1) Why are fixed costs zero in the long run?
2) A firm is producing 1,000 units of a good and the total cost of production is $4 million. $1 million in costs go to fixed factors like buildings, insurances, and operating licenses. The remaining $3 million goes to workers and suppliers.
a) Using the numbers provided, calculate the average total cost, the average fixed cost, and the average variable cost?
b) Explain what is meant by marginal cost?
c) If the marginal cost for the firm of producing 1,000 units is $2,500, what has been happening to the
average variable cost? Has it been increasing, decreasing, or staying the same? Use your answer in part (a) to help.
3) Consider a firm where the marginal product of the firm is 12 units per hour. That is, the last worker hired raises production by 12 units each hour. The price of the good is $2, meaning that the firm will make $24 ( = $2 * 12 units) each hour in revenue from this last worker. Under what case should this worker be laid off? (Hint: think about how marginal cost plays a role.)
4) What does economic profit consider that accounting profit does not?
5) What is meant by economies of scale?
6) Explain in your own words why economic profits are zero in the long run under perfect competition.
7) One of the assumptions/characteristics about perfect competition is that goods are identical across sellers. But why must identical goods be a facet of perfect competition?
8) Consider the term “price taker” as it pertains to market competition.
a) What does it mean to be a “price taker”?
b) Why does marginal revenue for the firm equal price under perfect competition?
9) Consider the following characteristics regarding the market for taxicab rides in New York City.
i) There are over a million people that might want a cab ride on any particular day and there are
thousands of taxi cabs.
ii) Fares are clearly posted and so people easily know how much rides will cost
iii) The driver of a taxi cab needs to buy a license from the city and there are only so many licenses
available. Once all the licenses have been sold, a person must wait until someone relinquishes a
license before buying it and becoming a taxi driver.
iv) Taxi rides are for the most part identical as one taxi isn’t really any different from another one.
Which one of these characteristics does not pertain to perfect competition? Explain. 10) Read the article, “If Milk is Good for Us, Why are We Drinking Less? found at:http://econlife.com/2014/06/milk-perfect-competition-limits-firms/
a) Why do milk producers have a hard time advertising and competing against one another?
b) Why are advertising campaigns run at the industry level and not the firm level?