Lane Community College

ECON 201 - Introduction to Microeconomics  Martinez
STUDY GUIDE: EXAM 2
(Schiller: Ch. 21, 22, 23)

This is a relatively detailed outline of the material relevant for Exam 2. However, this is not guaranteed to cover 100% of all possible topics relevant to the exam. It is intended only as a study aid, not as a full summary of course content.

LECTURE: INTRODUCTION TO THE THEORY OF PRODUCER BEHAVIOR


DEFINITIONS/CONCEPTS:  YOU SHOULD BE ABLE TO DEFINE AND IDENTIFY THE FOLLOWING.
  •  Modeling the production decision
  •  Production Function, capital, labor, inputs
  • Short run, long run, variable inputs, fixed inputs  
  • Marginal Product, marginal product of labor 
  • Technical (or productive) efficiency, allocative efficiency, productivity
TOPICS/RELATIONSHIPS: YOU SHOULD BE ABLE TO INTERPRET AND EXPLAIN THE FOLLOWING.
  • The assumption of profit maximization;    Are all firms actually motivated solely by maximizing profit? Why or why not?
  •  Law of decreasing marginal product (returns); relationship with Q=F(K,L)
MATH/GRAPHS: YOU SHOULD BE ABLE TO IDENTIFY, READ AND INTERPRET THE FOLLOWING MATH & GRAPHICAL RELATIONSHIPS AND CONCEPTS.
  •  Production Function (the Total Product Curve)
  • The Marginal Product Curve
  •  The point of diminishing marginal product
  •  The maximum total output point


CHAPTER 21: COSTS OF PRODUCTION


DEFINITIONS/CONCEPTS: YOU SHOULD BE ABLE TO DEFINE AND IDENTIFY THE FOLLOWING.
  •  Total cost, fixed costs, variable costs
  • Unit costs: Average Total Cost, Average Fixed Cost, Average Variable Cost, Marginal Costs

TOPICS/RELATIONSHIPS: YOU SHOULD BE ABLE TO INTERPRET AND EXPLAIN THE FOLLOWING.
  •  The relation between marginal product and marginal costs
  •  Law of increasing marginal costs 
  • The relation of the Law of decreasing marginal product to Law of increasing marginal costs

MATH/GRAPHS: YOU SHOULD BE ABLE TO IDENTIFY, READ AND INTERPRET THE FOLLOWING MATH & GRAPHICAL RELATIONSHIPS AND CONCEPTS.

  •  Total cost, fixed cost, average cost
  •  Short run unit cost curves: Average Total Costs, Average Fixed Cost, Average Variable Costs, Marginal Costs
  •  Minimum AVC & ATC condition: MC intersects AVC & ATC @ min. points
  • Long run unit cost curves: Average Total Costs, Marginal Costs
  • Long run ATC curve as the "envelope" of Short run ATC curves
  • Accounting and Economic Costs
 


CHAPTER 22:  THE (PERFECTLY)
COMPETITIVE FIRM


DEFINITIONS/CONCEPTS: YOU SHOULD BE ABLE TO DEFINE AND IDENTIFY THE FOLLOWING.
  • Accounting and Economic Profit
  • Total Revenue, marginal revenue
  •  Minimum AVC & ATC condition  
  • Maximum total revenue condition
  • Profit-Maximizing Level of Output (Profit maximization condition)

TOPICS/RELATIONSHIPS: YOU SHOULD BE ABLE TO INTERPRET AND EXPLAIN THE FOLLOWING
  •  Minimum AVC & ATC condition: MC intersects AVC & ATC @ min. points 
  • Profit Maximization condition:  MR = MC
MATH/GRAPHS: YOU SHOULD BE ABLE TO IDENTIFY, INTERPRET AND EXPLAIN THE FOLLOWING MATH & GRAPHICAL RELATIONSHIPS AND CONCEPTS.
  • Market demand curves vs. Individual firm demand curves
  •  Price line, demand line, marginal revenue line
  •  Marginal revenue = slope of total revenue
  • TR = P x Q + 0
  •  Marginal cost  = slope of total cost
  • Graphical derivation of the Supply curve S = MC above AVC
  • Short run profit maximization analysis 
  • Short run shut down point, break even point




CHAPTER 23:  (PERFECTLY) COMPETITIVE MARKETS


DEFINITIONS/CONCEPTS: YOU SHOULD BE ABLE TO DEFINE AND IDENTIFY THE FOLLOWING.
  • Explicit costs, implicit costs, opportunity costs 
  • Accounting profit , economic profit, normal profit = 0
  • Long run versus short run
  • Increasing, Constant, and Decreasing Costs
  • Economies of Scale

TOPICS/RELATIONSHIPS: YOU SHOULD BE ABLE TO INTERPRET AND EXPLAIN THE FOLLOWING.
  •  Price-taking behavior, competitive firm, market power
  • Perfect competition and the size of firms
  • Decreasing costs and the breakdown of Perfect Competition

MATH/GRAPHS: YOU SHOULD BE ABLE TO IDENTIFY, INTERPRET AND EXPLAIN THE FOLLOWING MATH & GRAPHICAL RELATIONSHIPS AND CONCEPTS.
  • The Demand and Supply curves of the Individual Perfectly Competitive Firm
  • Long run  profit maximization analysis
  • Long run shut down point, break even point 
  • Increasing, Constant, and Decreasing Costs
  • Economies of Scale





Econ 201 Short Answer Essay Questions for Midterm #2


1.       Is it true that all producers are motivated only to maximize profit?

 a.   If your answer is yes, explain the following:

a single proprietor's decision not to accept any additional customers in order to
spend more time with his grandchildren;
 
  b.    If your answer is no, then give 2 examples when profit maximization is not the sole
 motivation for a producer.

2.       Write out the Law of Decreasing Marginal Product.

3.       Explain why marginal product must decrease as output is increased.

4.       Write out the Law of Increasing Marginal Cost.

5.       Explain why marginal cost must increase as output is increased.

6.      Why is the Demand curve faced by an inidividual perfectly competitive firm horizontal?

7.       Explain why the Marginal Cost curve intersects the Average Variable and the Average Total
 cost curves at their minimum points.

8.       In perfect competition, why is a firm's maximum profit equal to zero?

9.       Explain the profit maximizing condition for a perfectly competitive firm.