Review:
Firms
1. Which of the following statements regarding firms is correct?
a. Corporations’ power comes from their numbers – they represent the most numerous form of business organization
b. Partnerships’ primary appeal is the limited liability that comes from that form of organization
c. Employment in the construction industry is notable because of the lack of volatility over time.
d. Corporations tend to account for a higher share of sales than their share of total firms
Corporations are HUGE, so they look big when we look at revenues or profits and small when we look at the number
of entities.
2. In the opening unit we talked about role private property plays in the market system in motivating people - in getting
them out of bed in the morning to work. It turns out that dot.com start-up companies were also very good at motivating
workers to work long hours for low pay. What feature of the compensation package was most directly tied with the
incentives to work under these conditions?
a. signing bonuses
b. step pay raises
c. options
d. hierarchical pay structure
Options worked as an incentive for workers
3. Based on the authors of The Corporation, the corporation "is singularly self-interested: its purpose is to create
wealth for its shareholders. And, like all ______, the firm is irresponsible, because it puts others at risk to satisfy its
profit-maximising goal, harming employees and customers, and damaging the environment." What type of personality
disorder did the corporation suffer from?
a. ADD
b. schizophrenia
c. psychopath
d. depression
e. bi-polar disorder
Corporations focus exclusively on profits and this singular focus is the definition of a psychopath
Faculty
Students
0
4
8
12
16
20
24
0
322
439
513
567
609
644
Average
Product
Marginal
Product
80.5
54.9
35.4
30.4
26.8
80.5
29.4
18.4
10.6
8.7
4. What is the average product of a faculty member if the firm employs 12 inputs?
The formula for AP = TP/I = 513/12 = 42.7
5. What is the marginal product of a faculty member if the firm increases its faculty from 12 to 16?
The formula for MP = (567-513)/(16-12)= 13.4
6. I overheard some students talking about how they had started studying and felt the extra grades they gained from the
extra studying time was rising. This would be an example of:
a. diminishing marginal product
b. diminishing marginal cost
c. increasing returns to scale
d. increasing marginal product
Because time studying is the input and grade is the output, this is a discussion of marginal product of time spent
studying – and here it is increasing.
Output
TC
0
322
439
513
567
609
644
FC
VC
$1,000
$4,200
$7,400
$10,600
$13,800
$17,000
$20,200
AC
$0
$3,200
$6,400
$9,600
$16,000
$19,200
MC
$13.05
$16.84
$20.66
$24.35
$9.94
$27.22
$43.51
$59.64
$31.38
$91.77
Use this table above to answer the following four questions.
7. What is FC?
FC is the cost that does not change with output = $1,000
8. What is the VC at an output level of 567?
VC is TC – FC = $13,800-$1,000 = $12,800
9. What is the AC of 609 units of output?
AC is TC/Output = $13,800/567 = $24.35
10. What is the MC of increasing output from 567 to 609?
MC is ΔTC/ΔQ = ($17,000-$13,800)/(609-567) = $75.72
11. Recently the decision was made by administrators at RIU to raise the university's enrollment by 1,000 students and
add 25 full-time faculty members. Prior to the announcement the student/faculty ratio was 25/1. Based on this data and
the fact that each additional student would pay tuition of $10,000 and each faculty member would be paid $80,000,
what is the marginal cost of an additional faculty member?
a. $20
b. $160
c. $800
d. $80,000
e. $160,000
It cannot get easier than this. An additional faculty member costs $80,000
12. Let's look at the situation facing Hisbro, a local toy manufacturer who is considering manufacturing a game called
suburbopoly. What we know is that the fixed cost of production = $500,000 and the additional cost of producing each
unit = $1.50. Based on these data, what would be the average cost of producing 500,000 games?
a. $.25
b. $2.5
c. $25
d. $250
e. $2,500
AC = TC/Q = (VC + FC)/Q = (1.5*500,000+500,000)/500,000 = 2.5
13. The decision by Hydroxide, a company that has invented a gadget that increases substantially the energy efficiency
of automobiles, to expand production by increasing both capital and labor to reduce the average cost of production is an
example of _______.
