CHAPTER 1 & 2

ECONOMICS METHOD AND ECONOMICS PROBLEM

• The key word of definition in economics is choose. Economics is the study of how individuals and
societies choose to use the scarce resources that nature and previous generations have provided.
• Four main idea to learn economics :
1. Learn way of thinking has important reasons for studying economics. There are three fundamentals
concepts to approach the economics.
a. Oppurtunity cost is the best alternative that we forgo, or give up, when we make a choice or a
decision.
b. Marginalism is in weighting the costs and benefit that arise from the decision.
c. Efficient market is a market in which profit opportunities are eliminated almost instantaneously.
The way to reveal concept efficient market is “ there’s no free lunch” .
2. To Understand Society
3. To Understand Global Affairs
4. To Be An Informed Citizen
• Microeconomics is the branch of economics that examines the functioning of individual industries
and the behavior of individual decision-making units-that is, business firms and households.
• Macroeconomics is the branch of economics that examines economic behavior of aggregates.
• Positive economics : an approach to economics that seeks to understand behavior and the operation of
systems without making judgements. It describes what exists and how it works.
• Normative economics : an approach to economics that analyzes outcomes of economic behavior,
evaluates them as good or bad, and may prescribe courses of action. This method is also called policy
economics.
• Every society has some system or mechanism that transforms that society’s scarce resources into
useful goods and services. Production is the process by which resources are transformed into useful
forms.
• Three basic questions all societies must decide to understand economics system:
a. What will be produced?
b. How will it be produced?
c. Who will get what is produced?
• The production possibility frontier (ppf) is a graph that shows all of the combinations of goods and
services that can be produced if all of society’s resources are used efficiently. The PPF ilustrates an
important economic concepts such as scarcity, unemployment, inefficiency, and incerasing the
opportunity cost of economic growth.
 CHAPTER 1 & 2
ECONOMICS METHOD AND ECONOMICS PROBLEM

Fill In The Blank

1. is a statement or set of related statements about cause and effect, action and reaction.
2. Economics is a study how people make .
3. Even in relatively unfettered market economies, governments redistribute income and wealth, usually
in the name of fairness or .
4. is a market in which profit opportunities are eliminated almost instantaneously.
5. Opportunity cost arise because resources are .
6. Resources or factors of production are the into process of production, goods and services of
value to households are the of the process of production.
7. The central institution through which a laissez-faire system answer the basic question is the
(which buyers and sellers interact and engage in exchange).
8. The process of using resources to produce new capital is called .
9. The government ought to expand the “Bantuan Langsung Tunai” program in order to help the poor.
The statement is an example of economics.
10. A formal statement of a presumed relationship between two or more variables is definition of
________.

True or False

1. To be an informed citizen requires a basic understanding of economics.

2. Opportunity cost is not the opportunity we chose, but the value of the next best alternative we didn’t
choose.
3. The collection and use of data to test economic theories is called descriptive economics.
4. A graphic called production possibility frontier shows all the combination of goods and services that
can be produced if all of society’s resources are used efficiently.
5. The effect of government “Bantuan Langsung Tunai” program to the daily consumed by poor people is
conducting normative economics analysis.
6. Because resources are scare, the opportunity cost of every investment in capital is forgone present
consumption.
7. Economic growth shifts the production possibility frontier curve up and to the right.
8. A producer has an comparative advantage in the production of a good or service if it can produce that
product using fewer resources.
9. Equity is a condition in which national output is growing steadily, with low inflation and full
employment of resources.
10. In a free market system, individual people and firms pursue their own self-interests with
regulation of government either directly or indirectly.

Multiple Choice

1. Why study economics ?

a. To examines the ways in which households and firms actually pay for their purchases.
b. To analyzes the economic function of legal rules and institutions.
c. To understand how the businesses compete.
d. To learn a way of thinking.
2. What a economy that produces what people want at the least possible cost?
a. Efficiency economy.
b. Command economy.
c. Laissez-faire economy.
d. Free trade economy.

3. In formulating economic theory, what concept that help us simplify reality to focus on the
relationships that interest us?
a. Variable.
b. Model.
c. Post hoc, ergo propter hoc.
d. The Ceteris Paribus.

4. The production possibility frontier curve has a negative slope that indicates ...
a. The trade-off that a society faces between two goods.
b. To increase the production of one good without decreasing the production of the other.
c. The economy can choose any combination of output.
d. None of the above.

5. Consider the firgure below. The shifts in the ppf were not parallel, because …

a. The productivity decreases were more dramatic for capital goods than for consumer goods.
b. The opportunity cost of building more capital goods rises.
c. The productivity increases were more dramatic for capital goods than for consumer goods.
d. The opportunity cost of producing more of either consumer goods or capital goods rises.

