Solutions_Review_Questions041215 - Review Materials for...

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1 Review Materials for Final Exam with some Solutions Included ECON2300N Prof. Xueda Song Note: To prepare for the exam, you should study lecture slides and notes, read required reading from the textbook, work on assigned Exercises, and follow the following review materials closely. Chapter 20 Profit Maximization Required reading: the whole chapter. Exercises: (1) Review Questions #1, 2, 3, 4, 6, 7, 8 on pp.384-385. 1. In the short run, if the price of the fixed factor is increased, what will happen to profits? Profits=total revenue-total costs= total revenue-(total variable cost+total fixed cost). In short run, fixed cost becomes sunk cost and won’t affect profit-maximizing output level. But when the price of the fixed factor increases, total fixed cost goes up. So profit decreases. 2. If a firm had everywhere increasing returns to scale, what would happen to its profits if prices remained fixed and if it doubled its scale of operation? If a firm had everywhere increasing returns to scale, its output will be more than doubling when it doubled its scale of operation. Given fixed prices, total revenue (=PxQ) will be more than doubling. Doubling scale of operation means doubling the use of every input. Given fixed prices, thus total cost will be exactly doubling. profit will increase.
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