a. marginal cost
b. economies of scale
c. diminishing marginal productivity
d. perfect competition
Because both inputs change we are talking about returns to scale
14. You are to assume the following information. MTI is very concerned about their production process that spews 10
million tons of chemicals into the environment per year, and that new scientific evidence has indicated that 500 people
will die as a result of exposure to the chemicals. If each person who dies is worth $200,000, what is the maximum that
MTI would pay per ton to eliminate the pollution based on a cost-benefit analysis?
a. $2 per ton
b. $5 per ton
c. $10 per ton
d. $20 per ton
The cost of deaths = 200,000*500 = 100,000,000 so the cost per ton = 10,000,000/10,000,000 = $10
15. Given your success as a consultant, let’s try another job. This time your job is to provide help to a local toy
manufacturer by answering the following question. How should you respond to the following situation? The managers
are considering the offer from an out-of-state business to buy an additional thousand Buzz Lightsecond toys at a fixed
price of $6 per toy. What we know is that this is $2 below the current price of the toys. We also know the firm is
currently producing 100,000 units at an average cost of $7 and costs will rise by $800 for every increase in production
of 100. What is the MC of the deal?
a. $8
b. $6
c. $4
d. $2
The secret is – does it raise profits which will happen if MR > MC. In this example each additional unit sold brings in
$6 in revenue (MR = $6) and each one costs an additional $8 = 800/100 (=MC).
16. Should the company take the deal?
a. yes
b. no
c. not enough information to answer question
The secret is – does it raise profits which will happen if MR > MC. In this case MC > MR so you do not
17. One more question before we leave our analysis of RIU. You will recall that the administration decided to increase
enrollment by 1,200 students and add 20 full-time faculty members. Prior to the announcement the student/faculty
ratio was 25/1. Based on this data and the fact that each additional student would pay tuition of $10,000 and each
faculty member would be paid $80,000, what is the marginal revenue of an additional faculty member?
a. $10,000
b. $50,000
c. $100,000
d. $500,000
e. $750,000
To calculate the marginal revenue of an additional faculty you would calculate the change in revenue from the
additional students = 1,000*$10,000 = $10,000,000 and divide it by the change in faculty = 20. The marginal revenue
would be $500,000.
18. If at an output level of 5,000 T-shirts, Terestial T-shirt Company is making an economic loss and marginal profit is
$.85 per cone, the firm should:
a. increase output
b. reduce output
c. leave output level at 5,000 shirts
d. shut-down
e. Not enough information to make a decision.
The only thing to look at is marginal profit since this tells us what happens to profit as a result of a change in input use and in this case marginal profit is positive so expand output.
19. At the center of any discussion of input prices is marginal productivity analysis, so let's see how good you are at it.
Which of the following statements is not an example of the marginal productivity theory of input use in action?
a.
the defense department's realization that wars will be unpopular so they are moving toward an armed services
with more 'smart' weapons and fewer 'dumb' soldiers
b.
the decision of APC, a local manufacturer, to invest in information technology in the 1990s when the price of
technology was falling relative to workers wages
c.
the decision by Hydroxide to expand production by increasing both capital and labor to reduce the average cost
of their new process for increasing the energy efficiency of automobiles
d.
the decision of RIU, a local university, to replace some of its full-time faculty with lower cost part-time faculty
All of these are examples of the marginal productivity theory but the decision by Azimo to expand production by
increasing both capital and labor to reduce average cost of their solar panels. This is an example of economies of scale
20. Which of the following statements is not an example of the marginal productivity theory of input use in action?
a. the defense department's realization that wars will be unpopular so they are moving toward an armed services with
few soldiers
b. the decision by Azimo to expand production by increasing both capital and labor to reduce the average cost of
their solar panels
c.
d.
the decision of APC, a local manufacturer, to move some of its manufacturing operation from South Kingston to
Ireland where labor is cheaper
the decision of schools like URI to invest in information technology in the 1990s when the price of technology
was falling relative to faculty salaries
Marginal productivity theory tells us to use less of a resource when the price rises in the short-run and in the long-run to
rebalance resources so that you use less of the more expensive resource. Only the decision by Azimo to expand
production by increasing both capital and labor to reduce the average cost of their solar panels is not an example.