Question & Answer

1. Could the long run and the very long run ever be the same length of time?

2. What will the long-run and very long-run market supply curves for a product look like? How will the shape of the long-run curve depend on returns to scale?

3. In the very long run, new isoquants will have to be drawn as factor productivity changes. An increase in productivity will shift the isoquants inwards towards the origin: less capital and labour will be required to produce any given level of output. Will this be a parallel inward shift of the isoquants? Explain.

Why are Christmas trees and fresh foods often sold cheaply on Christmas Eve? (See Box 6.5 on page 161.)

1. What will happen to an isocost if the prices of both factors rise by the same percentage?

2. What will happen to the isocost of Figure 6.8 if the wage rate rises to £15 000?

Calculate the MRS moving up the curve in Figure 6.5 between each of the points: e–d, d–c, c–b and b–a. Does the MRS diminish moving in this direction?

1. Could isoquants ever cross?

2. Could they ever slope upward to the right? Explain your answers.

If factor X costs twice as much as factor Y (P_x/P_y = 2), what can be said about the relationship between the MPPs of the two factors if the optimum combination of factors is used?

1. Name some industries where external economies of scale are gained. What are the specific external economies in each case?

2. Would you expect external economies to be associated with the concentration of an industry in a particular region?

How has the opening up of trade and investment between eastern and western Europe likely to have affected the location of industries within Europe that have

(a) substantial economies of scale;

(b) little or no economies of scale?

Why are firms likely to experience economies of scale up to a certain size and then diseconomies of scale after some point beyond that?

1. Which of the economies of scale we have considered are due to increasing returns to scale and which are due to other factors?

2. What economies of scale is a large department store likely to experience?

Table 6.4 illustrates five different short-run production functions: i.e. where the number of machines remains constant at one, two, three, four or five. In each case explain if there are diminishing or increasing marginal returns

Why is the minimum point of the AVC curve at a lower level of output than the minimum point of the AC curve?

Fill in the missing figures in the Table 6.3. (Note that the figures for MC come in the spaces between each level of output.)

The following are some costs incurred by a sports footwear manufacturer. Assume the manufacturer wants to increase output over a relatively short time period: i.e. in the economic short-run. Decide whether each one of the following is a fixed cost or a variable cost of expanding output in the short run or has some element of both. Clearly explain any assumptions you have made.

(a) The cost of synthetic leather and mesh materials. (b) The fee paid to an advertising agency. (c) Wear and tear on machinery. (d) Business rates on the factory. (e) Electricity for heating and lighting. (f) Electricity for running the machines. (g) Basic minimum wages agreed with the union. (h) Overtime pay. (i) Depreciation of machines as a result purely of their age (irrespective of their condition).

What implicit and explicit costs would a firm avoid if it decided not to expand production?

1. What is the significance of the slope of the line ac in the top part of Figure 6.1?

2. Given that there is a fixed supply of land in the world, what implications can you draw from Figure 6.1 about the effects of an increase in world population for food output per head?

What would happen to the TPP curve if the quantity of the fixed factor used in production were to increase to a new higher fixed level?

1. How will the length of the short run for the airline depend on the state of the aircraft industry?

2. Up to roughly how long is the short run in the following cases?

(a) A firm supplying DJs for clubs and parties.

(b) Nuclear power generation.

(c) A street food wagon.

(d) Superstore Hypermarkets Ltd.

In each case specify your assumptions.

Remember the question we asked at the beginning of the Chapter 4 (page 105): ‘Do you ever purchase things irrationally? If so, what are they and why is your behaviour irrational?’ Can you explain this behaviour better in the light of behavioural economics?

Give some other examples of decisions where people often change their mind with the passage of time once the costs or benefits become immediate.

According to rational choice theory, the money you’ve already spent – known as ‘sunk costs’ (see page 161) – should be excluded from decision making. However, there is considerable evidence that it does affect consumer behaviour. Using loss aversion, can you explain why this might be the case.

How good are you at making probabilistic judgements? Here is an interesting example. Suppose that one out of every hundred people in the population has a genetic medical condition. There is a test for this medical condition that is 99 per cent accurate. This means that if a person has the condition, the test returns a positive result with a 99 per cent probability; and if a person does not have the condition, it returns a negative result with 99 per cent probability. If a person’s test comes back positive (and you know nothing else about that person), what is the probability that s/he has the medical condition?

Another example of anchoring is partial computation. Assume two different groups of people are given 5 seconds to find the product of eight numbers. The calculation is presented to the first group in ascending order (1 ´ 2 ´ 3 ´ 4 ´ 5 ´ 6 ´ 7 ´ 8) and to the second group in descending order (8 ´ 7 ´ 6 ´ 5 ´ 4 ´ 3 ´ 2 ´ 1). Which group do you think will give the most accurate answers? Explain your reasoning.

Why might the predictions of the rational choice model generally approximate human behaviour in many situations?

How will the following reduce the moral hazard problem?

(a)  A no-claims bonus in an insurance policy.

(b)  You having to pay the first so many pounds of any insurance claim (an ‘excess’).

(c)  The use of performance-related pay.