APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 5. Which of the following would determine the marginal revenue product of an input used in a perfectly competitive output market? I. Dividing the change in total revenue by the change in the input. II. Dividing the change in marginal revenue by the change in the output. III. Multiplying the marginal revenue product by the marginal revenue of the output. IV. Multiplying marginal revenue by the price of the output. A. I only B. II only C. III only D. I and III only E. II and IV only

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 5. Which of the following would determine the marginal revenue product of an input used in a perfectly competitive output market? I. Dividing the change in total revenue by the change in the input. II. Dividing the change in marginal revenue by the change in the output. III. Multiplying the marginal revenue product by the marginal revenue of the output. IV. Multiplying marginal revenue by the price of the output. A. I only B. II only C. III only D. I and III only E. II and IV only MARGINAL REVENUE PRODUCT: The change in total revenue resulting from a unit change in a variable input, keeping all other inputs unchanged.

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 6. Which of the following explains why the marginal revenue product of an input in a perfectly competitive market decreases as a firm increases the quantity of an input used? A. The law of diminishing marginal returns. B. The law of diminishing marginal utility. C. The homogeneity of the product. D. The free mobility of resources. E. The total immobility of resources.

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 6. Which of the following explains why the marginal revenue product of an input in a perfectly competitive market decreases as a firm increases the quantity of an input used? A. The law of diminishing marginal returns. B. The law of diminishing marginal utility. C. The homogeneity of the product. D. The free mobility of resources. E. The total immobility of resources. LAW OF DIMINISHING MARGINAL RETURNS: A principle stating that as more and more of a variable input is combined with a fixed input in short-run production, the marginal product of the variable input eventually declines.

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 A firm requires labor & capital to produce a given output. Labor costs $8 per hour, & capital costs $12 per hour. At the current output level, the marginal physical product of labor is 40 units, & the marginal physical product of capital is 60 units. To minimize its production costs at the current level of output, in which of the following ways should the firm change the amount of labor & capital? Labor Capital Increase Increase Increase Decrease Decrease Increase Decrease No Change No Change No Change

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 A firm requires labor & capital to produce a given output. Labor costs $8 per hour, & capital costs $12 per hour. At the current output level, the marginal physical product of labor is 40 units, & the marginal physical product of capital is 60 units. To minimize its production costs at the current level of output, in which of the following ways should the firm change the amount of labor & capital? Labor Capital Increase Increase Increase Decrease Decrease Increase Decrease No Change No Change No Change Labor – 40/$8 = $5 Capital – 60/$12 = $5

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 In a competitive industry, suppose the marginal revenue product of the last donut baker hired is $35 and the marginal revenue product of the last bagel maker hired is $15. A bakery must pay donut bakers $40 a day and bagel makers $10 a day. Which of the following should the bakery hire to maximize profits? A. More donut bakers and fewer bagel makers. B. Fewer donut bakers and more bagel makers. C. Fewer of both donut bakers and bagel makers. D. More of both donut bakers and bagel makers. E. Neither more nor fewer donut bakers or bagel makers.

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 In a competitive industry, suppose the marginal revenue product of the last donut baker hired is $35 and the marginal revenue product of the last bagel maker hired is $15. A bakery must pay donut bakers $40 a day and bagel makers $10 a day. Which of the following should the bakery hire to maximize profits? A. More donut bakers and fewer bagel makers. B. Fewer donut bakers and more bagel makers. C. Fewer of both donut bakers and bagel makers. D. More of both donut bakers and bagel makers. E. Neither more nor fewer donut bakers or bagel makers. Donut: 35 – 40 = -5 Bagel: 15 – 5 = 5

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 Short 1. What determines the demand for a resource (factor of production)? Why is the demand for a resource downward sloping? What determines the elasticity of demand for a resource (factor of production)?

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 What determines the demand for a resource (factor of production)? Why is the demand for a resource downward sloping? What determines the elasticity of demand for a resource (factor of production)? The demand for a resource is derived from the demand for a good or service that is produced with the resource. The demand for resources is affected by the price of the good or service and the marginal productivity of labor. Because marginal productivity decreases as out put increases, marginal revenue product decreases. MRP is the demand for the resource. In addition, if the firm is operating in an imperfect product market, the price of the product will decrease as out decreases. This also decreases MRP. The elasticity of demand for the factor depends on the rate of decline of MRP, the elasticity of the demand for the product, ease of resource substitutability and proportion of total costs that the factor represents.

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 2. List three factors that would increase the demand for a resource, and explain why the factors would increase demand.

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 2. List three factors that would increase the demand for a resource, and explain why the factors would increase demand. Several examples: The demand for, and therefore the price of, the product produced by the resource increases The productivity of the resource increases The price of a substitute resource decreases, as long as the output effect is greater than the substitution effect The price of a substitute resource increases, as long as the substitution effect is greater than the output effect The price of a complementary resource decreases

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 Long 3. In the United States, textiles are sold in two separate and perfectly competitive markets. The textiles produced in the United States are sold in Market A, and imported textiles are sold in Market B. Explain how the supply curve for textiles produced in the U.S. will be affected by each of the following: A decrease in the number of firms in the U.S. producing textiles An increase in the price of textiles Assume textiles produced in Market A & Market B are close substitutes. B. Using one graph for Market A and another for Market B, show and explain how a substantial increase in the tariff on textiles imported into the United States will affect each of the following: i. equilibrium price & quantity of textiles sold in Market B (imported textiles) ii. Equilibrium price & quantity of textiles sold in Market A (textiles produced in the U.S.)

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 3. In the United States, textiles are sold in two separate and perfectly competitive markets. The textiles produced in the United States are sold in Market A, and imported textiles are sold in Market B. Explain how the supply curve for textiles produced in the U.S. will be affected by each of the following: A decrease in the number of firms in the U.S. producing textiles An increase in the price of textiles With few firms producing textiles, the supply of textiles is reduced; the supply curve shifts to the left (inward). With a high price for textiles, the quantity supplied increased along an unchanged supply curve.

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4 3. In the United States, textiles are sold in two separate and perfectly competitive markets. The textiles produced in the United States are sold in Market A, and imported textiles are sold in Market B. Assume textiles produced in Market A & Market B are close substitutes. B. Using one graph for Market A and another for Market B, show and explain how a substantial increase in the tariff on textiles imported into the United States will affect each of the following: i. equilibrium price & quantity of textiles sold in Market B (imported textiles) ii. Equilibrium price & quantity of textiles sold in Market A (textiles produced in the U.S.) The tariff raises the per unit supply price of all units of imported textiles; the supply curve in Market B shifts to the left (inward), leading to a higher equilibrium price and a lower equilibrium quantity of imported textiles. Since imported and domestically produced textiles are close substitutes, the increase in the price of imported textiles leads to an increase in the demand for domestically produced textiles (Market A). The Market A demand curve shifts outward. Both the equilibrium price and quantity increase in Market A.

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4

APE/Honors Economics – Test Study Questions – Micro – Unit 4 Mr. Weiss APE/Honors Economics – Test Study Questions – Micro – Unit 4