Economics

Question 1

What are the four factors of production

Answer 1

they are 1)land 2) labor 3) capital 4) materials

Question 2

related to the four factors of production, please explain the 4

Answer 2

Land—where the business facilities are located.
Labor—includes all workers from unskilled laborers to top management.
Capital—sometimes called physical capital or plant and equipment to distinguish it from financial capital. Refers to manufacturing facilities, equipment, and machinery.
Materials—refers to inputs into the productive process, including raw materials, such as iron ore or water, or manufactured inputs, such as wire or microprocessors.

Question 3

is capital money or something else (capital in this case being one of the 4 factors of production)

Answer 3

no. Capital in this case refers to pp&e, that is, physical capital. It refers to manufacturing facilities, equipment, or machinery. If we were to refer to anything else other than that, it would be financial capital.

Question 4

what is a veblen good

Answer 4

a veblen good is a good that when the price drops, so too does the quantity (demand), when the price increases, so too does the demand for it. We can think of a veblen good as a luxury item, where the item serves no other purpose than to be shown off. (EX: gucci bag).

Question 5

what is a giffen good.

Answer 5

a giffen good is an inferior good where the negative income effect outweighs the substitute effect. (this is because usually, when our income increases, we stop purchasing inferior goods. A giffen good is one where even with drop in price, we still buy the inferior good. (example rice. there’s better options, but we will contineu to buy it regardless, if anything, we buy more when price drops)

Question 6

for quantities of labor between zero and A (y = total output, x = quant of labor), what is happenign to the marginal product

Answer 6

marginal product is increasing as one additional input of labor can produce more products (higher output).

Question 7

what is occuring beyond the inflection point in the production at quantity of labor A up to quantity B (y = total output, x = quantity of labor)

Answer 7

we continue to see increases of marginal product of labor, but the increase is occuring at a declining rate.

Question 8

Beyond the quantity of labor B, what occurs when we add additional workers?

Answer 8

beyond the quantity of labor point B (y axis = total output, x = quantity of labor), we observe diminishing the total output. the marginal product of labor turns negative, and it’s bad to add 1 additional unit of labor, as the addition results in output that negative affects the company. (more costly).

Question 9

what should the company do if the AR>= ATC?

Answer 9

they should stay in the markets in both the short and long run

Question 10

what should the company do if the AR >= AVC

Answer 10

in the short run they should stay in the markets but they will need to exit in the long run as they cannot cover their costs (fixed costs that is)

Question 11

what should a company do if their AR<AVC

Answer 11

they should shut down in short run, exit markets in long run.

Question 12

under imperfect competition this time, what does it mean when total revenue = total cost

Answer 12

it meanst he company is breaking even

Question 13

under imperfect competition, what does it mean when TR<TVC

Answer 13

It means that in the short run they should shut down and in the long run they should exit.

Question 14

under imperfect competition, what does it mean when TC>TR>TVC

Answer 14

it means that in the short run, they should continue to operate as they can cover their variable costs, but in the long run they should shut down.

Question 15

For the last fiscal year, Legion Gaming reported total revenue of $700,000, total variable costs of $800,000, and total fixed costs of $400,000. Should the firm continue to operate in the short run?

Answer 15

The firm should shut down. Total revenue of $700,000 is less than total costs of $1,200,000 and also less than total variable costs of $800,000. By shutting down, the firm will lose an amount equal to fixed costs of $400,000. This is less than the loss of operating, which is TR – TC = $500,000

Question 16

Question: What are the market characteristics of monopolistic competition?

Answer 16

Answer: Monopolistic competition has the following market characteristics: a large number of independent sellers, differentiated products, low barriers to entry, and firms competing on price, quality, and marketing.

Question 17

Question: What is the significance of product differentiation in monopolistic competition?

Answer 17

Answer: In monopolistic competition, product differentiation is significant as it allows firms to compete on price, quality, and marketing. Consumers perceive competing products as close substitutes, and firms use product differentiation to inform the market about their products’ unique characteristics.

Question 18

Question: How do firms in monopolistic competition set their prices?

Answer 18

Answer: Firms in monopolistic competition set their prices by charging the price for the quantity where marginal revenue (MR) equals marginal cost (MC) from the demand curve. Due to the highly elastic demand curve, firms must consider the correlation between quality and price when setting their prices.

Question 19

Question: Why do firms in monopolistic competition earn positive economic profits in the short-run?

Answer 19

Answer: Firms in monopolistic competition earn positive economic profits in the short-run because they can charge a price (P) that exceeds their average total cost (ATC). They produce at the quantity where marginal revenue (MR) equals marginal cost (MC) to maximize economic profits. However, due to low barriers to entry, competitors will enter the market in pursuit of these economic profits.

Question 20

Question: What is the difference between the short-run and long-run output characteristics of monopolistic competition?

Answer 20

Answer: In the short-run, firms in monopolistic competition can earn economic profits due to their ability to charge a price (P) that exceeds their average total cost (ATC). In the long-run, competitors will enter the market, increasing supply and reducing the price (P) and quantity (Q) that firms can sell. In the long-run, firms will earn zero economic profits as the market returns to equilibrium.

Question 21

Question: Why is collusion impossible in monopolistic competition?

Answer 21

Answer: Collusion is impossible in monopolistic competition due to the large number of independent sellers, each with a relatively small market share. As a result, no individual firm has significant power over price, and there are too many firms for collusion to be possible.