6. Which one of the following questions is not basic economic question that all societies must answer?
a. What form the government should we adopt?
b. How is it produce?
c. Who gets what is produce?
d. What gets produce?

7. Consider the table below. According the theory of comparative advantage. Which country should
spcialize in the production of radio?

Output per Day of

 Work
Radi Television
o
Indonesi 6 3
a
China 1 2

a. Neither country has a lower opportunity cost of producing food than the other; thus, specialization
and exchange is not necessary.
b. China.
c. Indonesia.
d. The opportunity cost of producing food in Indonesia is the same as in China; therefore,
specialization and exchange are not necessary.

8. What is microeconomics?
a. The studies trade flows among countries and international financial institutions.
b. The deals with the factors that determine wage rates, employment, and unemployment.
c. The branch of economics that examines the functioning of individual industries and the behavior
of individual decision-making units.
d. The studies the potential failure of the market system to account fully for the impacts of
production and consumption on the environment and on natural resource depletion.

9. Which of the following statements are examples of positive economic analysis?

a. Allowing Chile to join NAFTA would cause wine prices in the US to drop.
b. The inheritance tax should be repealed because it is unfair.
c. The government should redistribute wealth from the rich to the poor.
d. a and b.

10. Four criteria are frequently applied in judging economic outcomes:

a. Opportunity cost, marginalism, efficient markets, equity.
b. Efficiency, equity, growth, stability.
c. Scarcity, stability, full employment, market.
d. All of the above.

Essay

1. Identify the slope for each question :

a. P = 35 – 10 qD
b. P = 2000 – 135qD
c. P = 100 + 2 qD
2. Explain about positive and normative economics! Give example (minimal 3) for each categories to
support your statement!
3. There are three fundamental concepts in studying economics. Please explain!
4. What differences between of comparative advantage and absolute advantage? Explain it and give the
examples!
5. What is the production possibility frontier? Explain briefly and draw the graph!
6. Identify the opportunity cost for these statement below :
a. Diana decided working at Chevron which has wage IDR 20 million per a month rather than going
to Germany for her master degree
 b. Mandiri Tbk. built new branch at some provinces in Indonesia instead paying dividend to the
shareholders.
7. China and Japan produces a wheat and tangerine. Both countries have 3000 workers. This is the
production per month for worker’s in both countries :

Basket of Basket of
wheat tangerine
Labor in China 80000 45000

Labor in Japan 25000 20000

a. Which country has an absolute advantage in the production of wheat and tangerine?
b. Which country has a comparative advantage in the production of wheat and tangerine?
c. Draw the PPF curve to both countries!
8. There are three fundamental concepts in studying economics. Explain it!
9. Explain clearly this statement below:
a. Consumer Sovereignity
b. Free Enterprise
10. Is there any difference between opportunity cost and trade off? Explain it!
 CHAPTER 3, 4 & 5
DEMAND, SUPPLY, MARKET EQUILIBRIUM, AND ITS ELASTICITY

• The law of demand indicates a negative relationship between price level and quantity of demand in a
period so when price level increased causes quantity of demand decreased, vice versa.
• Quantity demanded may change due to changes in the price level that caused movement along the
demand curve, while the demand for most goods may change due to changes in income, wealth,
tastes, prices of other goods, and expectations that caused a shift in the demand curve.
• The law of supply indicates a positive relationship between price level and quantity of supply in a
period so when price level increased causes quantity of supply increased, vice versa.
• Quantity supplied may change due to changes in the price level that causes movement along the
supply curve, while the supply for most goods may change due to changes in cost of production, and
prices of related goods that caused a shift in the supply curve.
• Market equilibrium occurs when the quantity demanded equals the quantity supplied which resulting
equilibrium price level and equilibrium output. When the quantity demanded exceeds the quantity
supplied will occur excess demand (shortage), could be caused by a price ceiling which the price
level is below the equilibrium price. When the quantity supplied exceeds the quantity demanded will
occur excess supply (surplus), could be caused by a price floor which the price level is above the
equilibrium price.
• Resource allocation is the market system determines the allocation of resources among produces
and the final mix of outputs, price rationing is the market system distributes goods and services on
the basis of willingness and ability to pay.
• Consumer surplus is the difference between the maximum amount a person is willing to pay for a
good and its current market price, the area is below a demand curve and above a price level.
Producer surplus is difference between the full cost of production for the firm and the current
market price, the area is above a supply curve and below a price level.
• The dead weight loss is the net loss in consumer surplus and producer surplus due to reduced
production or excess in production.
• Elasticity is a general concept that can used to quantify the response in one variable when another
variable changes. Price elasticity of demand measures how responsive consumers are to changes in
the price of a product.
c h ange∈quantity of demand
Price elasticity of demand = c h ange∈ price level

