

I. Solve for marginal revenue (MR) in each row, except for where labor = 0.

J. What is the profit maximizing total product, or quantity, for this firm? Provide the specific numerical value for TP.

K. State in each row, except the first where the labor is 0, whether this firm will choose to produce or shutdown.

L. Using your responses from part k, state what profit or loss the firm will earn at each quantity, except where labor is 0, stating how much they will earn if they shutdown if that is what you indicated they would do, or how much they would earn or lose if they decided to produce, if that is what you indicated they would do at the given TP level.

Complete either part m OR part n.

M. Is this firm an example of pure competition or monopolistic competition? Explain.

N. Which measure of profit (accounting profit or economic profit) will always be greater? Explain why.

Complete all parts to either Question 6 OR Question 7.

6. Pure Competition (15 points)

Complete parts a, b, c, d, and e.

A. Graph a purely competitive market showing the point of equilibrium at a price of $150 and a total product of 400,000.

B. Next to this graph, graph the purely competitive firm. What price will the firm charge for the product? Will they charge $150, less than $150, or more than $150?

C. Show the demand, average revenue, and marginal revenue curve on the graph for the firm.

D. Show the profit maximizing quantity for the firm at 250 units of output, or tp.

E. Show this firm making a profit of $5,000, making sure to solve for the numerical value for the ATC at the quantity, or tp, of 250, and showing the profit area on the graph.

7. Monopolistic Competition (15 points)

Complete parts a, b, c, and d.

A. Graphically represent a monopolistically competitive firm, using the curves that would provide information such as the profit maximizing price and quantity as well as the cost at the profit maximizing quantity.

B. Show the profit maximizing price and quantity for this firm at a price of $175 and a quantity of 3,000.

C. Show this firm earning a profit of $15,000, making sure to show the profit area

on the graph. Make sure to solve for the numerical value for the average total

cost (ATC) at the quantity of 3,000.

D. As this is a short run scenario, state what will happen to the product price and

average costs for this firm as it transitions from the short-run to the long-run.

8. You need not answer all questions as each question has its own point value.

1. If you were to draw the variable cost (TVC) and total cost (TC) curves, you would find that they increase at a decreasing rate at first and then increase at an increasing rate. Why does this happen? What is measuring their rate of change throughout the graph? (2 points)
2. While the demand curve for the monopoly and monopolistically competitive firms appear the same, they do differ when it comes to the elasticity of both. Which one of the two demand curves will be more elastic? Explain why. (2 points)
3. Last Friday, January 5, the December 2023 Employment Report was released. Which cost, fixed cost (TFC) or variable cost (TVC), is impacted by the number of employees a firm hires or lays off? (1 point)