- E—This defines diminishing marginal returns
and is often missed by students, who make the
mistake of identifying falling TPL, rather than
falling MPL, with diminishing returns. - A—Know the characteristics of all market
structures. - E—The fourth worker is the first to have lower
MPLthan the worker before. - C—Constant returns exist when a larger firm
has constant LRAC. - E—All other choices wouldproduce a decrease in
the demand for good X and would therefore
decrease both the price and quantity. You are
looking for the only choice that would not. More
consumers for good X would increase demand
and increase both the price and quantity - E—Since you know that AVC is $25 at Q=10,
TVC is $250. Adding this to the given $100 of
TFC produces $350 of total cost at Q=10. - A—The vertical distance between TC and TVC
is TFC. - A—Demand for labor is the MRPL curve.
Higher labor productivity increases labor
demand. - D—AFC declines as output rises.
- C—The shutdown point is at P<AVC.
- A—With no externality, MSB =MSC. With a
negative externality, MSC >MPC =MSB for
the good. - B—Barriers to entry are a defining characteris-
tic of monopoly. - B—Economies of scale are a common barrier to
entry; a key to maintaining long-run positive
profits. - A—Find the output level where MR =MC and
locate the price from the demand curve. Profit
is equal to Q¥(P – ATC) at that output. - C—CS is the area above price and under
demand. - C—A four-firm concentration ratio is the sum
of the market share of the four largest firms in
an industry. - D—Utility-maximizing consumers do not
equate the units of two goods, they equate
MU/P for each good.
45. D—As industries approach monopoly, prices
rise, lowering CS.
46. E—Negative externalities, like “fowl” odors,
impose spillover costs upon third parties. These
costs, ignored by the market, reflect an over-
allocation of resources to chicken production.
47. B—Know the characteristics of all market
structures.
48. A—Product differentiation results in a small
degree of price-setting ability and downward-
sloping demand curves for the firms. P=ATC
and profits are normal in the long run, and this
output level does not occur where ATC is min-
imized. This defines excess capacity.
49. B—DWL emerges when output is moved away
from where P=MC.
50. C—If P =ATC, economic profit is zero, or
normal.
51. D—Allowing more foreign competition lessens
market power of a monopolist and improves
efficiency as the price falls closer to MC.
52. E—Semitrucks are a complementary resource
to the truck drivers. If the price falls, demand
for the labor rises.
53. C—The monopsony hiring decision.
54. C—Use the least-cost rule of MPL/$5 =
MPK/$10 to find the optimal combination of
labor and capital. There are three combinations
of labor and capital where the MPKis twice the
MPL,but only one choice produces 18 units of
output. Remember that adding the marginal
products provides the total product.
55. B—This describes a cartel.
56. A—Certification exams decrease labor supply
and raise the wage in the market. A higher wage
increases the MC of producing the good, which
raises the price of the good.
57. E—If the price of a substitute resource falls,
labor demand can increase if the output effect is
greater than the substitution effect.
58. D—Know your public goods.
59. B—You are the recipient of a spillover benefit
from your neighbor’s purchase of a pool.
60. D—The private marketplace underprovides for
a public good because free riders benefit from
the good without paying for it. Government
must provide the public good.
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