• The types of elasticity of demand are perfectly inelastic (E d=0), inelastic (0<Ed<1), unitary elastic
(Ed=1), elastic (Ed>1), and perfectly elastic (Ed=~).

c h ange∈quantity demanded of Y
• The cross elasticity = c h ange∈ price level of X ; when E>0 indicates both of goods

are substitutes and when E<0 indicates both of goods are complements.
 CHAPTER 3, 4 & 5
DEMAND, SUPPLY, MARKET EQUILIBRIUM, AND ITS ELASTICITY

Fill In The Blank

1. The changes in the price of good X leads to changes in __________.

2. If the beef sales increased 50% when the price decreased 35%, then the elasticity of demand is
________.
3. The market system distributes goods and services on the basis of willingness and ability to pay is
called ________.
4. A demand curve has ________ slope indicates the relationship between ________ and ________.
5. The clothes traded in the ________ market while the labor traded in the ________ market.
6. The difference between the current price and the total cost of production is called _______.
7. When income falls, the demand for ________ goods will rise.
8. An increase in production cost caused the supply curve ________ to the ________.
9. Quantity of demand not respond at all when there are changes in prices, the kind of elasticity of
demand is ________.
10. The changes in _____ caused movement in the supply curve.

True or False

1. An increase in the price of good X causes a decrease in the demand for most goods.
2. Cost of production, income, and prices of related products are determinant of supply.
3. Surplus occurs when the quantity of supply is more than quantity of demand.
4. In the input market, households offer factors of production while the firms made the demand factors of
production.
5. Suppose the demand function is Qd x=1000-20Px. When a price is Rp 25, then quantity demanded of X
is 300 units.
6. Law of supply shows a positive relationship between quantity of supply and current price.
7. Floor price occurs when a current price below a equilibrium price.
8. In the equilibrium, there is no tendency for price change.
9. Percentage an increase in the price of X is 40% causes a decrease in the quantity demanded of the Y by
20%, then the goods are substitutes.
10. Decline in the shoe prices by 50% led to an increase in the quantity of shoes demanded by 60%,
then the elasticity of demand is a elastic type.

Multiple Choice

1. Which factors led to a shift in the supply curve?

a. taste, technology, and input prices.
b. input prices, income, and output price.
c. technology, wage, and prices of related goods.
d. expectation, technology, and input prices.

2. The demand function of shoes in PT ABCD is Qd x=5000-100Px. In early 2012 a price of shoe is $30
but in early 2013 a price of shoe increase to $35. What will happen in the demand curve of shoes?
a. Shift to left, QD become 500
b. Move to left, QD become 1500
c. Shift to left, QD become 1500
d. Move to left, QD become 1500
3. Where is the consumer surplus?
a. above the supply curve and above the price level
b. below the demand curve and above the price level
c. below the demand curve and below the price level
d. above the supply curve and below the price level

4. In Ramadhan, chili price increased from Rp 30.000 to Rp 90.000 which causes a decrease in the
quantity demanded and the elasticity of demand is a -0.5. What percentage a decrease in quantity
demanded?
a. 1% b. 10% c. 100% d. 200%

5. The wave demonstrations demanded that the government to raise the minimum wage from Rp
1.500.000 to Rp 2.000.000. This will result ...
a. excess of labor c. equilibrium
b. shortage of labor d. nothing happen

6. According to side curve, when a income increased cause a decreased of the quantity demanded of
demanded of X. So X is …
a. Inferior
b. Normal
c. Complements
d. Substitutes

7. At the price level of $ 4 quantity supplied of pants by Ohaye, Inc is 1000 units, when the price rise to $
8 the quantity supplied change to 3,000 units. What a supply function of pants by Ohaye, Inc?
a. QsL=1000+500PL c. QsL=-1000-500PL
b. QsL=1000-500PL d. QsL=-1000+500PL

8. What are the elasticity of demand at A-B and C-D?

a. -0.5 and -4
b. 4 and 0.5
c. -4 and -0.5
d. 0.5 and 4

9. If the price of a cup of juice increased from Rp 6.000 to Rp 10.000 and the quantity demanded falls
from 20 cups to 15 cups, then the elasticity of demand is ....
a. -2.68 b. -0.49 c. -0.63 d.-0.37
10. According to side curve, how much a producer when price level at Rp 1000?
a. Rp 60.000
b. Rp 1.000
c. Rp 30.000
 d. Rp 20.000

