Economics Micro & Macro (CliffsAP)

2. A.Yes, the garden gnome market is perfectly competitive. This is because the firm can sell any quantity of the
   gnomes at the market price (the firm is a price taker).
   B.Yes, the labor market for sculptors is perfectly competitive because the firm can hire any quantity at a given
   market price.
   C.

Quantity of Sculptors Total Gnomes Produced Price Marginal Revenue Wage

00 ---

1 13 $ 2 $ 26 $ 5

2 23 $ 2 $ 20 $ 5

3 30 $ 2 $ 14 $ 5

4 34 $ 2 $ 8 $ 5

5 36 $ 2 $ 4 $ 5

6 37 $ 2 $ 2 $ 5

(i) A profit-maximizing firm will employ a variable input until the marginal revenue is equal to the marginal

cost. In this case the firm will hire sculptors until the marginal revenue is equal to the wage. Therefore, to

maximize profits the firm should hire four sculptors. Although the marginal revenue is not equal to the

wage, four sculptors is the best quantity because the fifth sculptor’s marginal cost exceeds the marginal

revenue ($ 5 > $ 4), so the profit-maximizing firm won’t hire the fifth sculptor.

(ii) The profit maximizing quantity of gnomes produced is 34.

D.

(i) The total cost for the firm is the quantity of sculptors multiplied by the wage plus the fixed cost. When the

firm hires four sculptors, the total cost is $60 (4 * $ 5 + $ 40).

(ii) The total revenue for the firm is the total output times the price. When the firm’s total output is 34

gnomes, the total revenue is $68 (34 * $ 2).

(iii)Yes, the firm is earning an economic profit because the total revenue is greater than the total cost

($68 > $60).

3. A.The pizza parlor needs to hire enough workers to get to where marginal profit is equal to the marginal cost of
   one additional worker. The equation is:
   (marginal product of each worker)(price of each pizza) – (wage rate of one additional worker)

The marginal revenue per worker would be:

Number Of Workers Marginal Profit Per Worker

1 165 – 80 = 85

2 176 – 80 = 96

3 143 – 80 = 63

4 99 – 80 = 19

5 77 – 80 = -3

6 66 – 80 = -14

Since the 5thworker would actually decrease profits, the firm should stop hiring after the 4thworker.

Microeconomics Full-Length Practice Test 2

Microeconomics Full-Length

Practice Test 2