Intermediate Micro Exam 2

A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called: a) a production possibility curve. b) a production function. c) an isocost function. d) an isoquant.

b

Three Guys From Nowhere's short-run cost function is: C ( q , K ) = 0.5 q 2 K + 0.25 K where q is the number of pizzas produced and K is the number of ovens. Currently, TGFN's is leasing 4 ovens in the short run. 1. Calculate the average total cost of producing 10 pizzas: 2. The manager is considering leasing 5 additional ovens. If TGFN's adds 5 more ovens, what is the average total cost of producing 10 pizzas?

1. 1.35 2. 0.78

Guinan operates the Ten Forward Convenience Store in a small college town. Guinan sells six packs of beer for off-premises consumption. Guinan has very limited store space and has decided to limit her product line to one brand of beer, choosing to forego the snack food options that normally accompany her business. Guinan's is the only beer retailer physically located within the town limits. She faces considerable competition, however, from sellers located outside of town. Guinan regards the market as highly competitive and considers the current $4.50 per six pack selling price to be beyond her control. Guinan's total cost function is:TC = 2000 + 0.002Q2where Q refers to six packs per week. Included in the fixed cost figure is a $750 per week salary for Guinan, which she considers to be her opportunity cost. 1. Calculate the profit maximizing output for Guinan. 2. What is her profit? 3. Is this an economic profit or an accounting profit? 4. The town council has voted to impose a tax of $.50 per six pack sold in the town, hoping to discourage beer consumption. What is Guinan's new profit? 5. Should Guinan continue to operate? (Short run or long run, don't overthink it)

1. 1125 2. 531 3. economic 4. 0 5. yes

There are 100 firms in a competitive market with identical individual supply curves: q = 2 p − 20. The market demand curve is Q D = 4000 − 100 P. 1. The elasticity of supply at the market price is 2. Producer surplus is

1. 2 2. 10,000

A competitive firm can sell pretentious bumper stickers at a price of $0.10 per unit. Its total cost function is: TC = 5 - 0.5Q + 0.001Q2 1. What is the output that maximizes profit or minimizes losses in the short term? 2. If input prices increase and cause the cost function to become TC = 5 - 0.10Q + 0.002Q2 what will the new equilibrium output rate be?

1. 300 2. 50

Plainview & Son's Milkshake Co. has a cost function of C ( q ) = 422 + 1 3000 q 3. If they can sell a milkshake for $8.10 in a competitive market, the profit maximizing quantity they will produce is__ and their profit will be__

1. 90 2. 64

Crash Industries makes Wumpa Pies with the production function K 0.5 L 0.5. The wage rate is 16 and the rental rate of capital is 4. 1. Suppose that the manager wants to produce 144 pies. How much K and L should be employed to minimize costs? 2. What is the cost of producing 144 pies? 3. Suppose that the manager is faced with the same problem as in (A) except that he has a fixed amount of K. In fact, K = 64. How much L should be employed to minimize costs? L = 4. what is the total cost?

1. K=288 L=72 2. 2304 3. 324 4. 5440

Marvel Studios uses 15 green screens to produce 10 units of output per period. Marvel's short-run cost function is: C ( q , K ) = 15 q 2 K + 12 K where q is the number of units produced and K is the number of green screens Marvel leases. Marvel's long-run cost function is: LTC(q) = 26.8q. 1. If Marvel used 4 fewer green screens in the short-run, would short-run average total costs increase or decrease? 2. Does Marvel's long-run cost curve exhibit increasing, constant, or decreasing returns to scale?

1. decrease 2. constant

Consider a firm facing MRTS = K/(4L) with capital (K) on the vertical axis of the isoquant map. Suppose L=100 hours and K=400 machine hours at the current level of output. How much additional labor is required to maintain output if we reduce capital by one machine hour? a) Four hours b) Two hours c) One hour d) Three hours

K/4L = 100/400 K = (100)(4L)/400 K=L Since,K=L,we need to increase the use of labour by 1 hour if we want to maintain the same output if capital is reduced by 1 machine hour

A firm's total cost function is given by: TC = 4000 + 5Q + 10Q2 total fixed cost= average fixed cost= total variable cost= average variable cost= average total cost= marginal cost=

TC= 4000 AFC=4000/Q TVC= 5Q + 10Q^2 AVC= 5 + 10Q ATC= 4000/Q + 5 + 10Q MC= 5 + 20Q

A firm maximizes profit by operating at the level of output where: a) marginal revenue equals marginal cost. b) marginal revenue exceeds marginal cost by the greatest amount. c) average revenue equals average variable cost. d) total costs are minimized. e) average revenue equals average cost.

