EC102: CLASS 5
Christina Ammon
Overview
 Collect Problem Set
 Can also leave in pigeon hole until 5pm sharp (or email)
 Will go over parts next week in class
 Today: Quiz 5
• Continue with cost minimisation
• Start on the price taking firm
Question 1
 Consider a firm that employs robots and workers. If the wage
increases and the firm wants to keep the level of production
unchanged, it will hire:
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•
•
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More workers and more robots
More workers and fewer robots
Fewer workers and fewer robots
Fewer workers and more robots
Question 1
Question 2
 A car company employs robots and workers to produce 200
cars per day. Its R&D department invents a new technology
that makes both robots and workers more efficient. As a result,
the x200-isoquant:
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•
•
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Shifts towards the origin
Shifts away from the origin
Is unaffected
Is affected in an unpredictable way
Question 2
Question 3
 Point e1 corresponds the
efficient combination of
workers and robots because it
entails:
• the lowest opportunity cost of all
input combinations
• the lowest marginal cost of all
input combinations
• the lowest opportunity cost of
those input combinations that can
be used to produce 200 cars
• the lowest marginal revenue of
those input combinations that can
be used to produce 200 cars
Question 3
 Isoquant=
• All combination of inputs that yield the same output
 Isocosts
• All combination of inputs that yield the same economic costs
 Point e1 – the combination of inputs on the isoquant that costs
the least in economic terms
 i.e. the combination of inputs that yield output of 200 and has
the lowest opportunity cost
 What is the optimality condition again?
• MRTS=w/r
• MPL/MPK=w/r
Question 4
 In the long run, if the total cost function exhibits economies,
diseconomies or no effect of scale, the associated long run
average cost curve is respectively:
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•
•
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Upward sloping, downward sloping or flat
Flat, upward sloping or downward sloping
Downward sloping, upward sloping or flat
Upward sloping, flat or downward sloping
Question 4
The price taking firm
 What determines a firm’s optimal choice of output?
• MR=MC
 What is market power
• Market power is the firm’s ability to affect the price at which it sells its
output or buys its inputs
• Price taking firm = no market power
 How is a firm’s market power related to the elasticity of
demand?
•
•
•
•
How does elasticity affect the shape of the demand curve?
What is the relationship between MR and elasticity?
MR=(1-1/e)*p
What happens to MR=MC if e goes towards infinity?
Question 5
 A price-taking firm chooses its actions under the assumption
that:
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•
•
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it can influence the prices of the output that it sells or the inputs that it
buys
it cannot influence the prices of the output that it sells or the inputs that it
buys
it cannot influence the prices of the output that it sells but can influence
the prices of the inputs that it buys
it can influence the prices of the output that it sells but cannot influence
the prices of the inputs that it buys
Question 6
 The shutdown rule implies that a price-taking firm is better off
discontinuing its operations if for all output levels:
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•
•
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Marginal revenue is below total cost
Marginal cost is below marginal revenue
Average cost is below average revenue
Average revenue is below average cost
Question 6
Question 7
 A price-taking firm’s long-run supply curve coincides with:
• its long-run marginal cost curve below its long-run average cost curve
• its long-run average cost curve above its long-run marginal cost curve
• its long-run average cost curve below its long-run marginal cost curve
• its long-run marginal cost curve above its long-run average cost curve
Question 7
Question 8
 “The marginal output rule provides one way of calculating the
profit-maximising output level, but the factor-hiring rule
provides another. Thus, they lead to inconsistent levels of
output be produced.” This statement is:
•
•
False
True
Question 8
 What is the marginal output rule?
 What is the marginal factor rule?
 Are they equivalent? - YES
 The factor-hiring rule: MRP = MFC.
 And we know that MRP = MPP × MR,
 => MPP × MR = MFC
 The marginal output rule: MR = MC.

And MC = MFC/MPP
 => MR = MFC/MPP
Question 9
“No one was responsible for the great Wall Street crash. No one
engineered the speculation that preceded it. Both were the
product of free choice and decision of hundreds of thousands of
individuals.” (John Kenneth Galbraith)