EC 301 Test #2

Which of the following statements is FALSE regarding economic and accounting costs?

Economic costs only include implicit costs.

The marginal rate of technical substitution (MRTS) is equal to MPl/MPk

True

At the point of optimum combination of two inputs,

the slopes of the isoquant and isocost are equal.

A perfectly competitive firm maximizes profit by producing 500 units of output, selling each unit for $10. The firm's average variable cost is $7 and average fixed cost is $2. What is the firm's producer surplus?

$1500

Consider the following statements when answering this question for a perfectly competitive industry with increasing costs. 1. Increases in the demand for a good, which is produced by a perfectly competitive industry, will raise the short-run market price and can create positive economic profits in the short run. 2. Increases in the demand for a good, which is produced by a perfectly competitive industry, will raise the long-run market price but not create economic profits in the long run.

1 & 2 are true

Which of the following statements is (are) TRUE? 1. The firm's total cost is the sum of its fixed and variable costs. 2. In the long run, costs tend to become fixed. 3. In the long run, the firm can adjust the use of all of its inputs.

1 & 3

With which of the following scenarios should a perfectly competitive firm shut down in the short run? 1. P=$80, VC=$180000, and Q=2000 2. TR=$45000, AVC=$500, ATC=$600, and Q=$84 3. P=$11.55, ATC=$15, and AFC=$2

1 & 3

Frank produces and sells pizzas. His costs are as follows: TC=10000Q-200Q^2+Q^3; MC=10000-400Q+3Q^2. What is the output level at which minimizes his average cost to produce pizza

100

Which of the following characteristics relate(s) to perfect competition? 1. An industry is dominated by a few large firms. 2. Consumers cannot distinguish one firm's product from another. 3. New firms can easily enter the industry.

2 & 3

The total cost (TC) of producing computer software diskettes (Q) is give n as TC=200+5Q. Which part of the equation represents total fixed cost?

200

The total cost (TC) of producing computer software diskettes (Q) is given as: TC=5000+25Q. Total variable costs are?

25Q

Suppose a producer is currently using the optimum combination of labor and capital to maximize output at the least cost. If the current marginal rate of technical substitution of labor for capital is 25, and the marginal productivity of labor is 75, what is the marginal productivity of capital?

3

To maximize profits, a firm should produce where:

MR=MC

Which of the following is NOT a necessary condition for long-run equilibrium under perfect competition?

Prices are relatively low.

Which of the following is a Cobb-Douglas production function?

Q= K^0.5+L^0.5

Mason, Jacob, and Vincent, are the only consumers in the market for Beerbarrel Pretzels. Given their three individual demands, Mason: Q=20-4P; Jacob: Q=5-P; Vincent: Q=30-6P, what is the equation for the market demand curve?

Q=55-11P

What the numerical value for the elasticity of demand for a demand curve in a perfectly competitive firm?

The elasticity of demand is infinity.

If a firm is paying $25 per hour for workers and $50 per hour for capital, what is the MRTSlk at the optimum combination of labor and capital where costs are minimized?

The optimum combination of labor and capital where costs are minimized is 1/2.

Although the long-run equilibrium price of oil is $80 per barrel in a perfectly competitive industry, one producer has much lower costs because their oil reserves are relatively close to the surface and easier to extract. this one producer is the only firm in the industry able to have such an advantage. If the low-cost producer has a minimum average cost equal to $20 per barrel, then the difference ($60 per barrel) is:

an economic rent due to the scarcity of low-cost oil reserves.

Given Frank's costs in Question 11, his pizza experiences _________ if it produces more than the output level that minimizes average costs.

diseconomies of scale

A firm should __________ output whenever MR exceeds MC because __________.

expand; revenues will rise by more than costs, increasing the firm's profit

An isoquant

is a curve that shows all the combinations of capital and labor that yield the same total output.

The marginal rate of technical substitution is equal to the

ratio of the marginal products of the inputs

A straight-line isoquant

would indicate that capital and labor are perfect substitutes in production