a

A firm never operates: a) on the downward-sloping portion of its AVC curve. b) on the downward-sloping portion of its ATC curve. c) on its long-run marginal cost curve. d) at the minimum of its AVC curve. e) at the minimum of its ATC curve.

a

An isocost line reveals the a) input combinations that can be purchased for a given total cost. b) costs of inputs needed to produce along an expansion path. c) output combinations that can be produced with a given outlay of funds. d) costs of inputs needed to produce along an isoquant.

a

Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision: a) is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold. b) is correct and shows a solid command of the nature of opportunity cost. c) is incorrect because it treats the price of the shares as an explicit cost. d) is incorrect because when the price of a stock falls, the law of demand states that he should buy more shares.

a

Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000, and the interest rate is 10 percent. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all of his expenses) if he farms the land this year. What should he do? a) Sell to ABC Corporation. b) Reject both offers. c) Accept either offer as they are equivalent. d) Farm the land for another year and sell to XYZ Corporation.

a

If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the: a) rate at which the firm can replace capital with labor without changing the output rate. b) marginal product of labor. c) marginal product of capital. d) average rate at which the firm can replace capital with labor without changing the output rate.

a

Use the following statements to answer this question: I. Markets that have only a few sellers cannot be highly competitive. II. Markets with many sellers are always perfectly competitive. a) I and II are false. b) I and II are true. c) I is true and II is false. d) II is true and I is false.

a

When an isocost line is just tangent to an isoquant, we know that: a) output is being produced at minimum cost. b) the two products are being produced at the highest input cost to the firm. c) output is not being produced at minimum cost. d) the two products are being produced at the least input cost to the firm.

a

Which of the following inputs are variable in the long run? a) all of these b) Labor c) Capital and equipment d) Plant size

a

With its current levels of input use, a firm's MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis). This implies: a) the marginal product of labor is 3 times the marginal product of capital. b) the firm could produce 3 more units of output if it increased its use of labor by one unit (holding capital constant). c) if the firm reduced its capital stock by one unit, it would have to hire 3 more workers to maintain its current level of output. d) if it used one more unit of both capital and labor, the firm could produce 3 more units of output. e) the firm could produce 3 more units of output if it increased its use of capital by one unit (holding labor constant).

a

Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be: a) -4/5. b) 25/500. c) 25/20 or 1.25. d) 500.

a -w/L = -20/25

You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. Three employees can generate an average product of 4 cars per person in each hour, and five employees can generate an average product of 3 cars per person in each hour. What is the marginal product of labor as you increase the labor from three to five employees? a) MP = 1.5 cars b) MP = 3 cars c) MP = -1 cars d) MP = 15 cars

a Total product (3 employees) = 3*4 = 12 total product (5 employees) = 5*3 = 15 MP = (15-12)/(5-3) = 1.5

According to the law of diminishing returns: a) the total product of an input will eventually decline. b) the marginal product of an input will eventually decline. c) the marginal product of an input will eventually be negative. d) the total product of an input will eventually be negative. e) none of the above

b

An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in a river. Use the following two statements to answer this question: I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent. II. The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees. a) I is false, and II is true. b) Both I and II are true. c) Both I and II are false. d) I is true, and II is false.

b

An isoquant: a) is a curve that shows all possible output levels that can be produced at the same cost. b) is a curve that shows all the combinations of inputs that yield the same total output. c) is a curve that shows the maximum total output as a function of the level of labor input. d) must be linear. e) cannot have a negative slope.

b

In a constant-cost industry, an increase in demand will be followed by: a) a decrease in demand to keep price constant. b) an increase in supply that will bring price down to the level it was before the demand shift. c) no increase in supply. d) an increase in supply that will not change price from the higher level that occurs after the demand shift. e) an increase in supply that will bring price down below the level it was before the demand shift.

b

In the long run, which of the following is considered a variable cost? a) Expenditures for wages b) all of the above c) Expenditures for capital machinery and equipment d) Expenditures for research and development e) Expenditures for raw materials

b

Refer to Figure 7.4.1 above. An increase in production, from q1 to q2: a) uses less inputs in the long run. b) is more costly in the short run than in the long run. c) costs the same in the short run or in the long run. d) uses more capital in the short run.

b

Refer to Figure 8.4.3 above. When the firm produces the loss-minimizing level of output, it can recover: a) neither the fixed nor the variable cost in their totality. b) all of the variable cost and part of the fixed cost. c) all of the fixed cost and part of the variable cost. d) all of the variable cost, but none of the fixed cost.