Essay

1. Complete the following demand schedule and draw the demand curve if Harga Qd
known demand function is Qdx=500-25Px. (Rp) (Uni
t)
20 ____
____
_____ 125
2. ___
a. What a difference between normal good and inferior good (give _____ 250
examples)? What will happen to both quantity demanded if ___
income increased (draw the curves)? 5 ____
b. What a difference between substitutes good and complements good ____
(give examples)? What will happen to quantity demanded of X if a _____ 500
price of substitutes good decreased and to quantity demanded of Y if a ___
price of complements good decreased (draw the curves)?
3. Find the equilibrium of these equation:
Qdx=4000-500Px and Qsx=-1000+2000Px
Complete your answer with the graph!
4. Explain each conditions and draw graphically!
a. For protect farmers, the government set a minimum price of grain.
b. The LPG price should not exceed the price set by the government.
5. Explain the difference between quantity of supply and a change of supply! What will happens to
price level and Qs if:
a. The workers demanding higher wages and was granted by firm.
b. A price level of X increased.
6. Why the demand curve can be cut the X-axis and Y-axis? Explain!
7. What are the differences between types of elasticity of demand like elastic, inelastic, unitary elastic,
perfect inelastic, and perfect elastic?

8. Complete a table below:

P Q Εd Type of Elasticity
Rp 50 - -
20.000
Rp 45 ____ ________
 29.000 ____
_____ 18 -1 ________
___
Rp ____ 0 ________
45.000 ____
Rp 30 ____ ________
30.000 ____

9.
a. Calculate the consumer suplus and
producer surplus
b. What will happen to consumer surplus
and producer surplus if the output
production falls to 100 units?

10.
a. Quantity demanded of X changes from 100 units to 125 units when the price of X changes from
Rp 3.000 to Rp 2.500, while the price of Y changes from Rp 8.000 to Rp 6.000 causes quantity
demanded of X changes from 100 units to 150 units. Calculate the cross elasticity and
determined a relationship between these goods!
b. The initial price of good X is Rp 2.000 and the quantity demanded of X is 25 units, while the
price of Y changed from Rp 5.000 to Rp 7.000 causes quantity demanded of X to 30 units.
Calculate the cross elasticity and determined a relationship between these goods!
 CHAPTER 6
HOUSEHOLD BEHAVIOR AND CONSUMER CHOICE

• A key assumption in the study of household and firm behavior is that all input and output markets are
perfectly competitive.
• Perfect competition is an industry structure in which there are many firms, each small relative to the
industry, producing virtually identical (or homogeneous) products and in which no firm is large
enough to have any control over price.
• Perfect knowledge is the assumption that households posses a knowledge of the qualities and prices
of everything available in the market, and that firms have all available information concerning wage
rates, capital costs, and output prices.
• Every household must make three basic decisions: (1) how much of each product, or output, to
demand; (2) how much labor to supply; and (3) how much to spend today and how much to save for
the future.
• It is best to think of the household choice problem as one of allocating income over a large number
of goods and services. A change in the price of one good may change the entire allocation.
• Households allocate income among goods and services to maximize utility. This implies choosing
activities that yield the highest marginal utility per dollar. In a two-good world, households will
choose to equate the marginal utility per dollar spent on X with the marginal utility per dollar spent
on Y. This is the utility-maximizing rule.
• The labor supply curve is a diagram that show quantity of labor supplied at different wage rates. Its
shape depends on how households react to changes in the wage rate
• In the labor market, a trade-off exists between the value of the goods and services that can be bought
in the market or produced at home and the value that one places on leisure. The opportunity cost of
paid work is leisure and unpaid work. The wage rate is the price, or opportunity cost, of the benefits
of unpaid work or leisure.
• In addition to deciding how to allocate its present income among goods and services, a household
may also decide to save or borrow. When a household decides to save part of its current income, it is
using current income to finance future spending. When a household borrows, it finances current
purchases with future income.
 CHAPTER 6
HOUSEHOLD BEHAVIOR AND CONSUMER CHOICE

Fill In The Blank

1. ___ goods are goods for which demand goes up when income is higher and for which demand goes
down when income is lower.
2. Consumer ___ is the difference between the maximum amount a person is willing to pay for a good
and its current market price.
3. ___ is the satisfaction, or reward, a product yields relative to its alternatives.
4. The total amount of satisfaction obtained from consumption of a good or service is called ___.
5. ___ the more of one good consumed in a given period, the less satisfaction (utility) generated by
consuming each additional (marginal) unit of the same good.
6. The shape of the labor supply curve depends on households react to change in the ___ rate.
7. The set of options that is defined and ___ by a budget constraint.
8. When income rises, demand for normal goods increases. This is called ___.
9. Utility maximizing rule is equation the ratio of the ___ utility of a good to its price for all goods.
10. Consumption changes because purchasing power changes is called the ___ effect.

