ECON test #2

For the production function: Q = 12LK, what happens to average cost as the firm produces more? -Average cost decreases -Average cost increases -Average cost stays constant

average cost decreases

When computing economic profit, we assume that capital earns a: -Risk-free rate of return. -Zero rate of return. -Average rate of return. -None of the answers above is correct. -Positive rate of return

average rate of return

For the production function Q = 4LK, returns to scale: Select one: -Is decreasing. -Can be increasing, decreasing, or constant depending on the values of L and K. -Is increasing. -Is constant.

is increasing

Under constant returns to scale, -A given percentage change in one input implies an equal change in total output. -A given percentage change in all inputs implies constant marginal products for all inputs. -A given percentage change in all inputs causes an equal percentage change in output. -The production function varies linearly with all inputs. -A constant level of output is achieved with various combinations of inputs.

-A given percentage change in all inputs causes an equal percentage change in output.

In the long run, the firm produces a given level of output at least cost by -Equating the ratios of marginal products to input costs across all inputs. -Ensuring equality of marginal products across inputs. -Using a greater proportion of the cheaper input. -Intensively applying more and more labor to its fixed plant. -None of these answers is correct.

-Equating the ratios of marginal products to input costs across all inputs.

In the short run, a firm should expand the use of a variable input until -Its marginal product is zero. -Its marginal revenue product is zero. -Its marginal revenue product is at a maximum. -Its marginal revenue product equals the input's marginal cost. -None of the above answers is correct.

-Its marginal revenue product equals the input's marginal cost.

After stopping production of its only product, a firm's total cost is -Zero. -Its total variable cost. -Its total fixed cost. -Its marginal cost. -There is not enough information to answer.

-Its total fixed cost.

In the short run, is it possible for a firm to change inputs? -Yes, any and all inputs can be changed. -Yes, although only small input changes are possible. -No, all inputs are fixed in the short run. -Not completely or all; one or more inputs are fixed. -It depends on the duration of the short run.

-Not completely or all; one or more inputs are fixed.

The point of intersection between the ATC and MC curves indicates -The point of maximum profit. -The largest possible quantity. -The beginning of economies of scale. -The quantity where ATC is at its minimum. -Answers a and d are both correct.

-The quantity where ATC is at its minimum

As labor usage increases in the short-run, the marginal product of labor -First falls, then rises. -First falls, reaches a flat portion, then rises rapidly. -Will eventually start to fall. -First rises, then reaches a plateau. -First rises, then falls, then rises again.

-Will eventually start to fall.

Which of the following can a firm vary in the long-run? -no factors of production -all factors of production -all factor of production except capital such as factories and machinery -only capital factor of production such as factories or machineries -more information about the firm is needed to answer this question

-all factors of production

Which of the following is the best definition of a production function? -A function that lists all possible production methods. -A function showing the maximum output the firm can produce for any combination of inputs. -A measure of the firm's production costs for a given set of inputs. -A measure of the minimum technology needed to produce a given level of output. -A function that shows maximum outputs obtained from a production facility.

A function showing the maximum output the firm can produce for any combination of inputs.

A company's cost function is given as: TC = 25 + 30Q + 0.2Q^2 What is the equation for the company's average variable cost? Select one: -AVC = 30Q + 0.2Q2 -AVC = 25/Q + 30 + 0.2Q -AVC = 25 + 30Q + 0.4Q2 -AVC = 30 + 0.4Q -AVC = 30 + 0.2Q

AVC = 30 + 0.2Q

Which of the following is the best description of a normal good? -An increase in income lowers the price of the product. -An increase in the price of a rival good increases its demand. -An increase in income increases its unit sales. -A decrease in income spurs greater advertising on the good. -A decrease in price raises its unit sales.

An increase in income lowers the price of the product.

If the price of a substitute good increases significantly, demand for the competing good will -Increase -Remain unchanged. -Decrease -Increase or decrease, depending on the difference between the two prices. -The effect is uncertain. It depends on the price elasticity of demand.

Decrease

If a firm quadruples (4x) in size and output triples (3x), what is the returns to scale? Cannot determine Decreasing returns to scale Increasing returns to scale Constant returns to scale

Decreasing returns to scale

Which of the following best describes the meaning of "inelastic demand"? -Demand is relatively unresponsive to price. -Demand is completely unresponsive to price. -Demand is fairly responsive to price. -Demand is highly responsive to price. -The percentage change in quantity is equal (and opposite) to the percentage change in price.

