Q EC314: Managerial Economics Chapters 8 and 9 Essay Test This test is worth 60 points total. Be sure to answer each question clearly and concisely! Avoid answering questions that weren’t asked. Before attempting this test, make sure that you have studied a) Chapters 8 & 9 from the textbook, b) the instructor’s comments on Chapters 8 & 9, c) the Chapter Readings for Chapters 8 & 9, and the Chapter Perspectives for Chapters 8 & 9. Chapter 8: Production Costs and the Theory of the Firm A. Explain how it can be that something that an accountant calls a profit is actually a cost from the economist’s point of view. What is the difference between economic and accounting profits? (8) B. Explain Ronald Coase’s explanation for why firms exist.(6) C. Using the model developed in Chapter 7 of the textbook, explain what is meant by the idea of an “optimum-size firm.” What forces would make firms in one industry on average larger than firms in another industry (e.g. grocery stores are generally much larger than beauty parlors)? (16) Chapter 9: Production Costs in the Short-run and the Long-run A. In the competitive model, the short-run supply curve of a firm is its marginal cost curve (above minimum average variable cost) and the market supply curve is the horizontal summation of those marginal cost curves across all firms. Since marginal cost curves are upward-sloping, short-run supply curves must also be upward-sloping. Why – what is it that causes marginal cost curves to be upward-sloping in the short-run? (6) B. In the long-run, a firm’s costs of production are shown by the long-run average cost curve. (12) (1) What forces explain the typical shape of the long-run average cost curve? (6) (2) How is the shape of the long-run average cost curve related to what the firms in an industry will look like? Will there be lots of firms or just a few, or perhaps even just one? Will all the firms be about the same size or will firms of different size coexist? (How do you know?) (6) C. What is the “first mover advantage” and why does the textbook call it a myth? (12)