True False

1. Change in income can lead demand curve movement along.

2. Labor supply curve is a diagram that show the quality of labor supplied at different wage rates.
3. Perfect subtitution is the assumption that households posses an information of the qualities and prices
of everything available in the market.
4. In general, the budget constraint: Px.X + Py.Y = I
5. Perfect subtitutes are identical product.
6. In input market, household demand resources.
7. The slope of an budget contraint is the ratio of the marginal utility of X to the marginal utility of Y.
8. If we impose a constraint of limited income and fixed prices on households, those households would
not be free to choose which goods to buy and which not to buy.
9. A change in price of one good can`t change the entire allocation of income.
10. The real cost of a good or services is its opportunity cost.

Multiple Choice

1. Among the basic assumption made in this and some of the following chapters is perfect
competition. One of the characteristics of perfectly competitive industries is that there are ...
a. A few firms, and possibly just a single firm producing the entire market output at times.
b. A relatively small and stable number of firms, each of considerable size.
c. Many firms, each small and stable relative to size of the industry.
d. All of the above are possibilities in a perfectly competitive industry.

2. The complex set of institutions in which suppliers of capital (households that save) and the demand for
capital (firms wanting to invest) interact is called …
a. Financial market
b. Capital market
c. Labor market
 d. Financial capital market

3. The anaysis of the interaction between firms and households assumes that …
a. Labor and capital are supplied by firms
b. Labor and capital are supplied by household
c. The demand curve for labor illustrates that households participation in the labor market
d. All of the above

4. When the price of something we buy ____ , we are better off. When the price of something we buy
_____, we are worse off.
a. Rises. falls
b. Rises, rises
c. Falls, rises
d. Falls, falls

5. The opportunity cost of present consumption in terms of foregone future consumption is called …
a. Price
b. Interest rate
c. Constant return to scale
d. Wage

6. The additional satisfaction gained by the consumption or use of one more unit of a good or service is
called …
a. Maximizing Utility
b. Total Utility
c. Utility
d. Marginal Utility

7. If a person has an income of $ 2000 and is known Px = $ 200 and Py = $ 250. Then the slope of his
budget constraint is …
a. 200/2000
b. 250/2000
c. 200/250
d. -200/250

8. If Px = $ 150 and Py = $ 100, while MUx = 12, the MUy should be …

a. 8
b. 10
c. 12
d. 18

9. The shapes of the indifference curves depend on the preferences of the consumer, and the whole set of
indifference curves is called ...
a. Accumulation indifference
b. Marginal rate of thecnical subtitution
c. Marginal Utility
d. Preference map
10. The real cost of a good or services is its opportunity cost, and opportunity cost is determined by …
a. The budget constraint
b. The budget line
 c. Relative price
d. Total utility

Essay
1. Every household must make basic decision. Please mention and explain the household ddecision in
output market!
2. Refer to the figure below. Suppose that the income of the consumer equals $20. Use the information
on the graph to the determine the price of goods Y and X.

3. Refer to the figure below. What explains the moves in

the budget lines in graphs A and B?

4. Explain about the Law of diminishing marginal utility and give an example!
5. Supposed a person chooses to consume a combination of clothing and a motorcycle. If there is an
increase in world oil price. How does it affect the consumption of goods? Explain with graph!
6. Mention and explain factors influence the quantity of a given good or service demanded by a single
household!

Refer to the figure. Which point is preferred and not preferred to the others? explain your reason!
 8. Explain income and substitution effects of a price change for a normal goods!
9. Explain the diffrence between income and subsitution effects of a wage change!
10. Explain about the paradox of value!
 CHAPTER 7
THE PRODUCTION PROCESS

• Production is the process by which inputs are combined, transformed, and turned into outputs.
• The assumption are the firm is in the competitive industry where consists of many firms, relatively
small compare to the industry, and the product is homogeny.
• All firms must make several basic decisions to achieve maximum profits: (1) How much output to
supply, (2) Which production technology to use, (3) How much of input to demand.
• Profit (economic profit) is the difference between total revenue and total cost. Profit = total revenue -
total cost
• Total revenue is the amount received from the sale of the product (q x P).
• Total cost (total economic cost) is the total of (1) out-of-pocket costs, (2) normal rate of return on
capital, and (3) opportunity cost of each factor of production.
• Normal rate of return is a rate of return on capital that is just sufficient to keep owners and investors
satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free
government bonds.
• Short run: period of time for which two conditions hold: The firm is operating under a fixed scale
(fixed factor) of production, and firms can neither enter nor exit an industry.
• Long run: period of time for which there are no fixed factors of production: Firms can increase or
decrease the scale of operation, and new firms can enter and existing firms can exit the industry.
• The Bases of Decisions: (1) The market price of output which determines potential revenues, (2) The
techniques of production that are available, and (3) The prices of inputs.
• Production function or total product function is a numerical or mathematical expression of a
relationship between inputs and outputs.
• Marginal product is the additional output that can be produced by adding one more unit of a specific
input, ceteris paribus.
∆TP TP2 - TP 1
• MP = = , where X is input.
∆X X2 - X 1

