Quiz 4

A perfectly competitive hardware manufacturer has total revenue of $85 million, total variable costs of $45 million, and fixed costs of $10 million. What is the firm's producer surplus?

$40 million

Suppose that the price of labor (Pl) is $10 and the price of capital is $20. What is the equation of the isocost line corresponding to a total cost of $100?

100 = 10L + 20K

The marginal product of labor in the production of computer chips is 50 chips per hour. The marginal rate of technical substitution of hours of labor for hours of machine-capital is 0.40. What is the marginal product of capital?

125 chips per hour

Holding capital constant, when labor increases from 9 to 10 units, output increases from 192 to 208 units.

16 20.8

Suppose a tech innovation shifts the marginal cost curve downward. Which one of the following cost curves does NOT shift?

Average fixed cost curve

If a perfectly competitive firm finds that it is producing an output level where price is above average variable cost but less than marginal cost, it should

Decrease its output.

A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function: C - L^0.5*M^0.75 This production function exhibits

Increasing returns to scale for all output levels.

A perfectly competitive is producing the output that maximizes its profit. If its fixed cost increases, and industry price remains constant, how should it respond in the short run

It should keep output the same

Suppose a perfectly competitive firm's total cost of production (TC) is TC= q^3 - 8q^2 +30q +20 and the firm's marginal cost of production (MC) is MC(q) = 3q^2 - 16q +30 The firm's short run supply is given by

P=3q^2-16q+30 for prices above $14 Note: look for the 2 answers that gave the same last numbers and then pick the one w a 3 in the front of the answer

Why do firms enter an industry when they know that in the long run economic profit will be zero? Firms would enter an industry if profit will eventually be zero because zero economic profit

Signifies that a firm is earning as much as it could in its next best activity is a normal rate of return that includes the opportunity cost of resources used in production

How does a change in the price of one input change the firm's long-run expansion path? If the price of an input change, then the

Slope of the isocost lines will change, and the firm will substitute toward the relatively cheaper input, pivoting the expansion path toward the axis of the relatively cheaper input.

Explain the term "marginal rate of technical substitution." What does a MRTS = 5 mean? It means that if the input on the horizontal axis is increased by one unit, then the input on the vertical axis ____ by 5 units and output will ____.

The MRTS gives the amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant. It means that if the input on the horizontal axis is increased by one unit, then the input on the vertical axis DECREASES by 5 units and output will NOT CHANGE. **note: no matter what MRTS equals (3,2,5, etc.) these answers do not change

The firm is ___ The firm could decrease the cost of production holding output constant by using more ___ and less ____

The firm is not minimizing the cost of production because MPk/r is less than MPl/w Labor Capital Note: if MPk/r is greater than MPl/w , then the answer is 1. Capital and 2. Labor. (switched cap and labor)

In the short run when some inputs are fixed, marginal cost must eventually rise as a firm's output increases because

There will eventually be diminishing marginal products for the firm's variable inputs.

In 1985, Alice paid $20,000 for an option to purchase 10 acres of land. By paying the $20,000, she bought the right to buy the land for $100,000 in 1992. When she acquired the option in 1985, the land was worth $120,000. In 1992, it is worth $110,000. Should Alice exercise the option and pay $100,000 for the land?

Yes

Imposition of an output tax on all firms in a competitive industry will result in

a leftward shift in the market supply curve

In perfect competition, a firm's marginal revenue is

all of the above

labor productivity

all of the above are true

Why are isocost lines straight lines? Isocost lines are straight because the slope of such lines...

equals the ratio of input prices, and this ratio is fixed.

Why would a firm that incurs losses choose to produce rather than shut down? In a perfectly competitive industry, if a firm is incurring losses, then it might choose to produce in the short run because

price is greater than average variable cost, resulting in smaller losses than would result from shutting down. Revenue is greater than variable costs, resulting in smaller losses than would result from shutting down

At every output level, a firm's short run average cost (SAC) equals or exceeds its long-run average cost (LAC) because

there are at least as many possibilities for substitution between factors of production in the long run as in the short run