Questions and Answers of Economics An Introduction To Traditional

Explain in words what the marginal productivity of labor and average productivity of labor measures and why this is important information for the owner of a business.
List the four broad categories of factors of production or inputs to production. How are they represented in a production function?
Consumer sovereignty says that households ultimately decide what businesses produce. How does advertising compromise the notion that household's control what businesses do?
Why does marginal productivity rise and then fall in the short run?
What is the role of technology in production?
Explain why diminishing marginal productivity eventually causes average productivity to fall.
What is the difference between the short-run and long-run? Is there a fixed time period associated with short-run and long-run? Explain why or why not.
Sketch a graph of marginal productivity and average productivity. Label the point where MP = 0 and AP = 0.
Why do the additions to output fall after a certain number of workers in the short run?
What happens to output in the short run as production increases? What inputs are “fixed” and which input is variable in the short-run? How does this explain diminishing marginal productivity?
What might happen to output in the long run as the number of inputs are increased? Are there any fixed inputs in the long run?
When marginal productivity ‘increases at a decreasing rate,’ what part of the marginal productivity curve are we referring to? What does that mean?
Compare and contrast product technology and process technology.
Describe how a competitive advantage can erode over time.
What are the issues raised about the traditional treatment of technology in production?
Compare and contrast the traditional and progressive view of labor as an input into production.
What is the difference between the long run and the short run?
Are there any fixed inputs in the long run? Why not? What does that mean for costs in the long run?
How do short-run and long-run costs differ? Why?
Indicate true, false, or uncertain for the following statements, and explain why:a. In the long run, advancing technology makes the optimal plant size smaller.b. The long-range average cost envelope
Sketch graphs to illustrate costs in the short run and long run.
What is happening to the average total costs of production when there are economies of scale? What are explanations for economies of scale?
The text lists three examples of fixed costs—fire insurance premiums, security guard services, and existing debt payments. List and discuss three additional fixed costs for a manufacturing firm.
Explain how and whether each of the following would affect short-run marginal, variable, fixed, and total costs:a. Wage rate paid to assembly-line workers increases.b. Salary paid to upper management
What is happening to the average total costs of production if there are diseconomies of scale? What are explanations for diseconomies of scale?
Explain the difference between accounting and economic profits. What is included in calculating economic profits that is not included in accounting profits?
Suppose you fear competition from a low-cost foreign rival. Recognizing that labor costs are your largest cost of production, you decide to announce a 10 percent across-the-board wage reduction. Do
Indicate true, false, or uncertain for the following statements, and explain why:a. AVC = ATC in the short run.b. AFC + AVC + MC = ATC.c. Average fixed cost falls as production proceeds through
What is the difference between normal (or zero), positive, and negative economic profits?
Would a business owner want to stay in business if the economic profit is negative? Explain why or why not.
If a business owner is earning a zero or normal economic profit, what does that mean?
If a business owner is earning a zero or even negative economic profit, does that mean the accounting profit is negative? Explain.
Compare and contrast the debate over “who gets what” according to traditional and progressive analysis.
Why is the demand for the factors of production called derived demand?
Explain the rationale behind the optimal input rule—that is, that firms should hire factors until MRP = MFC. Draw a diagram to illustrate your answer.
Describe how traditional and progressive analyses think about marginal productivity.
Why is the MRP curve downward sloping? What factors cause it to shift? Answer with respect to the MRP for each of the factors of production.
What conditions must hold for the capital market to be in equilibrium? What will happen if the return on capital is less than the rate necessary to overcome risk and time preference? Draw a diagram
Under what conditions is the labor supply curve upward sloping? When is it backward bending? What factors cause the labor supply curve to shift?
Suppose that the marginal revenue product of capital is greater than r*, the interest rate necessary to induce saving. However, instead of buying more capital, the firm hires more labor. Would this
Carefully distinguish between marginal productivity rent and economic rent. When does land command economic rent? marginal productivity rent? Draw a diagram to illustrate your answer.
How can marginal productivity theory be used to explain wage differentials? Give specific examples.
Do entrepreneurs “deserve” the money they make? Answer according to marginal productivity theory.
Using diagrams, illustrate a. Why offshore oil workers have higher wages than on-shore oil workers.b. How human capital raises a worker’s wage.c. Why Alaskan workers have higher wages than workers
Economic rents can be earned on all factors of production, not just unimproved land. Explain whether and why each of the following may command economic rent:a. A Beatles reunion concertb. Harvard
Ceteris paribus, which of the following would tend to cause the wage rate to increase?Draw diagrams to explain your answers.a. An increase in the labor force participation rateb. Technological
Suppose you bought 100 acres of farmland, installed an irrigation system, and built a farmhouse. You then rented the property for $5,000 per month. Five years later, you have made no improvements on
Compare and contrast marginal productivity theory and progressive labor theory. What are the key differences?
