Exam 7: The Production Process: the Behavior of Profit-Maximizing Firms

A firm sells 150 units of output at a price of $8 each. The economic cost of producing the 150 units of output is $1,000. Calculate the firm's level of economic profit.

Use the table below to answer the following questions. Calculate the total cost of production if labor and capital costs are equal at a $1 each. The recalculate the costs when only the price of labor rises to $5 but capital costs remain at $1. Identify the least cost technology in both cases.

What assumptions do economists make about the time period known as the short run?

Mitzi's Pet Salon hires you to determine the company's status. The data below provides information on the company's annual costs and revenues. Mitzi spends at least 40 hours a week at her place of business. If she closed the salon, she could work for her competitor and earn $15,000 per year. She also owns the building that houses the salon and could rent it out for $18,000 per year if she closes her business. Calculate the economic cost and economic profit for Mitzi's Pet Salon. Would an accountant come to the same conclusion about the profitability of this firm? Explain.

What does it mean when economists say that labor and capital are complementary inputs?

The data below shows the relationship between total output and the amount of labor hired at Jack's Quick Lube Station:

Comment on the following statement: "Isoquants must be downward sloping."

What is the marginal technical rate of substitution?

A manager of a small company makes the following statement - "We need to keep hiring additional workers up to the point where the marginal productivity of the last worker we hire is at its maximum. This way we can maximize the total productivity of the firm." Critically evaluate this statement.

What is the relationship between marginal product and average product?

As a manager of a shoe-repair shop, you estimated that the total product of labor used to repair shoes varies according to the following data but some of your figures were deleted by a clerk: Fill in missing data in the table above.

What two things determine the cost of production?

What do economists mean when they say that capital can labor can be both complementary inputs and substitutes.

What is the difference between accounting cost and economic cost?

Evaluate the following statement. "As the marginal product function falls it will eventually cut the average product function where average product is rising."

A lawyer quits his job at a top legal firm where he was making $100,000 per year. He was just informed that his late aunt has bequeathed to him $1 million in cash. He decides to use all of the money to open and run his own hardware store. Assume at the end of the first year of business that his accountant has informed him that he earned a $90,000 accounting profit. Why would an economist not be quite as impressed? Explain.

How do economists define the time period known as the long run?

Referring to the table below, identify the unit of labor where diminishing returns has set in. Explain your answer.

Why might a firm remain in operation even if it is earning zero economic profit?

Fred's Bar and Grill hires you to determine the company's status. The data below provides information on the company's annual costs and revenues. Fred spends at least 40 hours a week at his place of business. If he closed the bar, he could work for his competitor and earn $30,000 per year. He also owns the building that houses the bar and could rent it out for $24,000 per year if he closes his business. Calculate the economic cost and economic profit for Fred's Bar and Grill.