• Law of diminishing returns occurs when additional units of a variable input are added to fixed inputs
after a certain point, the marginal product of the variable input declines.
• Average product is the average amount produced by each unit of a variable factor of production.
• Two things determine the cost of production: (1) Technologies that are available and (2) input prices.
 CHAPTER 7
THE PRODUCTION PROCESS

Fill in The Blank

1. ____________ is the difference between total revenue and out of pocket cost, while ___________is
the difference between total revenue and total cost of production, including opportunity cost.
2. Technology that relies heavily on human resources is called _______.
3. ____________ is a rate of return on capital that is just sufficient to keep owners and investors
satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free
government bonds.
4. Cost of production is determined by ___________ and __________.
5. A graph that shows all the combinations of two inputs which are available for a given total cost is
called ___________.
6. ___________ is the process by which inputs are combined, transformed, and turned into outputs.
7. ___________ is the average amount produced by each unit of a variable factor of production.
8. Firm in the competitive industry produce _________ product, so the product cannot be differentiated
or identical with other firm in the industry.
9. Total revenue is quantity multiplied by .
10.If the labor is increased from 6 persons to 8 and the output also increases from 14 to 28, the marginal
product is _________.

True or False

1. Firm can enter to the industry and exit from the industry in the long run.
2. Firm will produce more output when the average production is decreasing.
3. Average product is at its minimum at the point of intersection with marginal product.
4. Law of diminishing return shows how marginal product declines even if the total of production is
still increasing.
5. Production function shows how much output can be produced from the sets of inputs.
6. In perfect competitive market, firm take market price as given, which implies that the market
demand is infinitely elastic.
7. As long as marginal cost of production is greater than the average cost of production, the average
cost of production will decrease.
8. Suppose the price of the output is increasing, then the firm will decrease the output they produce.
9. Technology determines the proportion of input. If the technology is capital intensive, than the
amount of labor is greater than the amount of capital.
10.In the short run, the firm operates under a variable cost.

Multiple Choices

1. What is the primary object of a firm?

a. Maximizing revenue
b. Maximizing cost
c. Maximizing profit
d. Maximizing utility

2. What is the difference between long run and short run from the perspective of production theory?
a. In the short run, only capital varies, and in the long run both capital and labor varies.
b. In the short run, only labor varies, and in the long run both capital and labor varies.
c. In the short run, all inputs are variable, and in the long run they are invariable.
 d. In the short run, all inputs are invariable, and in the long run they are variable.

3. Which of the following is NOT a property of isoquant?

a. Always non-linear
b. Further out is better
c. Set of inputs that produce the same quantity
d. Downward sloping

4. The component/s of total cost:

a. Out of pocket costs
b. Reasonable rate of return on capital
c. Opportunity cost of each factor of production
d. All answers are true

5. In competitive industry each buyer and seller ________

a. Is a price taker
b. Produce different products
c. Believes that can influence price
d. Prevents the entry of competitors

6. The cost of production will be ________, if the proportion of input is ________.

a. Decrease, increasing
b. Increase, constant
c. Constant, decrease
d. Increase, increasing

7. The firm decide how much to product is based on, except:

a. The price of the output in the market
b. How much the other firm produce their product
c. How much to pay the employer and the capital
d. Whether using the labor intensive or capital intensive

8. Suppose Unilever Company gets sales $ 250.000 and the production cost is $217.000. If the initial
investment is $200.000 with the interest rate in the market is 8%. Which one is correct?
a. The firm has $33.000 economic profit
b. The firm has $17.000 economic profit
c. The firm has $17.000 accounting profit
d. The firm has $33.000 accounting loss

9. Marginal Product will intersect with average product at:

a. Average product maximum.
b. Average product minimum.
c. Marginal product maximum.
d. Marginal product minimum.

10. Look at the graph below. Which point that show the cost minimizing firm?
 a. Point C
b. Point B and D
c. Point B
d. Point C and D

Essay

1. Mention the bases of decision of a firm who compete in perfect competitive industry!
2. Explain the differences condition of the firm in the long run and the short run!
3. Suppose the firm has the revenue from sales $ 25,000, while the cost of producing is $ 19,500. How
much is the profit? Is the profit called as economic profit? Explain!
4. One of the assumption in this chapter said that the firm is in perfectly competitive market. Explain
why the firm in perfect competition acts as a price taker?
5. Explain about the law of diminishing return!
6. Look the table below:

L Ou Marginal Average
a tp Product Product
b ut
o
r
0 0 - -
1 4
2 9
3 16
4 25
5 36
6 45
7 50
a. Complete the table!
b. At what point does the law of diminishing return occur? Draw the graph!
 Look at the table below (for no 7 & 8). Suppose a firm want to produce 50 outputs. There are four
technologies that can be used.

