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BIG PICTURE IDEAS

#1. The law of diminishing marginal .. states that the additional output produced from hiring an additional
worker will eventually .. .
#2. There are four per-unit short-run cost curves: AFC, AVC, .. , and .. .
#3. Firms maximize profit when marginal .. equals marginal .. .
#4. Firms in a perfectly competitive market are price .. because they produce identical products. They also
face no .. to entry and are e cient in the long run.
#5. Other firms enter a market if they can make .. and leave if they make .. .
In the long run, perfectly competitive firms earn no .. profit.

Topic 3.1- The Production Function

1. The law of diminishing marginal returns occurs because of .. resources , like capital and land.
2. Complete the chart. 4. Plot TP, MP, and identify the 3 stages of returns. 5. Identify the equation for marginal
Number of Total Marginal product.
Workers Product (TP) Product (MP
0 0
1 5
True or False:
2 15 6. If the total product increases from
3 19 50 to 70 units as a result of hiring
two workers, the marginal product
4 20 is 20 units.
5 20 7. Total product increases at an
6 18 increasing rate due to
specialization.
3. After which worker does diminishing 8. Total product decreases when
marginal returns set in? marginal product falls.

Topic 3.2- Short-Run Production Costs

9. .. costs DON’T change as more units are produced (e.g. rent, insurance, etc.) and ..
costs do change as more units are produced (e.g. wages to workers, raw materials, etc.)
10. Identify the equation for average total cost (ATC). 16. Fill in the blanks for a firm producing boxes of oranges.
Output Variable Total
11. Identify the equation for average variable cost (AVC). MC AVC AFC ATC
(boxes) Cost Cost
12. Identify the equation for average fixed cost (AFC). 0 $0 $10 - - - -

13. Define marginal cost (MC). 1 $20

2 $15
3 $70 $3.30 $23
14. Average .. cost plus average
fixed cost equals average .. cost.
4 $40 $2.50 $27.50
15. When MC is .. ATC, MC pulls ATC down. When MC is .. ATC, MC pulls ATC up.
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Topic 3.2- Short-Run Production Costs (continued)

17. For each scenario, identify how each will change 22. Draw and label ATC, AVC, AFC, and MC. 23. Draw and label TC, VC, and FC
(↑, ↓, or no change).
AFC AVC ATC MC
Fixed costs decrease
Variable costs decrease
Fixed costs increase

True or False
18. In the short run, all resources are variable.
19. Total cost increases at a constant rate.
20. MC always intersects ATC at ATC’s minimum.
21. AFC equals ATC plus AVC.

Topic 3.3- Long-Run Production Costs

24. In the long run, all resources are .. . 28. Label the minimum e cient scale quantity Q*.
25. Define economies of scale.

26. Define diseconomies of scale.

27. On the graph to the right, draw the long run ATC and
identify economies of scale and diseconomies of scale.

Topic 3.4- Types of Profit Topic 3.5- Profit Maximization

29. .. profit is total revenue minus Use the table to calculate the following. Assume the price is $15.
only explicit costs. 34. What is the profit maximizing quantity?
30. .. profit is total revenue minus Explain.
explicit and implicit costs (including opportunity costs).
31. What is normal profit?
35. How much is the profit or loss? Show work.

True or False: 36. What is the profit or loss if the price

32. If economic profit is zero, accounting profit is positive. increased to $25? Show work.
33. Profit equals marginal revenue minus marginal cost.

Topic 3.6- Short-Run and Long-Run Decisions

37. What is the shutdown rule? 38. Where is a firm’s short-run supply curve?

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Topic 3.7- Perfect Competition

39. Identify the characteristics of perfect competition.

Use the graph to identify the following. Show your work.

40. Profit maximizing quantity.
41. Total revenue.
42. Total cost.
43. Economic profit.
44. What will happen to the number of firms in the market in the long run?
Explain.

45. Assume the market reaches long run equilibrium. What would be the
price and quantity?
46. If the price fell to $8, should the firm shut down in the short run?

47. Draw a perfectly competitive market and firm with the firm making profit. Shade profit. 48. Draw a perfectly competitive firm in
Market Firm long run equilibrium.

49. What must be true if a firm continues to 53. Show what will happen on both graphs in the long run assuming constant costs.
produce when they have a short-run loss?

50. In long run, perfectly competitive firms are

.. e cient because
the price equals the marginal cost.
51. In long run, perfectly competitive firms are
.. e cient because
output is produced at the lowest cost.
52. In the long-run, firms earn no economic profit, 54. What happened to the price and 55. What happened to the price and
but accounting profit is .. . quantity in the market? quantity for the firm?

56. The market price will stay the same from long run to long run in a .. cost industry.
57. The market price will increase from long run to long run in an .. cost industry.
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