How do capitalists use marginal productivity to explain wages of workers and the large profits for the owners?
Explain the significance of each assumption in terms of creating “perfect competition.”
What assumptions of a perfectly competitive market are violated in each of the other market structures.
Does earning a normal profit or when economic profit = 0 mean a firm is not earning a profit? Explain.
What assumption(s) of competitive markets is critical for competing away excess profits? Explain.
Describe why it takes many firms in a market in order for an individual firm to be price taker.
Why can there be excess profits in the short run but not in the long run?
Use a supply and demand graph of a market to demonstrate and explain the price an individual firm “takes.”
Demonstrate graphically and explain what happens to excess profits in the long run.
Why is the individual firm’s product demand curve horizontal? What happens if firms deviate from that price?
Why is the assumption of homogenous products important for the horizontal demand curve of individual firms?
Define and describe costs in the short run. Demonstrate their relationships graphically. What happens to MC if labor costs increase?
Explain why firms would not produce where MC > MR or where MC < MR.
Why are there so few industries that would be considered perfectly competitive?
Why and why not are agricultural markets an example of perfectly competitive markets?
Explain why monopolists put efforts into maintaining their monopoly.
What assumptions of a perfectly competitive market are violated? Explain.
How does demand curve for individual monopolists differ from demand curve for individual firm in a perfectly competitive market? Explain.
Explain how monopolists' lower costs and increase demand.
How is profit maximizing quantity decision the same for a monopoly and for a firm in a perfectly competitive market? How is the pricing decision different? Explain.
What are some examples of natural monopolies?
How do monopolists maintain their monopoly? How does this violate assumptions of a perfectly competitive market? Explain.
How do traditional and progressive economists differ in their analyses of monopolies?
Why is output different for a monopolist than for a firm in a perfectly competitive market?
State examples of great attempts to regulate monopolies.
Can a monopolist set both price and quantity? Explain.
Explain why or why not government regulations are effective. Give examples.
Explain what is meant by referring to the market as a “process.”
State the law of demand. State the law of supply. What is meant by the phrase “. . . holding all other things constant”?
What is equilibrium? Why is it significant? Does it ever change?
Explain why the focus of supply and demand analysis is strictly limited to exchange?
Does the demand curve in the supply and demand model capture all the people who want or desire a good? Why or why not?
What happens to supply and demand analysis if the government intervenes in the market?
Are there many real world examples of perfectly competitive markets? What might that mean for supply and demand analysis? Give an example.
Assume that the price of coffee is below equilibrium. What pressures would cause this market to tend toward equilibrium?
Suppose that the market for wooden Number 2 lead pencils is in equilibrium. Determine how the following shocks will affect the equilibrium price and quantity. Draw a graph to illustrate each of your
Suppose that the market for PC laptop computers is in equilibrium. Determine how the following shocks will affect the equilibrium price and quantity. Draw a fully labeled demand and supply curve
What is equilibrium? Why is it such an important concept?
Use supply and demand to explain excess supply. What might cause excess supply? Describe the process that eliminates excess supply.
Use supply and demand to explain excess demand. What might cause excess demand? Describe the process that eliminates excess demand.
What three factors can cause a change in demand? What factor can cause a change in the quantity demanded?
What factors can cause a change in supply? What causes a change in the quantity supplied?
Draw a simple supply and demand curve diagram for coffee. Assume that incomes of consumer are rising. What happens to demand and supply? What happens to equilibrium price and quantity?
Assume that for some reason the coffee price in the previous question is above the equilibrium price. What pressures would cause this market to tend toward equilibrium?
Explain how the increasing concentration of ownership of media outlets impacts political decisions.
What is the definition of democracy? Give examples of the formal structures and institutions of democracy
How can you have a formal democratic structure in place that is not really democratic? Give historical examples and explain.
Can you have an effective democracy without the structures of democracy? Can you have a formal democracy without having an effective democracy? Explain.
What are some barriers to effective democracy?
What are some possible conflicts of interest in how the media presents news and events? How could these conflicts create bias in reporting? What policies would you recommend attempting to stop biased
“It’s not what you know, it’s who you know.” How could this statement apply to elections?
What is the relationship of income to percentage of voter turnouts and political participation? What might be some reasons? What would you suggest increasing voter participation at lower income

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