Review_sheet_for__final_exam_fall_07

Review_sheet_for__final_exam_fall_07 - ECO 211 Final Exam...

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ECO 211 Final Exam Review Sheet Fall 2007 This exam covers material in chapters, 13 (Costs of Production) 14 (Perfect Competition), 15 (Monopoly), 16 (Oligopoly) and 17 (Monopolistic Competition). You need to know the material on antitrust and regulation covered in the last class. Chapter 13: Costs Chapter 13: Production and Costs Know the difference between economic costs and accounting costs. Know the difference between economic profits and accounting profits. Be able to explain why a firm is ‘satisfied’ with economic profits equal to zero. Know that economic costs are the opportunity costs of all inputs used in production—whether the firm makes an explicit cash payment (explicit costs) or if it owns the resource and so makes no explicit payment (implicit costs). Know the difference between the short-run (some input fixed) and the long-run (all inputs variable) for a firm. Short-Run Costs By definition, the Short-Run is a time period so short that one input is fixed. We assume that capital is the fixed input and labor is the variable input. In other words, the short-run production function shows the relationship between the amount of labor used and the quantity of output produced: ) L , K ( F Q = . The single most important assumption regarding the short-run production function is that it exhibits diminishing marginal product of labor . The Law of Diminishing Marginal Returns states that, in the short-run, as the firm uses more labor it will reach a point where the marginal product of labor will decline. The explanation of this law relies on the fact that the amount of capital available for labor to use is fixed in the short-run. Thus, as the firm produces more output (by hiring more labor), the fixed amount of capital is spread over more and more workers. The reduced quantity of capital per worker causes the productivity of labor to fall at the margin.

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