Micro Exam 3

Fixed costs have no effect on a firm's profit. (True/False)

False

The next problems consider a firm that has the total cost function TC = 100 + Q + Q3. This firm's fixed costs are

$100.

The marginal rate of technical substitution of labor for capital (MRTSLK) tends to be higher

the larger the quantity of capital already employed.

The next problems consider a firm that has the total cost function TC = 100 + Q + Q3. If this firm produces 5 units of output, then its total cost equals

$230

Refer to Variable Cost of Production. If the firm instead has $15 in fixed costs, the average cost of the third unit of output is

$25 per unit.

Q. Variable Cost 0 0 1. 30 2. 50 3. 60 4. 80 5. 110 6 160 7. 250 8. 400 Refer to Variable Cost of Production. The marginal cost of the fifth unit of output is

$30 per unit.

Refer to Variable Cost of Production. If the total cost of producing the fifth unit of output is $150, fixed costs must be

$40.

The next problems consider a firm that has the total cost function TC = 100 + Q + Q3. What is the marginal cost of producing a sixth unit of output?

$92.

Which of the following is not classified as a capital input?

500 shares of General Motors stock.

Q. Marginal Cost 1. 3 2. 4 3. 6 4. 9 5. 13 6. 18 7. 24 8. 31 Refer to Marginal Cost of Production. Suppose demand for the firm's product is horizontal at a price of $18 per unit. How much output should the firm produce in order to maximize its profit?

6 units

All points on the expansion path have the same marginal rate of technical substitution. (True/False)

True

Caterpillar has spent $5 million to date on a new plant, and another $2 million is needed to complete the plant. When construction was started, it was projected that production at the new plant would add $12 million to Cat's profit, but new projections show the additional profit will be only $6 million. Assuming the incomplete plant is worthless, should Cat complete the new plant or abandon it?

Cat should complete the plant because it would create a net profit of $4 million.

Cost minimization requires that the marginal product of labor equal the marginal product of capital. (True/False)

False

Higher costs are always passed on to a firm's customers in the form of higher prices. (True/False)

False

If marginal cost rises when output is increased, then the average cost of production is also rising. (True/False)

False

If the total benefits received from drug enforcement exceed its total costs, then the government should expand its drug enforcement activity. (True/False)

False

Moving down and to the right on an isoquant tells us how much quantity increases as inputs increase. (True/False)

False

Output is held fixed along an isocost. (True/False)

False

Profits will be positive as long as marginal revenue is bigger than marginal cost. (True/False)

False

The production function describes how much output a firm can generate for various cost levels. (True/False)

False

The short run is any period of time less than one year, while the long run refers to a period of time one year or more in length. (True/False)

False

Total cost and marginal cost can both be plotted on the same graph since both include a measure of quantity. (True/False)

False

When labor is the only variable input in the short run, average variable cost equals the wage rate times the average product of labor. (True/False)

False

A firm's revenue can be calculated from its demand curve using the formula "price times quantity." (True/False)

True

A point on the firm's expansion path both minimizes the cost of producing a given output level and maximizes the output obtained for a given expenditure level. (True/False)

True

If marginal cost exceeds marginal revenue, then a reduction in output will create higher profits. (True/False)

True

The marginal cost of producing tea can be measured in dollars per pound of tea. (True/False)

True

Refer to Marginal Cost of Production. If the firm has $20 in fixed costs, producing 4 units generates variable costs of

UK

Refer to Marginal Cost of Production. Suppose the firm has $20 in fixed costs, and demand for the firm's product is horizontal at a price of $18 per unit. What is the firm's maximum profit?

UK

Refer to Marginal Cost of Production. Suppose the firm's fixed costs increase to $60, and demand for the firm's product remains horizontal at a price of $18 per unit. What is the firm's maximum profit?

UK

You are deciding whether or not to take your car on a 1,500 mile highway trip. Which of the following is the least likely to affect your decision?

Your annual insurance payment.

The marginal cost curve crosses

both the average cost curve and the average variable cost curve at their bottoms.

A sunk cost is one that

can no longer be avoided.

An isoquant shows the various combinations of labor and capital that

can produce some fixed level of output.

If a firm's marginal cost exceeds its marginal revenue, then

cutting back production will increase the firm's profit.

In the short run, a firm's marginal cost tends to rise as more is produced because of

diminishing marginal returns.

If a firm can adjust its employment of all inputs, then it is

in the long run.

The set of all baskets of inputs that can be employed at a given cost defines a(n)

isocost curve.

A firm will increase its production when

its marginal revenue rises.

If the average cost curve is downward sloping, then

marginal cost is smaller than average cost.

The shapes of the total product and marginal product curves are related because

marginal product gives the slope of total product.

Economists generally assume that the firm's goal is to: a. minimize profit b. maximize profit c. make its market share as large as possible d. maximize its production

maximize profit

A firm is currently producing at a level where its MC = 10 and its MR = 5. We can conclude that this firm is

over-producing.

As increasing amounts of a good are produced, the marginal cost of production tends to

rise

Marginal benefit is defined as

the additional benefit gained from the last unit of an activity.

Marginal cost is defined as

the additional cost attributable to the last unit produced.

The marginal product of labor is defined to be

the additional output attributable to the last unit of labor employed.

If the marginal rate of technical substitution of labor for capital (MRTSLK) exceeds the relative price of labor in terms of capital (PL/PK), then

the firm needs to use less capital and more labor to reach its expansion path.

A firm is currently producing 200 units of output using 60 hours of labor and 80 hours of capital. The marginal product of labor is 12 units of output per hour, and the marginal product of capital is 15 units of output per hour. If the wage rate is $6 per hour and the rental rate is $3 per hour, then

the firm should use more capital and less labor.

Diminishing marginal returns to labor imply that

the firm's short-run marginal cost curve will be upward sloping.