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Exam III Review

Exam III Review. Econ 101 – 1 Tuesday, November 28 th. Value of Total Product (VTP): VTP = Q*P = P*TP Value of Average Product (VAP): How much revenue does each person produce, on average? Value of Marginal Product (VMP) How much revenue does the last person hired produce?. The Short-Run.

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Exam III Review

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  1. Exam III Review Econ 101 – 1 Tuesday, November 28th Sherman

  2. Value of Total Product (VTP): VTP = Q*P = P*TP Value of Average Product (VAP): How much revenue does each person produce, on average? Value of Marginal Product (VMP) How much revenue does the last person hired produce? The Short-Run Sherman

  3. The Short-Run:AP • How much average does each person produce, on average, when: • Labor = 1? • Labor = 2? • Labor = 3? Sherman

  4. The Short-Run:AP • AP when: • L = 1: • AP = TP/L • AP = 80/1 • AP = 80 • L = 2: • AP = 200/2 • AP = 100 • L = 3: • AP = 270/3 • AP = 90 Sherman

  5. The Short-Run:VAP • Price = $3 • What is the VAP when: • Labor = 1? • L = 2? • L = 3? Sherman

  6. The Short-Run:VAP • Price = $3 • VAP when: • L = 1 • VAP = AP*P • VAP = 80*3 • VAP = $240 • L = 2 • VAP = 100*3 • VAP = $300 • L = 3 • VAP = 90*3 • VAP = $270 Sherman

  7. The Short-Run:Marginal Product • How much more is produced with the addition of the: • 1st person? • 2nd person? • 3rd person? Sherman

  8. The Short-Run:Marginal Product • Marginal Product of: • 1st person • MP1 = (TP1 – TP0)/ΔL • MP1 = (80 – 0)/1 • MP1 = 80 • 2nd person • MP2 = (TP2 – TP1)/ΔL • MP2 = (200 – 80)/1 • MP2 = 120 • 3rd person? • MP3 = (TP3 – TP2)/ΔL • MP3 = (270 – 200)/1 • MP3 = 70 Sherman

  9. The Short-Run:Value of Marginal Product • How much more revenue is produced with the addition of the: • 1st person? • 2nd person? • 3rd person? Sherman

  10. The Short-Run:Value of Marginal Product • Price = $3 • VMP when we add the: • 1st person • VMP = MP*P • VMP = 80*3 • VMP = $240 • 2nd person • VMP = 120*3 • VMP = 360 • 3rd person • VMP = 70*3 • VMP = $210 Sherman

  11. What can the firm vary in the short run? Capital: is it quick/easy/cheap to build new buildings? buy machinery? Labor: is it easy to hire/fire people in the short run? How does the firm decide how much labor to use? The Short Run:Choosing Inputs Sherman

  12. The Short Run:Choosing Labor • The firm will only hire if the last person pays for herself (VMP >= Wage) • How does the firm decide how much labor to use? • VMP = cost of last employee (wage) • Where does this firm stop? Sherman

  13. As quantity produced rises: diminishing marginal returns “too many chefs in the kitchen spoil the broth” gains to specialization decrease increasing marginal costs Profit is maximized where P = MP The Short Run:Cost Curves and Revenue Sherman

  14. Individual firms and consumers cannot affect supply, demand, or price. Firms have identical products, information, and production technologies Free entry and exit The Short Run:Perfect Competition Sherman

  15. Total Profit = Total Revenue – Total Cost Π = TR – TC (Q/Q)*Π = (TR – TC)*(Q/Q) Π = (TR/Q – TC/Q)*Q Π = (P*Q/Q – TC/Q)*Q Π = (P – ATC)*Q Economic Profit Sherman

  16. Is the economic profit here positive, negative, or zero? The Short Run:Enter/Exit Decisions S P P MC ATC P0 P0 D q 100 1000 Q Sherman

  17. Π > 0 Who will want to enter the market? Who will want to exit? The Short Run:Enter/Exit Decisions S P P MC ATC P0 P0 D q 100 1000 Q Sherman

  18. Set q where P = MC Who will enter? exit? The Short Run:Enter/Exit Decisions S P P MC ATC P1 P1 D q 100 1000 Q Sherman

  19. Π = 0 Who will want to enter the market? Who will want to exit? The Short Run:Enter/Exit Decisions P P MC S ATC Pe Pe D qe q Qe Q Sherman

  20. Π = 0 This is the long-run equilibrium! No one enters, no one exits. P = MC = ATC The Short Run:Enter/Exit Decisions P P MC S ATC Pe Pe D qe q Qe Q Sherman

  21. The Long Run:Increasing Returns to Scale Remember: ATC = TC/Q P LRAC ATC0 P = ATC0 ATC1 P = ATC1 Q Sherman

  22. The Long Run:Constant Returns to Scale Remember: ATC = TC/Q P LRAC ATC2 ATC3 P = ATC2,3 Q Sherman

  23. The Long Run:Decreasing Returns to Scale Remember: ATC = TC/Q P LRAC ATC5 P = ATC5 ATC4 P = ATC5 Q Sherman

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