O Technolo Technolo Technolog

ut gy A gy B yC
pu
t
K L K L K L
50 7 3 4 6 2 8
10 7 5 5 7 3 8
0
15 8 6 6 7 4 8
0

7. If the price of the labor is $5 and the price of capital is $8, which one is optimal production
technology?
8. Suppose the price of the labor is decreasing to $3 with capital price $8. Now, which one is the
optimal production technology?
9. Look at the graph below!

Show mathematically how MP and AP can be derived from TP!

10.Define Isoquant using a graph and explanation! What is the slope of isoquant curve?
 CHAPTER 8
SHORT-RUN COSTS AND OUTPUT DECISIONS

• There are three decisions facing firms:

a. The quantity of output to supply
b. How to produce that output (which technique to use)
c. The quantity of each input to demand
• The short run is a period of time for which two conditions hold:
1. The firm is operating under a fixed scale (fixed factor) of production,
2. Firms can neither enter nor exit an industry.
• Costs in the short run :
- Fixed cost is any cost that does not depend on the firm’s level of output. These costs are incurred
even if the firm is producing nothing. There are no fixed cost in the long run.
- Variable cost is a cost that depends on the level of production chosen.
TC=TFC +TVC
Where, TC : Total Costs
TFC : Total Fixed Cost
TVC : Total Variable Cost
- Average Fixed Cost (AFC) is the total fixed cost (TFC) divided by the number of units of output
(q).
- Average Variable Cost (AVC) is the total variable cost (TVC) divided by the number of units of
output (q).
- Marginal Cost (MC) is the increase in total cost that result from producing one more unit of
output. Marginal cost reflects changes in variable costs.
• Causes marginal cost is the cost of one additional unit. Average variable cost is the average variable
cost per unit of all units being produced. So, average variable cost follows marginal cost, but lags
behind.
• Sunk costs occurs when firms have no control over fixed costs in the short run.
• The fact, in the short run the firm faces diminishing returns to variable inputs and the firm has limited
capacity to produce output.
• The relationship between marginal cost and average variable cost :
a. When marginal cost is below average cost, AC is declining.
b. When marginal cost is above average cost, AC is increasing.
• Total Revenue is the total amount that a firm takes in from the sale of its output.
TR = P x q
• Marginal Revenue is the additional revenue that a firm takes in when it increases output by one
additional unit.
• In perfect competition, MR = P, therefore, the profit-maximizing perfectly competitive firm will
produce up to the point where the price of its output is just equal to short run marginal cost. The key
idea is that firms will produce as long as marginal revenue exceeds marginal cost.
 CHAPTER 8

SHORT-RUN COSTS AND OUTPUT DECISIONS

Fill in the Blank

1. Total fixed cost divided by the number of units of output is called _____.
2. In the short run, the firm is operating under a _____ factor of production.
3. Total fixed costs and total variable costs together will make up _____.
4. Additional cost caused by the additional of one unit being produced is called_____.
5. Costs that include the full opportunity costs of all inputs include implicit costs is called ___.
6. If a firm produces 250 unit of magazine with the cost incurred about $1320, and the price of each
magazine is $7, how much is the profit that the firm get _____.
7. A declining in average fixed cost since there is an increasing in total output is _____.
8. Marginal cost intersects the _____ at their minimum points.
9. In the perfect competitive market, the demand curve is _____.
10.Firms will keep produce as long as marginal revenue exceeds _____.

True or False

1. In the short run, a firm has no fixed costs because it can expand or exit the industry.
2. Total variable cost always has a positive slope.
3. Marginal costs reflect changes in variable costs.
4. When marginal cost below average variable cost, average variable cost declines toward it.
5. The firm has no choice but to pay them when firm does not produce is a variable cost.
6. The total variable cost curve shows the cost of production using the best available technique at each
output level, given current factor prices.
7. Firms want to maximize their profits by the difference between their marginal revenue and marginal
cost.
8. The profit maximizing output level for all firms is the output level where MR = MC.
9. The marginal cost curve of a perfectly competitive profit maximizing firm is the firm’s short run
demand curve.
10.The maximum profit in perfect competitive market reach when marginal revenue exceeds the
marginal cost.

