Econ Mid-Term Study Questions

For the cost function C(Q) = 100 + 2Q + 3Q2, the total variable cost of producing 2 units of output is

16 From the given cost function: C(Q) = 100 + 2Q + 3Q2, variable cost components are the ones with Q terms. So, VC = 2Q + 3Q2 Now, evaluate VC when Q=2 VC = 2(2) + 3(2)2 VC = 4 + 12 = 16

If quantity demanded for sneakers falls by 25% when price increases 10% we know that the absolute value of the own-price elasticity of sneakers is

2.5 E = 25/10 = 2.5

If the cross-price elasticity between ketchup and hamburgers is -1.2, a 4% increase in the price of ketchup will lead to

4.8% drop in quantity demanded of hamburgers From the cross-price elasticity formula, we know -1.2 = X/4 Solving this relationship for X, we find X = -1.2*(4) = -4.8, so we see that quantity demanded will decrease by 4.8%

The additional cost incurred by producing an additional unit of output is defined as the

marginal cost.

The additional revenue that arises by selling an additional unit of output is defined as

marginal revenue.

We would expect the demand for jeans to be

more elastic than the demand for clothing.

Suppose the marginal product of labor is 8 and the marginal product of capital is 2. If the wage rate is $4 and the price of capital is $2, then in order to minimize costs the firm should

use more labor and less capital We see that MPL=8, w=4, MPK=2, and r=2. So if MPL/w=MPK/r is the cost minimizing input rule, we can use that to investigate here: MPL/w=8/4=2MPK/r=2/2=1 So this shows us that each dollar we spend on labor gives us more productivity than each dollar that we spend on capital, since 2>1. So, we should spend more on labor and use less capital.

For a steel factory, a decrease in the cost of electricity to the plant will cause the supply curve to

shift to the right.

If the interest rate is 10% and cash flows are $1,000 at the end of year one and $2,000 at the end of year two, then the present value of these cash flows is

$2,562 PV = ((1000/(1.1)^1)+(2000/(1.1)^2)) = 2,561.98 rounded to 2,562

For a cost function C = 100 + 10Q + Q2, the average fixed cost of producing 10 units of output is

10 From the given cost function C = 100 + 10Q + Q2, the fixed costs are the components not attached to Q. FC = 100 To find the average fixed costs of producing ten units you divide FC by 10: AFC = 100/10 = 10

Suppose the production function is given by Q = 5K + L2. How much output is produced when 5 units of capital and 10 units of labor are employed?

125 This is a linear production function: Q = 5K + L2 First, substitute in K=5 and L=10 and then solve for Q. Q = 5(5) + (10)2 Q = 25 + 100 = 125

In a competitive market, the market demand is Qd = 60 - 6P and the market supply is Qs = 4P. The full economic price under a price ceiling of $3 is

8 From the given supply curve: Qs = 4P, if P=3 we see that Qs = 12. To find the full economic price at this level of quantity supplied, we plug Q=12 back into the demand curve and solve for P. 12 = 60 - 6P, so we see that P=8

Suppose the production function is Q = min {K, 2L}. How much output is produced when 4 units of labor and 9 units of capital are employed?

8 This is a Leontief production function. Given Q = min {K, 2L}, we plug in K=9 and L-4, and then choose the smaller (min) value. Q = min {9, 2(4)} = min {9, 8}, so 8 units produced.

In a competitive market, the market demand is Qd = 60 - 6P and the market supply is Qs = 4P. A price ceiling of $3 will result in

A shortage of 30 units. From the given demand curve: Qd = 60 - 6P, if P=3, we see that Qd = 42 From the given supply curve: Qs = 4P, if P=3 we see that Qs = 12 The difference is the shortage of 30 units.

If the production function is Q=K1/2L1/2 and labor is fixed at 25 units, then the marginal product of capital (MPK) will be

MPK = 2.5K-1/2

If your firm's inverse demand curve is found to be P = 30 - 2Q, what is your marginal revenue function equal to?

MR = 30 - 4Q

To maximize profits, a firm should stop producing and selling output in the range of production where

Marginal Profit is equal to zero.

The higher the interest rate

The smaller the present value of a future amount

Graphically, a decrease in advertising to your consumer base will cause the equilibrium

price and quantity to both decrease. Advertising is a shift factor of demand. Decreases in advertising will shift the demand curve to the left, which will cause the new equilibrium with the given supply curve to occur at a lower price and a lower output level.

Which of the following signals to the owners of scarce resources, the best use of those resources?

profits of businesses

If a firm's production function is Leontief and the wage rate goes up

the cost minimizing combination of capital and labor does not change.

You are the manager of a firm that has the following inverse demand curve P = 63 - 5Q, total revenue function TR = 63Q - 5Q2 and total cost function TC = 10 + 3Q. The profit-maximizing output for you to produce and sell is

6 MR = 63 - 10Q MC = 3 MR=MC implies that 63-10Q = 3, so optimal quantity is Q=6.

The production function Q = L.5K.5 is called

Cobb-Douglas

Which of the following conditions is true when a producer minimizes the cost of producing a given level of output?

If you have two inputs, labor (L) and capital (K), the cost minimization rule is that MRTS = MPL/MPK = w/r (the ratio of input prices) This also implies that MPL/w = MPK/r, which means the marginal product per dollar spent on all inputs are equal.

If the interest rate is currently 10%, and you can only make one of the investments listed below, which one would you prefer in order to maximize the net present value of your investment?

Incurring a cost of $100 today to receive $100 at year's end for each of the next two years NPVa = ((100/(1.1)^1))+((100/(1.1)^2))+((100/(1.1^3))+((100/(1.1)^4))) - 300 = 317 - 300 = $17 NPVb = ((100/(1.1)^1))+((100/(1.1)^2))+((100/(1.1^3))) -200 = 249 - 200 = $49 NPVc = ((100/(1.1)^1))+((100/(1.1)^2)) - 100 = 174 - 100 = $74 This would be the maximized net present value.

The production function for a competitive firm is Q = K.5L.5. The firm sells its output at a price of $10, and can hire labor at a wage of $5. Capital is fixed at 25 units. The profit-maximizing quantity of labor is

Solve for the VMPL and set that equal to wage. Since capital is fixed, insert k=25 into production, so Q=(25).5(L).5 which simplifies to Q=5(L).5 Now take derivative of Q with respect to L to find MPL=(.5)(5)(L)-.5 MPL=2.5(L)-.5 Now multiply by P=10 to get the VMPL=25(L)-.5 Now set VMPL=w and solve for L 25(L)-.5=5 1/5=(L)-.5 L=(1/5)-2 L=25 (none of the above)

Changes in the price of a good lead to

changes in the quantity supplied of the good

Assume that the price elasticity of demand is -2 for a certain firm's product. If the firm raises price, the firm's managers can expect total revenue to

decrease.This is based on the total revenue test, which states that raising prices in the elastic range of demand (E=-2 is in the elastic range) will lead to lower total revenue. The price increase will be met with an even bigger decrease in quantity demanded.

Which of the following is an implicit cost of going to college to be a full time student?

foregone wages

Suppose the demand for good X is given by Qdx = 10 + ax Px + ay Py + aM M. If ay is positive, then

goods y and x are substitutes From the given estimated demand curve, we know that ay is the coefficient on the cross price (Py). Whenever the coefficient is positive, it signals that the two goods (X and Y) are substitutes. If Py goes up, and Qdx goes up (positive relation) we see that consumers are substituting away from good Y, which has become relatively more expensive, towards good X.