b

Refer to Table 8.1. The maximum profit available to the firm is: a) $20. b) $35. c) $155. d) $30. e) $180.

b

Scenario 7.3:Use the production function: Q = 4L^1/2K^1/2. Refer to Scenario 7.3. Suppose that your firm decides to double its output to 400. To achieve this level of output the firm will have to: a) more than double its inputs. b) exactly double its inputs. c) less than double its inputs.

b

Suppose a plant manager ignores some implicit marginal costs of production so that the perceived MC curve is below the actual MC curve. What is the likely outcome from this error? a) Firm produces less than optimal quantity and earns higher profits. b) Firm produces more than optimal quantity and earns lower profits. c) Firm produces more than optimal quantity and earns higher profits. d) Firm produces less than optimal quantity and earns lower profits.

b

The marginal product of an input is: a) total product divided by the amount of the input used to produce this amount of output. b) the addition to total output due to the addition of the last unit of an input, holding all other inputs constant. c) the addition to total output that adds nothing to profit. d) the addition to total output due to the addition of one unit of all other inputs. e) the addition to total output that adds nothing to total revenue.

b

The marginal rate of technical substitution is equal to the: a) slope of the total product curve. b) ratio of the marginal products of the inputs. c) change in output minus the change in labor. d) change in output divided by the change in labor.

b

What describes the graphical relationship between average product and marginal product? a) Average product cuts marginal product from below, at the maximum point of marginal product. b) Marginal product cuts average product from above, at the maximum point of average product. c) Marginal product cuts average product from below, at the maximum point of average product. d) Average and marginal product do not intersect. e) Average product cuts marginal product from above, at the maximum point of marginal product.

b

Which of the following is NOT an expression for the cost minimizing combination of inputs? a) MPL/MPK = w/r b) MRTS = MPL /MPK c) MRTS = w/r d) none of the above e) MPL/w = MPK/r

b

Joe owns a coffee house and produces coffee drinks under the production function q = 5KL where q is the number of cups generated per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). What is the average product of labor? a) AP = 5 b) AP = 5K c) AP = 5L d) AP = 5K/L

b AP = Q/l =5KL/L =5K

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm: a) could reduce the cost of producing its current output level by employing more capital and less labor. b) could reduce the cost of producing its current output level by employing more labor and less capital. c) is producing its current output level at the minimum cost. d) could increase its output at no extra cost by employing more capital and less labor.

b Worker: 100*$10 = 1000; Capital: 50*$21 = 1050. As the cost of labor is less than capital, thus employing more labor and less capital. Moreover the marginal productivity of labor is also more than the capital.

Does it make sense to consider the returns to scale of a production function in the short run? a) No, returns to scale is a property of the consumer's utility function. b) Yes, this is an important short-run characteristic of production functions. c) Yes, returns to scale determine the diminishing marginal returns of the inputs. d) No, we cannot change all of the production inputs in the short run.

d

Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery? a) Bubba contracts burger production. b) Bubba adds grilled chicken sandwiches to the menu. c) Bubba adds more varied inputs to burger production. d) Bubba expands burger production, focusing on that one good. e) Bubba cuts back on the diversity of the menu.

b economies of scope- An economy of scope means that the production of one good reduces the cost of producing another related good. Economies of scope occur when producing a wider variety of goods or services in tandem is more cost effective for a firm than producing less of a variety, or producing each good independently. economies of scale- Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods. Costs can be both fixed and variable.

Acme Container Corporation produces egg cartons that are sold to egg distributors. Acme has estimated this production function for its egg carton division:Q = 25L0.6K0.4,where Q = output measured in one thousand carton lots, L = labor measured in person hours, and K = capital measured in machine hours. Acme currently pays a wage of $10 per hour and considers the relevant rental price for capital to be $25 per hour. Determine the optimal capital-labor ratio that Acme should use in the egg carton division. a) 2 b) 2/3 c) 4/15 d) 10/25

c

Consider the following statements when answering this question: I. Whenever a firm's average variable costs are falling as output rises, marginal costs must be falling too. II. Whenever a firm's average total costs are rising as output rises, average variable costs must be rising too. a) I and II are both true. b) I and II are both false. c) I is false, and II is true. d) I is true, and II is false.

c

Refer to Figure 6.2.2 above. This figure shows the impact of technological improvements and conveys the idea that: a) without an increase in the productivity of labor, the contributions of technology are insufficient to avoid diminishing returns as the production function shifts upward. b) technology causes an increase in the output per time period, but as the production functions show, the contributions of technology are also subject to diminishing marginal returns. c) even though any given production process exhibits diminishing returns, labor productivity increases with technological improvements. d) productivity increases with technology, but just as labor is subject to diminishing returns, so is technology.

