Econ110A-111 ASSIGNMENT

DATE: 11/13/2023

Austin McAuley 20405540

Course: Econ 110A-111

Section: F23

Assignment #: 2
A2-1)
False
Economic profit of a firm is calculated as total revenue (TR) minus total costs (TC). These
costs specifically include explicit and implicit costs. The Queens grad's new firm’s annual
revenue is $500,000, and its annual hired labour and rental costs are $300,000, adding up to
a total cost of $300,000. However, due to implicit costs we must also factor in the $200,000
opportunity cost of leaving his other job. Hence, the economic profit is $500,000 - $300,000 -
$200,000=0. The true economic profit is $0 (TR-TC= Economic profit).

A2-2)
TRUE
A decrease in the wage rate or other variable input prices will shift down the marginal cost
(MC) curve. This is because lower input costs reduce the additional cost incurred when
producing each additional unit of output. Therefore, firms can produce the same quantity of
output at a lower cost, leading to a downward shift in the MC curve.

A2-3)
True
When increasing output, firms may initially incur higher average costs (AC), particularly if
they are using some fixed inputs. Firms may experience diminishing returns to scale when
they attempt to increase production without being able to modify all of their inputs, which
raises the average cost of producing extra units. As they fully utilize economies of scale,
businesses will improve production and reduce average costs in the long run, with greater
flexibility to modify all inputs.
A2-4)
TRUE
In the short run, where the government imposes an environmental tax on firms in a
competitive industry, firms initially bear the full burden of the tax. Initially, they assume the
cost of the tax without passing it on to consumers immediately. However, in the long run,
firms typically adjust their production levels or even exit the industry, which will result in
changes to supply and prices. In the end, consumers will likely bear the tax burden through
higher prices in the long run as firms adjust to the new tax regime.

A2-5)

A)
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