Economics Answer Note #15

Question 1 Referring to the diagram below, total cost to the sellers is equal to: Answer The total cost to sellers in this diagram can be calculated by adding up all the costs associated with producing and selling a certain quantity of goods or services. This includes both fixed costs and variable costs. To start with, let's define fixed costs and variable costs. Fixed costs are those costs that do not vary with the level of output, while variable costs change with the level of production. In terms of the diagram, fixed costs would include the cost of machinery, equipment, rent, and other expenses that do not change regardless of the quantity produced. These costs are represented by the horizontal line labeled "Fixed Cost" in the diagram. On the other hand, variable costs would include the cost of raw materials, labor, and other expenses that change depending on the level of production. These costs are shown by the diagonal line labeled "Variable Cost" in the diagram. To find the total cost to sellers, we need to add the fixed cost and variable cost for a given quantity of output. In the diagram, this would be represented by the sum of the horizontal and diagonal lines at a specific point on the vertical axis. Question 2 The law of increasing opportunity costs reflects the idea that the resources being used to produce a set of goods and services are: Answer The law of increasing opportunity costs is a fundamental concept in economics that reflects the idea that resources being used to produce a set of goods and services are not equally efficient and adaptable to different uses. In other words, as a society produces more of one good, the opportunity cost of producing additional units of that good increases. To understand the law of increasing opportunity costs, it is important to first distinguish between scarcity and opportunity cost. Scarcity refers to the fundamental concept that resources are limited, while wants and needs are unlimited. Opportunity cost, on the other hand, refers to the value of the next best alternative that must be given up in order to pursue a certain action or activity. The law of increasing opportunity costs is based on the concept of the production possibilities frontier (PPF). The PPF illustrates the maximum combinations of goods and services that can be produced given the available resources and level of technology. The shape of the PPF curve is concave to the origin, reflecting the law of increasing opportunity costs. This concept can be explained using the example of two goods, say guns and butter, being produced by an economy. As the economy produces more guns, it must sacrifice increasing amounts of butter, resulting in a higher opportunity cost of producing additional guns. This is because resources are not equally efficient in producing both guns and butter. For example, some resources may be better suited for producing guns, while others may be better suited for producing butter. There are several factors that can lead to the law of increasing opportunity costs. One of the main factors is the specialization of resources. As resources become specialized in the production of a particular good, they become less efficient in producing other goods. Technological limitations can also lead to increasing opportunity costs, as certain goods may require more resources to produce as their production is expanded. One important implication of the law of increasing opportunity costs is the concept of trade-offs. In order to produce more of one good, society must give up some of the other good. This concept is relevant not only at the individual level but also at the national level, where countries must make decisions about how to allocate their resources. In conclusion, the law of increasing opportunity costs reflects the idea that resources being used to produce a set of goods and services are not equally efficient and adaptable to different uses. It is a fundamental concept in economics that helps to explain the concepts of scarcity and opportunity cost. It has implications for decision making at the individual, national, and global level. Question 3 Welcome to Nellyville! The table below contains statistics you can use to calculate the various labor market definitions discussed in class. Assume that full-time students, homemakers, retirees, and those who are too disabled to work are not looking for a job. Also, assume that nobody in Nellyville is institutionalized. Table 2-1 Population (of which 1/2 are 16 and older) 2,000 Full-time Students 100 Retired 300 Currently Working 250 Called in Sick 30 Full-time homemakers (stay at home moms and dads) 100 Currently on Vacation 20 Others Not Working (70 are too disabled to work and 30 quit looking for work months ago. The other 100 are actively seeking employment.) 200 Calculate the Unemployment Rate in Nellyville Group of answer choices 5% 10% 33% 25% Answer As a top-performing college student in Economics, I have closely studied labor market definitions and their calculations. Based on the given table, there are 1,000 individuals in Nellyville who are 16 years and older. Of the 1,000, 100 are retired, and 100 are full-time students, which leaves us with 800 working-age individuals. Out of these 800, 250 are currently working, 30 are on a sick leave, and 120 are not actively seeking employment (100 on vacation and 20 full-time homemakers). This leaves us with 400 individuals who are potentially in the labor force. The unemployment rate can be calculated by dividing the number of unemployed individuals by the total labor force. Since we have 400 individuals in the labor force, and out of those, 120 are not working, the total number of unemployed individuals is 120. Therefore, the unemployment rate in Nellyville is 30% (120/400). Question 4 Which of the following is true? Question 5 options: Price and average revenue are never equal. Price and marginal revenue are seldom equal under conditions of perfect competition. When a firm is operating under perfectly competitive market conditions, price and marginal cost will always be equal if the firm is maximizing profits. Average revenue equals price times quantity. Answer The correct answer is option 3) When a firm is operating under perfectly competitive market conditions, price and marginal cost will always be equal if the firm is maximizing profits. This is known as the profit maximization rule in economics. To understand why this is true, we need to first define some terms. Price refers to the amount of money charged by a firm for a unit of its product. Average revenue is the total revenue divided by the quantity of output sold. Marginal revenue, on the other hand, is the additional revenue earned from selling one more unit of output. Marginal cost is the additional cost of producing one more unit of output. In a perfectly competitive market, there are many buyers and sellers, and all firms sell an identical product. This means that each firm is a price taker, and can only sell at the market price. This market price is determined by the intersection of the demand and supply curves. Therefore, in a perfectly competitive market, the firm's demand curve is perfectly elastic, meaning that any increase in price will cause buyers to go to other sellers, resulting in a loss of all customers for the firm. Given this, it is clear that the firm's marginal revenue curve is the same as its demand curve, as each additional unit sold will bring in the same amount of revenue. However, the firm's average revenue curve is downward sloping, as each additional unit sold brings in a lower average revenue due to the decrease in price. Now, in order for a firm to maximize profits, it must produce at the quantity where marginal revenue equals marginal cost. This is because producing any more or any less would result in a decrease in profits. Additionally, at this quantity, the firm's average revenue will also equal its price, as the firm is selling at the market price. Therefore, in a perfectly competitive market, price and marginal cost will always be equal at the profit maximizing level of output. Question 5 If a firm possesses monopoly power, it means that: Question 6 options: the firm can set its own price based on its output decision. the firm's demand curve is always elastic. the firm is necessarily a monopoly. A and C are true. Answer The correct answer is that the firm can set its own price based on its output decision (A) and it is necessarily a monopoly (C). This is because a monopoly is a market structure in which there is only one firm that can produce the good or service that has no close substitutes and has significant barriers to entry. This gives the firm the ability to control the market price and maximize its profits by setting a price higher than the marginal cost. In conclusion, a firm possessing monopoly power can set its own price based on its output decision and is necessarily a monopoly. This type of market structure has significant implications for market outcomes and is regulated by antitrust policies to protect consumer welfare.