Economics - Economics Section 1
1. Under perfect competition, what will a firm least likely earn in the long run?
- Option : C
- Explanation : Under prefect competition, a firm only earns normal profit in the long run as competition drives prices down to long-run marginal cost. Economic profit is zero.
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- Option : B
- Explanation : B is correct. Analyst 1 is not correct because labor productivity is calculating by dividing total output by total labor. Analyst 2 is correct.
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- Option : C
- Explanation : The point at which, the benefit of employing one more labor starts to decrease is termed as diminishing marginal product of labor.
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4. The Production Manager of a manufacturing company has gathered the following information:
| Labor (L)Â | Total Product (TP) |
| 0Â | 0 |
| 1Â | 175 |
| 3Â | 450 |
| 5Â | 600 |
| 7Â | 675 |
| 9 | 700 |
The level of labor at which the average product of labor is highest is closest to:
- Option : A
- Explanation : Average product = Total product / labor. Average product of one worker is 175. Average product of 3 workers = 450 / 3 = 150. Average product of 5 workers = 600 / 5 = 120. It is the highest for 1 worker.
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5. The Production Manager of a manufacturing company has gathered the following information:
| Labor (L)Â | Total Product (TP) |
| 0Â | 0 |
| 1Â | 175 |
| 3Â | 450 |
| 5Â | 600 |
| 7Â | 675 |
| 9Â | 700 |
As labor is added, the firm experiences increasing returns. The number of workers where increasing marginal returns turn to diminishing marginal returns is closest to:
- Option : B
- Explanation : Marginal product = Change in total product / Change in labor. The increase in MP from 0 to 1 worker is 175. This is the only point where marginal product increases.
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