MAN

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1. If firms in a competitive industry are presently earning an economic profit, what long-run consequences exist for the number of firms in this industry and the market price of their product.

Number of Firms Product Price

a. Increase Increase

b. Increase Decrease

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An industry earning a profit will attract firms, thus the number of firms will increase. However, competition will increase as well, and this will cause the price of that industries product to fall.

c. Decrease Increase

d. Decrease Decrease

e. Decrease No change

. A firm is a competitive seller of output at a market price of $. The only resource required to create its product is labor, which is purchased competitively at a wage rate of $6 per hour. The last worker employed increases total output from 6 to 40 units per hour. What is the marginal revenue product for this worker?

a. $

b. $6

c. $1 (40-6)

d. $4

e. Indeterminable from the information given.

. A firm requires labor and capital to produce a given output. Labor costs$8 per hour, and capital costs $1 per hour. At the current output level, the marginal physical product of labor is 40 units and the marginal physical product of capital is 60 units. Which of the following actions would this firm undertake to minimize its production costs at the current level of output?

Labor Capital

a. Increase Increase

b. Increase Decrease

c. Decrease Increase

d. Decrease No change

e. No change No change (40/8)= (60/1), thus MP labor = MP of capital and costs are minimized

4. Which of the following statements correctly describe(s) a firm that is a monopsonistic employer of labor?

I. The firm determines its level of labor employment by equating the marginal revenue product of labor with its marginal resource cost.

II. The firm pays a wage that is equal to the marginal revenue product of labor.

III. The firms labor supply curve is more elastic than the labor supply curve of a competitive employer.

a. I only. MRP= MRC holds true for competitive and monopsonistic models, thus statement I is correct. Statement II is incorrect for the monoposonistic model because the employer, being a monopoly, can control the wage rate. Statement III is also false because a monopsonistic firm has a supply curve that is equally elastic as every other firm.

b. II only.

c. III only.

d. I and II only.

e. I, II and III.

5. In a competitive industry, suppose the marginal revenue product of the last donut baker hired is $5, the marginal revenue product of the last bagel baker hired is $15, and a bakery must pay donut bakers $40 a day and bagel bakers $10 a day. The bakery should hire which of the following in order to maximize profits?

a. More donut bakers and fewer bagel bakers.

b. Fewer donut bakers and more bagel bakers. Profits are maximized when the MRP (labor)= 1, thus in this example, the MRP (donut bakers) must equal 1 and the MRP (bagel bakers = 1. Currently, the firm is paying its last donut baker more than his MRP, and is paying the last bagel baker less than his MRP, thus the firm must hire fewer donut bakers and more bagel bakers, to maximize profits.

c. Fewer of both donut bakers and bagel bakers.

d. More of both donut bakers and bagel bakers.

e. It is currently hiring the right number of donut bakers and bagel bakers.

6. Although statistical data show that broadcasting revenues exceed the profits of most professional sports teams, thus suggesting that these teams could not operate profitably without broadcasting revenues, an economist concluded that this overstates the importance of broadcasting for team owners profits. How can the concept of economic rent be used to explain this conclusion?

a. If there were no broadcasting, team owners would not have to rent TV lines and their costs would be lower.

b. If the owners had to pay economic rent to players, they could never make a profit without broadcasting revenues.

c. If there were no broadcasting revenues, players salaries would not include as much economic rent, and the team owners costs would be lower. Broadcasting revenues represent a surplus to team owners. Thus, if broadcasting did not exist, the owner would not have to pay his players as much economic rent, because there salaries would be lower, and his costs would derease.

d. Without broadcasting, owners could operate as monopolies instead of competitors and collect enough economic rent to overcome the loss of TV revenues.

e. If there were no games broadcast, owners could charge more for tickets and increase the total amount of economic rent they receive.

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