Multiple Choice

1. Supposed that PT. Tamima produce a book at price $7 and get profit $575. The total cost of that firm
is $4500. How much the quantity produced?
a. 722
b. 723
c. 724
d. 725

2. Which the following curves embodies information about both input prices and technology?
a. The average variable cost
b. The total fixed cost curve
c. The total variable cost curve
d. None of the above
3. Marginal cost intersects the ___ and ___ curves at their minimum point.
a. Total fixed cost, total variable cost
b. Average total cost, average variable cost
c. Total fixed cost, average variable cost.
d. Average variable cost, average marginal cost

4. The process of dividing total fixed costs by dividing total fixed cost by more units of output and
average fixed cost declines as quantity rises is called…
a. Economic cost
b. Accounting cost
c. Sunk cost
d. Spreading overhead

5. The relationship between average variable cost and marginal cost is as follows, except…
a. Marginal cost below average variable cost when average variable cost declining
b. Marginal cost above average variable cost when average variable cost increasing
c. Marginal cost below average variable cost when average variable cost minimum
d. Marginal cost above average variable cost when average variable cost minimum

6. Refer to the figure below, suppose that the market is initially in equilibrium at a price of $5. Then,
market demand increases to D1. What should the firm do?

a. Maintain the level of output constant at 300 units, where ATC is minimum, this will
guarantee maximum profit.
b. Produce 300 units but charge the higher price of $6 in order to maximize profit.
c. Increase the level of output to 350, although it is unlikely that profit will increase.
d. Increase the level of output to 350 units because profit would increase.

7. The profit maximizing level of output for perfect competition firms is where….
a. MR = MC
b. P = MC
c. P = MR
d. MD = MR

8. Refer to the figure below. A phenomenon often calledoverhead is better illustrated by one of the
graphs below. Which one?
 a. Both graphs illustrate that phenomenon.
b. Neither graph illustrates that phenomenon.
c. The graph on the left.
d. The graph on the right.

9. Below are characteristics of perfect competition, except…

a. Homogenous products
b. Free entry and exit industry
c. Price maker
d. Can’t control over prices

10.If a firm produced 500 unit of pencil with cost incurred about $2500 and the price of each pencil is
$6, how much is the profit that the firm get?
a. 450
b. 500
c. 550
d. 600

Essay

1. What cost that are imposed to the firm in the short run?
2. Determine the best technique used by the company at every level of output in order to maximize
profits earned! (if
Pk =3 ; P L=4 )

Units of Input
Product Technique TVC
K L
A 6 4
1 unit output
B 4 6
A 10 8
2 unit output
B 8 10
A 11 6
3 unit output
B 7 12

3. You are given the following cost data :

 T T a. Complete the
T AV AT M T
Q F V P ∏ table!
C C C C R
C C b. Graph AVC, ATC
1 and MC on the
6
0 1 50 same graph.
0
0
1 4. Do you agree or
6
1 4 50 disagree with
0
0 each of the
1 following
6
2 6 50 statements?
0
0 Explain your
1 reasons.
6
3 7 50 a. For a
0
0
1
6
4 8 50
0
2
1
6
5 9 50
0
5
2
6
6 2 50
0
0
2
6
7 5 50
0
0
2
6
8 9 50
0
0
3
6
9 4 50
0
0
4
1 6
0 50
0 0
0
competitive firm facing a market price above average total cost, the existence of economic
profits means that the firm should increase output in the short run even if price is below
marginal cost.
b. If marginal cost is rising with increasing output, average cost must also be rising.
c. Fixed cost is constant at every level of output except zero. When a firm produced no output,
fixed costs are zero in the short run.

5. Explain the concept below :

a. Spreading overhead
b. Sunk cost
c. Price taker
d. MR = MC
6. How is the firm’s profit maximizing quantity affected when there is a change in fixed cost or a
change in variable cost?

7. Based on the information on the graph, fill in the blanks in the table below!

Output TVC TFC TC

100
300
400

8. Explain which of the following is fixed cost or a variable cost for this condition below.
a. The cost of jet fuel used in Android Airlines.
b. Increasing magazine production for 50 exemplar
c. The monthly rent office administration.
d. The salary paid to labor.

9. Which the following statements involves a short-run decision and which involves a long-run
decision? Explain briefly!
a. McD will open 89 more stores abroad than originally predicted, for a total of 1340.
b. For three hours on Tuesday, Starbucks will shut down every single one of its 7,100 stores so
that baristas can receive a refresher course.
c. In the ramadhan month, the AYZ company impose an office hours only from 8.00 am until
4.00 pm.
d. Starbucks is closing 616 stores by the end of March.

10.What is the relationship between marginal costcurve with average total cost and average variable
cost? Explain and draw the diagram.