c

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). If the wage rate paid to the pilots increases relative to the rental rate of capital for the airplanes, then: a) the optimal capital-labor ratio should increase. b) We do not have enough information to answer this question. c) the optimal capital-labor ratio remains the same. d) the optimal capital-labor ratio should decrease.

c

Use the following statements to answer this question. I. The numerical labels attached to indifference curves are meaningful only in an ordinal way. II. The numerical labels attached to isoquants are meaningful only in an ordinal way. a) I is false, and II is true. b) both I and II are true. c) I is true, and II is false. d) both I and II are false.

c

A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function C=L0.5M0.75. This production function exhibits: a) no clear pattern of returns to scale. b) decreasing returns to scale for all output levels. c) increasing returns to scale for all output levels. d) constant returns to scale for all output levels.

c C* = (2L)^0.5(2M)^0.75 = 2^0.5*2^0.75 x L^0.5*M^0.75 = 2^1.25 x L^0.5*M^0.75 = 2.38 x C C*/C = 2.38 > 2

A construction company builds roads with machinery (capital, K) and labor (L). If we plot the isoquants for the production function so that labor is on the horizontal axis, then a point on the isoquant with a small MRTS (in absolute value) is associated with high ________ use and low ________ use. a) capital, labor b) none of the above c) concrete, gravel d) labor, capital

d

At the profit-maximizing level of output, marginal profit a) is increasing. b) may be positive, negative or zero. c) is also maximized. d) is zero. e) is positive.

d

Cicero's Pizza House is a profit maximizing firm in a perfectly competitive local restaurant market, and their optimal output is 80 pizzas per day. The local government imposes a new tax of $250 per year on all restaurants that operate in the city. How does this affect Cicero's profit maximizing decisions in the long run? a) Cicero will remain in business but will definitely produce less pizza. b) No impact on the restaurant's decisions c) Cicero's will definitely shut down. d) Cicero's decision depends on the circumstances—if their profits are larger than $250 per year, then the tax does not impact output; otherwise, the restaurant will shut down.

d

Consider the following statements when answering this question: I. Increases in the demand for a good, which is produced by a competitive industry, will raise the short-run market price. II. Increases in the demand for a good, which is produced by a competitive industry, will raise the long-run market price. a) I and II are false. b) I is false, and II is true. c) I and II are true. d) I is true, and II is false.

d

Eva's Taqueria operates in a perfectly competitive local taco market. If the price of taco cheese increases (ceteris paribus), what is the expected impact on Eva's profit-maximizing output decision? a) Output decreases because the price of pizza must also increase. b) Output increases to cover the higher input cost. c) Output increases because the marginal cost curve shifts upward. d) Output decreases because the marginal cost curve shifts upward.

d

Firms often use patent rights as a: a) way to achieve perfect competition. b) none of the above c) barrier to exit. d) barrier to entry.

d

If any of the assumptions of perfect competition are violated, graphs with downward-sloping demand curves cannot be used to study the firm. a) supply-and-demand analysis cannot be used to study the industry. b) graphs with flat demand curves cannot be used to study the firm. c) one must use the monopoly model instead. d) there may still be enough competition in the industry to make the model of perfect competition usable.

d

If current output is less than the profit-maximizing output, then the next unit produced a) will decrease profit. b) will increase cost more than it increases revenue. c) may or may not increase profit. d) will increase revenue more than it increases cost. e) will increase revenue without increasing cost.

d

Refer to Figure 8.3.2 above. The demand of a price taker is illustrated: a) by neither curve. b) in both panels. c) in panel (b) d) in panel (a).

d

The law of diminishing returns refers to diminishing: a) total returns. b) all of these. c) average returns. d) marginal returns.

d

Which of the following production functions exhibits constant returns to scale? a) q = KL0.5 b) q = log(KL) c) q = KL d) q = K + L

d

Rihanna's Diner, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Rihanna should: a) lower her output. b) close her doors immediately. c) continue producing in the short and long run. d) continue producing in the short run, but plan to go out of business in the long run. e) raise her prices above the perfectly competitive level.

d (p> AVC, its better to produce at a loss) (p<AVC, its better to shut down production)

The short run is: a) however long it takes to produce the planned output. b) three years. c) a time period in which at least one set of outputs has been decided upon. d) less than a year. e) a time period in which at least one input is fixed.

e