Changes

:(e) pencils

:(e) pencils

'''''Answer''''':  Our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer.  Gold is not scarce under any meaning of the word.  Knock it out as an answer.

'''''Answer''''':  The most basic rule for multiple choice tests is this:  be sure to understand the question.  See that "EXCEPT"?  Typically several miss that, and pick the wrong answer.  Be sure never to miss a question because you did not understand the question.

Pennies, paper clips and pencils are all inexpensive, but they do cost something.  A penny is not worth much, but it is worth something.  If you had a hundred of them, you could buy a chocolate bar.  But it doesn't matter how much salt water you might have at the ocean.  That's worthless.  Nobody would pay anything for it, not even a penny.  The correct answer is (d).

 

Pennies, paper clips and pencils are all inexpensive, but they do cost something.  A penny is not worth much, but it is worth something.  If you had a hundred of them, you could buy a chocolate bar.  But it doesn't matter how much salt water you might have at the ocean.  That's worthless because there is a free oversupply.  Nobody would pay anything for it, not even a penny.  Thus it is not economically scarce.  The correct answer is (d).

'''2.  Imagine a firm in perfect competition, and in long-run equilibrium.  Which of the following statements is true?'''

'''2.  Imagine a firm in perfect competition, and in long-run equilibrium.  Which of the following statements is true?'''

'''''Answer''''':  Again, our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer.  Let's look at answer choice (a):  the total revenue of the firm cannot be increased.  That is wrong because if we increase our output, we could increase our total revenue, even though we may lose money on that additional unit.  For example, if we sold chocolate candy bars for $1, we could always increase revenue by selling another one for the below-market-price of 50 cents.  We'd lose money on that additional bar, but we'd increase our overall revenue.

'''''Answer''''':  Again, our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer.  Let's look at answer choice (a):  the total revenue of the firm cannot be increased.  That is wrong because if we increase our output, we could increase our total revenue, even though we may lose money on that additional unit.  For example, if we sold chocolate candy bars for $1, we could always increase revenue by selling another one for the below-market-price of 50 cents.  We'd lose money on that additional bar, but we'd increase our overall revenue.

Similarly, answer choice (d) must be wrong because we know that we would continue selling until MR (marginal revenue) declines to where it equals MC (marginal cost).  That point were MR=MC is not where MR is the maximum.

Similarly, answer choice (d) must be wrong because we know that we would continue selling until MR (marginal revenue) declines to where it equals MC (marginal cost).  That point were MR=MC is probably not where MR is the maximum.

Would marginal cost (MC) be at its average (choice (c))?  No reason to think so.  Marginal cost would be higher for the first few units produced by the firm, and lower as volume increases.  Most likely MC is below its average as the last unit is produced.

Would marginal cost (MC) be at its average (choice (c))?  No reason to think so.  Marginal cost would be higher for the first few units produced by the firm, and lower as volume increases.  Most likely MC is below its average as the last unit is produced.  For example, you can usually hit a baseball more efficiently after you've hit several dozen baseballs before it.

That leaves us with the possible answer choices of (b) and (e).  We should try to eliminate one of these to improve our chances of selecting the correct one.  To do so, let's reread the question.  It says the firm is perfectly competitive and in long-run equilibrium.  That means it has done everything possible to lower its costs, and has all the time it needs to get its costs as low as possible.  It does not have to pay for overtime workers; it can hire precisely the optimal number of workers needed without incurring overtime costs.  Using the fact that we are in the "long run" for a perfectly competitive firm, we know that its costs are as low as they can be.  Answer (e) best fits those conditions in the question: "the average total cost is at a minimum."

That leaves us with the possible answer choices of (b) and (e).  We should try to eliminate one of these to improve our chances of selecting the correct one.  To do so, let's reread the question.  It says the firm is perfectly competitive and in long-run equilibrium.  That means it has done everything possible to lower its costs, and has all the time it needs to get its costs as low as possible.  It does not have to pay for overtime workers; it can hire precisely the optimal number of workers needed without incurring overtime costs.  Using the fact that we are in the "long run" for a perfectly competitive firm, we know that its costs are as low as they can be.  Answer (e) best fits those conditions in the question: "the average total cost is at a minimum."

:(c) its marginal cost increases

:(c) its marginal cost increases

:(d) its average total costs decrease

:(d) its average total costs decrease

:(e) its costs remain constant.

:(e) its costs remain constant

'''''Answer''''':  Think back to what "economies of scale" means.  It refers to whether the firm has better efficiency at a bigger size, or better "returns to scale" as the size of a firm increases.  We talked about "increasing" returns to scale and "decreasing" returns to scale.  The "economies of scale" suggests that the firm can operate more "economically" if it has larger "scale" or size.  In other words, "economies of scale" means "increasing returns to scale."

'''''Answer''''':  Think back to what "economies of scale" means.  It refers to whether the firm has better efficiency at a bigger size, or better "returns to scale" as the size of a firm increases.  We talked about "increasing" returns to scale and "decreasing" returns to scale.  The "economies of scale" suggests that the firm can operate more "economically" if it has larger "scale" or size.  In other words, "economies of scale" means "increasing returns to scale."

What happens when a firm that has "increasing returns to scale" increases its output?  It must expand, or get bigger, to increase its output.  But, like Wal-Mart, such a firm does better and becomes more profitable the bigger it is.  So (a), (b) and (e) are incorrect.

What happens when a firm that has "increasing returns to scale" increases its output?  Like Wal-Mart, such a firm does better and becomes more profitable the bigger it is.  So (a), (b) and (e) are incorrect.

We're left with a choice between answers (c) and (d).  But (c) can't be right either.  The firm is better off the bigger it is, when it has increasing returns to scale or "economies of scale."

We're left with a choice between answers (c) and (d).  But (c) can't be right either.  The firm is better off the bigger it is, when it has increasing returns to scale or "economies of scale."

By process of elimination, the correct answer must be (d).

By process of elimination, the correct answer must be (d). We can confirm it is right by thinking back to the Wal-Mart example:  as it increases its "scale", it increases the quantity of its goods, and that enables it to lower the average costs for each good and then lower the prices.  Its ATC decreases as it increases its size; it has "economies of scale" or "increasing returns to scale."

== Assignment ==

== Assignment ==