Assume That a Competitive Economy Can Be Described by a Constant

question 50

Essay

Assume that a competitive economy can be described by a constant returns to scale (Cobb- Douglas) production function and all factors of production are fully employed. Holding other factors constant, including the quantity of labor and technology, carefully explain how a one-time, 50 percent decrease in the quantity of capital (perhaps the result of war damage) will change each of the following:
a.the level of output produced;
b.the real wage of labor;
c.the real rental price of capital;
d.capital's share of total income.

Explain the concept of a firm's supply curve in the context of price and output decisions.

Analyze the impact of market demand on equilibrium prices and profit maximization in purely competitive markets.

Understand the concept of profit maximization for competitive firms and calculate profit per unit.

Identify how to determine portions of total costs that can be recouped in the short run versus shutting down.

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Definitions:

Direct Material

Raw materials that can be directly attributed to the production of specific goods or services.

Applied Overhead

The estimated overhead costs assigned to individual units of production, based on a predetermined rate.

Customized Product

A product specially designed and made according to the specifications and requirements of a particular customer.

Work in Process Account

An account used to track the costs associated with unfinished products during the manufacturing process, including labor, materials, and overhead.