Suppose capital and labor are perfect substitutes resulting in a production function of q = K + L. That is, the isoquants are straight lines with a slope of -1
Derive the long-run total cost function TC = C(q) when the wage rate is w and the rental rate on capital is r.
The firm will always hire the input that is cheapest. So, the function is
If w < r, TC = wq.
If w > r, TC = rq.
If w = r, either equation works.
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Perfectly competitive markets will tend to under-allocate resources to nonexclusive public goods because a. these goods are produced under conditions of increasing returns to scale
b. no single individual can appropriate the total benefits provided by the purchase of such goods. c. these goods are best produced under conditions of monopoly. d. no private producer can provide the capital necessary to produce such goods.
The explanation for the slope of
a. the supply of loanable funds curve is based on the logic that a higher real interest rate leads to higher saving. b. the demand for loanable funds curve is based on the logic that a higher interest rate leads to higher saving. c. the supply of loanable funds curve is based on the logic that a higher real interest rate leads to lower saving. d. the demand for loanable funds curve is based on the logic that a higher interest rate leads to lower saving.
When moving along a market demand curve, the prices of related goods are assumed to be constant. With an aggregate demand curve,
A. the assumption is meaningless because we are using a market basket for all goods and services. B. the prices of related goods have an inverse relationship. C. all goods are assumed to have the same price. D. the same assumption holds true.
The fact that at the competitive equilibrium nobody can be made better off without making someone else worse off implies that
A) the equilibrium is Pareto efficient. B) the equilibrium is not Pareto efficient. C) the prices need to adjust further. D) further gains from trade are possible.