Minimization of Total Industry Costs of Production Practice Questions | Marginal Revolution University

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Practice Questions

Minimization of Total Industry Costs of Production Practice Questions

Entrepreneurs shift capital and labor across industries in pursuit of profit. Let’s look at this a little more closely. Suppose there are two industries: a high-profit industry, Industry H, and a low-profit industry, Industry L. Answer the questions below about these two industries. If the two industries have similar costs, then what must be true about prices in the two industries? *

a. Prices in Industry H are higher than in Industry L.

b. Prices in Industry H are lower than in Industry L.

c. Indeterminate from the given information.

Suppose instead that the prices in the two industries were identical. In this case, what must be true about the costs in the two industries? *

a. Costs in Industry H are higher than in Industry L.

b. Costs in Industry H are lower than in Industry L.

c. Indeterminate from the given information.

Assuming that prices in the two industries were identical, if labor and capital are moved from Industry L to Industry H, are more units of output lost in Industry L or gained in Industry H? *

a. More units of output are lost in Industry L than are gained in Industry H.

b. More units of output are gained in Industry H than are lost in Industry L.

c. Indeterminate from the given information.

Suppose that two industries, the pizza industry and the calzone industry, are equally risky, but rates of return on capital investments are 5% in the pizza industry and 8% in the calzone industry. Which way will capital flow—from the pizza industry to the calzone industry, or from the calzone industry to the pizza industry? *

a. From pizza industry to calzone industry.

b. From calzone industry to pizza industry.

c. Indeterminate from the given information.

We’ve claimed that the efficient way to spread out work across firms in the same industry is to set the marginal cost of production to be the same across firms. Let’s see if this works in an example. Consider a competitive market for rolled steel (measured by the ton) with just two firms: SmallCo and BigCo. If we wanted to be more realistic, we could say there were 100 firms like SmallCo and 100 firms like BigCo, but that would just make the math harder without generating any insight. (We’ll also ignore fixed costs of starting up the firms just to make things a little simpler. ) The two firms have marginal cost schedules like this: What is the total cost of SmallCo producing 6 units of output?

*

a. $60

b. $130

c. $150

d. $210

e. $280

What is the total cost of BigCo producing 6 units of output? *

a. $30

b. $60

c. $90

d. $120

e. $130

What would the price have to be in this competitive market for these two firms to produce a total of 11 tons of steel? *

a. $30

b. $40

c. $50

d. $60

e. Indeterminate from the given information.

What would the total cost be if BigCo were the only firm in the market, and it had to produce 7 tons of rolled steel? *

a. $40

b. $70

c. $130

d. $140

e. $170

What would total cost be if SmallCo and BigCo let the invisible hand divvy up the work between them to produce 7 tons of rolled steel? *

a. $20

b. $30

c. $70

d. $90

e. $130

Would it make sense to shut down the more inefficient of the two firms? *

a. Yes

b. No

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Principles of Economics Microeconomics

Course (105 videos)

Introduction

Introduction to Microeconomics

Practice Questions

Opportunity Cost and Tradeoffs

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Marginal Thinking and the Sunk Cost Fallacy

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Supply, Demand, and Equilibrium

The Demand Curve

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The Supply Curve

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The Equilibrium Price and Quantity

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Understanding the Demand Curve: Shifts and Consumer Surplus

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What Shifts the Demand Curve?

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Change in Demand vs. Change in Quantity Demanded

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Understanding the Supply Curve: Shifts and Producer Surplus

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What Shifts the Supply Curve?

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Exploring Equilibrium

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Supply and Demand Terminology

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Does the Equilibrium Model Work?

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Elasticity and Its Applications

Elasticity of Demand

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Calculating the Elasticity of Demand

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Office Hours: Elasticity of Demand

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Elasticity of Supply

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Elasticity of Supply: Why Housing is Unaffordable

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Elasticity of Supply: Do Gun Buybacks Work?

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Taxes and Subsidies

Commodity Taxes

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Who Pays the Tax?

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Tax Revenue and Deadweight Loss

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The Price System

A Price Is a Signal Wrapped up in an Incentive

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Markets Link the World

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The Great Economic Problem

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Information and Incentives

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Prediction Markets

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Price Ceilings and Price Floors

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Price Ceilings: Shortages and Quality Reduction

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Price Ceilings: Lines and Search Costs

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Price Ceilings: Deadweight Loss

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Price Ceilings: Misallocation of Resources

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Price Ceilings: Rent Controls

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Rent Control in Mumbai

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Price Floors: The Minimum Wage

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Price Floors: Airline Fares

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Why Do Governments Enact Price Controls?

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Price Controls and Communism

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Trade

The Big Ideas of Trade

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Comparative Advantage

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Another Look at Comparative Advantage

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Comparative Advantage Homework

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Tariffs and Protectionism

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Arguments Against International Trade

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Avengers: The Story of Globalization (Optional)

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Externalities

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Pigouvian Taxes

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Pigouvian Subsidies

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The Coase Theorem

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Trading Pollution

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A Deeper Look at Tradable Allowances

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Externalities and Incentives: The Economics of COVID

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Costs and Profit Maximization Under Competition

Introduction to the Competitive Firm

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Maximizing Profit Under Competition

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Maximizing Profit and the Average Cost Curve

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Entry, Exit, and Supply Curves: Increasing Costs

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Entry, Exit, and Supply Curves: Constant Costs

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Entry, Exit, and Supply Curves: Decreasing Costs

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Competition and the Invisible Hand

Minimization of Total Industry Costs of Production

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The Balance of Industries and Creative Destruction

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Monopoly

Maximizing Profit Under Monopoly

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Office Hours: Calculating Monopoly Profit

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The Monopoly Markup

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The Costs and Benefits of Monopoly

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Price Discrimination

Introduction to Price Discrimination

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The Social Welfare of Price Discrimination

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Labor Markets

The Marginal Product of Labor

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Econ Duel: Is Education Signaling or Skill Building?

Human Capital and Signaling

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The Tradeoff Between Fun and Wages

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Compensating Differentials

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Do Unions Raise Wages?

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Public Goods and the Tragedy of the Commons

Public Goods and Asteroid Defense

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A Deeper Look at Public Goods

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The Tragedy of the Commons

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Asymmetric Information

Asymmetric Information and Used Cars

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Asymmetric Information in Health Insurance

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Solutions to Moral Hazard

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Consumer Choice

Introduction to Consumer Choice

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Budget Constraints

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Indifference Curves

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Consumer Optimization

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Office Hours: Game Theory

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Principles of Economics: Microeconomics

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