Economic Survey
Chapter 5 Assessment review
5.1 Assessment
1
Explain the law of supply in your own words.
Producers will offer more of a good as its price increases.
2
What is the difference between supply and quantity supplied.
A price change will cause a change in the quantity supplied, whereas an outside
factor, such as inclement weather, causes a change in supply.
3
How does the quantity supplied of a god with a large elasticity of supply react to a
price change?
A good with a large elasticity of supply will be very responsive to changes in price.
Supply will rise swiftly in response to a change in price.
4
If the price of oil rises around the world, what will happen to oil production in
Texas? Explain your answer.
Oil production in Texas will increase because the law of supply dictates that as
prices increase, suppliers will produce more.
5
Explain whether you think the supply of the following goods is elastic or inelastic
and why?
a) Hotel rooms. Inelastic because the number of hotel rooms can be increased but not
quickly or easily. Supply is not very responsive to a change in price.
b) taxi rides elastic. Taxi drivers can put in more hours. Taxi companies can put
out more taxis. Very responsive to change in price.
c) photographs.- Elastic due in part because a change in price can produce more/less
photographers. Price sensitive.
6
When the price of a good rises, total supply in the market will rise, but some
entrepreneurs might actually choose to work less. Why might they make this choice.
If the market price rises, and entrepreneur may choose to produce less and still
make the same amount of money as before. 1) could maintain quantity supplied
continue making a profit; 2) produce less and still make the same amount of money;
3) increase supply totally
Section 5.2 Assessment:
Labor – number of workers Output – beanbags per
hour
0
0
1
4
2
10
3
17
4
23
5
28
6
31
7
32
8
31
Marginal product of
labor
-----------4
6
7
6
5
3
1
-1
1
How does the marginal product of labor change as more workers are hired?
See table. The marginal product of labor increases up to a point and then decreases
as more workers are hired. In the example, the increase is seen up to the point
where labor is working efficiently with those hired becoming specialized in doing
one of three tasks.
2
What is the impact of diminishing marginal returns to labor?
See table. Diminishing Marginal return will probably have a negative affect on
labor. The firm will look at the point where the Marginal return on labor will
become negative and stop hiring more employee.
3
Give an example of a fixed cost and a variable cost of a bakery.
Fixed cost
Variable Cost
 building
- cost of ingredients / wheat, milk, yeast, etc..
 machinery
- labor
 rent/lease/mortgage
- utilities
4
How does a firm calculate marginal cost?
Marginal cost is calculated by finding out how much additional cost results from
each additional unit produced. Using your table, what is the Marginal cost when
producing 9 beanbags? _____
5
A firm has two factories, one twice as large as the second. As the number of
workers at each factory increases, which factory will experience diminishing returns first.
The smaller firm will experience diminishing returns first because it has half as
much capital for workers to use to produce goods.
Firm A
Firm B
1 sewing machine
2 sewing machines
1 pair of scissors
2 pair of scissors
4 bean bags/hour
8 bean bags/hour
Firm B has twice as much capital than Firm A. Specialization increases in Firm B –
possibly 6 people v 3 people .
6
Explain whether each of these expenses of a textile mill is a fixed cost or a
variable cost, and why?
a) repairs to a leaking roof Variable Cost – repair of capital is not a monthly
occurrence.
b) cotton - variable Cost – price of materials are assumed to be price sensitive.
c) food for the mills cafeteria – variable cost – again price can vary day to day.
d) night security guard – Fixed cost – here this employee is a need.
e) electricity – Variable cost- use of electricity will vary according to production
schedule
7
Use the table below to answer the following questions:
Output
Fixed cost Variable
cost
Total cost Marginal
cost
1
2
3
4
5
$5
$5
$5
$5
$5
15
32
60
96
150
$10
$27
$55
$91
$145
15
17
28
36
52
a) What is the total cost when output is 2? - complete table
32
b) What is the marginal cost of the third unit?
28
c) How much should this firm produce if the market price is $24?
2
Chapter 5.3 assessment
1
How does subsidy affect supply?
A subsidy lowers marginal cost and increasing supply.
2
Why does the government impose excise taxes?
Governments use excise taxes to discourage sales of products that are thought to be
harmful to the public – Cigarettes, alcohol, gasoline (Chicago excise tax).
3
How can regulations affect a producer's output decision?
Government regulations might cause products to be more costly to produce,
decreasing supply.
4
Decide whether each of these events would cause an increase or decrease in the
supply of American made backpacks:
a) the government raises the minimum wage of backpack workers to $40 an hour.
Decrease – increase Variable cost of producing one backpack per hour. Shift to the
left
b) a new regulations requires firms to make backpacks out of expensive clear plastic.
Decrease – increase in fixed costs will cause producer to cut back on quantity
supplied. Shift to the left.
c) an engineer invents a machine that can sew ten backpacks a minute, speeding up
production.
Increase – technology that helps to produce more units without increasing variable
costs (wages) will in the long run shift the supply curve to the right.
5
Explain why a change that lowers the marginal revenue (price) changes the
quantity produced in the same direction as a change that raises the marginal cost of
production.
Lowering Marginal revenue (price) will force the producer to cut costs (variable
costs). Therefore, if Marginal revenue is decreased, then marginal cost will also.
The affect is also true if you raise Marginal cost, Marginal Revenue will also raise so
that the producer can continue making a profit . Both situations result in lower
profits.
Output
Fixed
cost
Variable
cost
Total
cost
Marginal
cost
1
$5
$10
15
15
2
$5
$27
32
17
3
$5
$55
60
28
4
$5
$91
96
36
5
$5
$145
150
52
Chapter 5 assessment
1
How does the marginal product of labor change as more people are hired? Look
at the beanbag table.
Labor – number of
workers
Output – beanbags per
hour Given
Marginal product of
labor
0
0
------------
1
4
4
2
10
6
3
17
7
4
23
6
5
28
5
6
31
3
7
32
1
8
31
-1
The Marginal product of labor increases to a point and then decreases with each
new hire. The optimum level of efficiency is at producing 17 beanbags per hour.
Total output continues to increase but a slower rate.
2
What categories of costs combine to create a firm's total cost?
Fixed costs and variable costs combine to create total cost. Fixed costs are also
defined as overhead, are costs that are the same no matter how much is produced.
Variable costs rise or fall depending on the amount produced.
4
What circumstances cause a firm to experience diminishing marginal returns?
Diminishing Marginal Returns occur when output declines with each additional unit
of labor. In the example of the beanbag manufacturer, there was no capital to help
increase productivity- buying more sewing machines and scissors. After the third
hire, the law of Diminishing Marginal returns started to be seen. Production when
down with each new hire.
5
How can the global economy affect the supply of a good in the United States?
Global economic events such as increase in wages in China, and increase in
technology innovations, or trade restrictions will have an affect on the supply of
goods to the United States.
6
Assume that a $1 per pound tax has been placed on fish. What effect will this
have on the supply curve for fish?
7
A local coffee shop has the following expenses:
$5,000
$3,000
$4,000
$2,000
rent
full time manager
part time workers
coffee beans, milk, cups
In July the owner anticipates earning $7,000. If she choose to close down the shop, she
will no longer have pay the costs above.
Question: Do you think the owner should close down the shop?
Number of
units
Fixed
costs
Variable
cost
Total
Cost
Margin
al cost
Margin
al
Revenue
0
$8,000
0
$8,000
0
0
1
8,000
6,000
14,000
6,000
7,000
No, she should not shut down operations. Her Marginal Revenue is greater than
Marginal cost.
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