Question 22

Question: What is the significance of marketing in monopolistic competition?

Answer 22

Answer: In monopolistic competition, marketing is essential to inform the market about a product’s differentiating characteristics. Firms compete on price, quality, and marketing, and consumers perceive competing products as close substitutes. Effective marketing can make a significant difference in a firm’s ability to compete.

Question 23

Question: How do low barriers to entry affect monopolistic competition?

Answer 23

Answer: Low barriers to entry in monopolistic competition mean that new firms can enter the market if existing firms are earning economic profits. This increased competition can lead to a reduction in prices and profits in the long-run, as new firms enter the market.

Question 24

Question: What is the demand curve for firms in monopolistic competition?

Answer 24

Answer: Firms in monopolistic competition face downward-sloping demand curves that are highly elastic. This is because competing products are perceived by consumers as close substitutes. As a result, firms must consider the correlation between quality and price when setting their prices.

Question 25

uestion: How do firms in monopolistic competition maximize economic profits?

Answer 25

Answer: Firms in monopolistic competition maximize economic profits by producing where marginal revenue (MR) equals marginal cost (MC) and charging the price for that quantity from the demand curve. In the short-run, firms can earn positive economic profits due to their ability to charge a price (P*) that exceeds their average total cost (ATC*). However, in the long-run, increased competition will reduce the price (P) and quantity (Q) that firms can sell, leading to zero economic profits.

Question 26

Why do consumers benefit from brand name promotion and advertising?

Answer 26

Answer: Consumers benefit from brand name promotion and advertising because they receive information about the nature of a product, which often enables them to make better purchasing decisions.

Question 27

How do firms in monopolistic competition pursue economic profits?

Answer 27

Answer: Firms in monopolistic competition pursue economic profits by engaging in product innovation, which can enable them to increase prices and earn economic profits.

Question 28

Why do advertising expenses tend to be high for firms in monopolistic competition?

Answer 28

answer: Advertising expenses are high for firms in monopolistic competition because they need to inform consumers about the unique features of their products and create or increase a perception of differences between products that are actually quite similar.

Question 29

What is the optimal amount of innovation spending for a firm?

Answer 29

Answer: A firm is considered to be spending the optimal amount on innovation when the marginal cost of additional innovation just equals the marginal revenue (marginal benefit) of additional innovation.

Question 30

How do brand names provide information to consumers?

Answer 30

Answer: Brand names provide information to consumers by providing them with signals about the quality of the branded product, which can be more valuable than an inspection of the product itself.

Question 31

What is the role of product innovation in monopolistic competition?

Answer 31

Answer: Product innovation is a necessary activity for firms in monopolistic competition as it allows them to differentiate their products and make them relatively more desirable to consumers. This can lead to less-elastic demand curves, enabling firms to increase price and earn economic profits.

Question 32

How does advertising affect the average total cost curve for a firm in monopolistic competition?

Answer 32

Answer: Advertising costs increase the average total cost curve for a firm in monopolistic competition. However, the increase to average total cost attributable to advertising decreases as output increases because more fixed advertising dollars are being averaged over a larger quantity. In some cases, advertising can even decrease a firm's average total cost.

Question 33

Why do firms in monopolistic competition spend more on advertising compared to firms in perfect competition or monopolies?

Answer 33

Answer: Firms in monopolistic competition spend more on advertising to inform consumers about the unique features of their products and to create or increase a perception of differences between products that are actually quite similar. This is necessary because each firm in monopolistic competition faces downward-sloping demand curves and needs to differentiate its product in order to charge a higher price.

Question 34

How do brand names provide information to consumers in monopolistic competition?

Answer 34

Answer: Brand names provide information to consumers by signaling the quality of the branded product. Firms in monopolistic competition spend a significant portion of their advertising budget on brand name promotion to create a positive reputation that signals high quality to consumers.

Question 35

Why do firms need to continually innovate in monopolistic competition?

Answer 35

Answer: Firms in monopolistic competition need to continually innovate to maintain their economic profits. Close substitutes and imitations will eventually erode the initial economic profit from an innovative product, so firms need to look for new product features that will make their products relatively more desirable to consumers than those of the competition.

Question 36

what are some market characteristics of monopolistic competition

Answer 36

1) low barriers to entry 2) able to somewhat compete on price, marketing and quality. 3) have differentiated products vs perfect competition 4) large number of independent sellers (price searchers, no ability for collusion -price fixing)

Question 37

what are the three effects that explain why the AD curve slopes downward

Answer 37

1) the wealth effect, the interest rate effect, the real exchange effect

Question 38

what is the wealth effect

Answer 38

the W.E results from how changes in the price level affect consumers purchasing power.

Question 39

what happens with a increase/decrease in price levels

Answer 39

increase: consumers need to hold greater nominal money balances when price levels incresae decrease: consumers need to hold less nominal money balances when price levels decerase

Question 40

what is the interest rate effect

Answer 40

it is related to the demand for money. when Price levels increase, consumers need to hold greater nominal balances to purcahse real g/s. only an increase in interest rates will restore equilibrium between money supply and nominal balances.

Question 41

under the interest rate effect, what is interest? hint: a choice)

Answer 41

it is an opportunity cost of either holding money vs investing

Question 42

what is the real exchange rate effect

Answer 42

it describes the effect that the exchange rate has on domestic goods to foreign markets. for example, an increase in price level of domestic goods results in higher costs to foreigners, and therefore less exports occur for the domestic market.