Demand is relatively unresponsive to price.

In the long run, the firm produces a given level of output at least cost by: Select one: Equating the ratios of marginal products to input prices across all inputs. Ensuring equality of marginal products across inputs. Using a greater proportion of the cheaper input. Intensively applying more and more labor to its fixed plant. None of these answers is correct.

Equating the ratios of marginal products to input prices across all inputs.

mark-up rule

Eqxpx/Eqxpx+1 * MC

For a downward sloping demand curve, the associated marginal revenue curve -Coincides with the demand curve. -Lies below and parallel to the demand curve. -Has the same price intercept but a steeper slope than the demand curve. -Is positive for all levels of sales. -None of the above answers is correct.

Has the same price intercept but a steeper slope than the demand curve.

In the short run, as a result of diminishing returns, -Total output decreases. -Both marginal product and marginal cost decrease. -Marginal product increases and marginal cost decreases. -Marginal product remains constant. -Marginal product decreases and marginal cost increases.

Marginal product decreases and marginal cost increases.

When the price of smart phones decreases, the demand for data plans will: Select one: -Remain unchanged. -The effect is uncertain. It depends on the price elasticity of demand. -Increase. -Decrease. -Increase or decrease, depending on the difference between the two prices.

Increase

The price elasticity of demand for electricity is -Unitary -Inelastic -Elastic

Inelastic

In the short run, a firm should expand the use of a variable input until? -Its marginal revenue product equals the input's marginal cost. -Its marginal product is zero. -Its marginal revenue product is zero. -None of the above answers is correct. -Its marginal revenue product is at a maximum

Its marginal revenue product equals the input's marginal cost.

In the short run, the firm should continue to operate (produce) if and only if -Price exceeds marginal cost. -Marginal revenue equals marginal cost. -Price exceeds average fixed cost. -Price exceeds average variable cost. -Price exceeds average total cost.

Price exceeds average variable cost.

If the price of a good is in the inelastic range and the firm raises price, -Quantity will be unchanged and revenue will increase. -Quantity will fall just enough to leave revenue unchanged. -Quantity will fall, but revenue will increase. -Quantity will fall, but the revenue change cannot be determined. -None of the above answers is correct.

Quantity will fall, but revenue will increase.

The production manager of a clothing manufacturer estimates that the daily total cost of producing men's suits is given by the equation: TC = 2,000 + 396Q - 0.8Q2 The market price of suits is $300. Should the firm shut down? -Short term, the firm should close because its price is less than its average variable cost. -Long term, the firm should stay open since it is earning an economic profit. -Short term, the firm should close because it is not earning an economic profit. -Short term, the firm should stay open since price exceeds average variable cost.

Short term, the firm should close because its price is less than its average variable cost.

A firm's has fixed costs of $4,400, and total variable costs of $2,200 with its current production. Currently, the firm is generating $3,000 in total revenue. Should the firm shut-down in the short run? -Long term, the firm should stay open since it is earning an economic profit. -Short term, the firm should stay open since total revenue exceeds variable cost. -Short term, the firm should close because its total revenue is less than its variable cost. -Short term, the firm should close because it is not earning an economic profit.

Short term, the firm should stay open since total revenue exceeds variable cost.

If the cross price elasticity between two goods is -2.5, how are the two goods related? -The goods are strong substitutes. -The goods are unrelated. -The goods are strong complements. -The goods are weak substitutes. -The goods are weak complements.

The goods are strong complements.

In which case is demand likely to be more elastic, the long run or the short run? -The long run, because there are fewer chances to find substitutes. -The short run, because buyers are able to adjust quickly to changes. -The long run, because buyers can find more numerous substitutes. -The short run, because in the long run there are fewer substitutes -The long run because income increases will tend to outweigh price changes.

The long run, because buyers can find more numerous substitutes.

Fixed costs are -Those that vary with the level of output that the firm might produce. -Contractual obligations of the firm. -Invariant to external economic conditions. -Those that do not vary with respect to different courses of action under consideration. -More important in the short run than in the long run.

Those that do not vary with respect to different courses of action under consideration.

what is the firm's revenue maximizing price?

Total revenue is always maximized at the midpoint of a linear demand curve.

Assume the demand for shirts is P = 40 - Q, and the cost per shirt is $10. Now assume that there the firm incurs an opportunity cost when it sells a shirt instead of a hat. The optimal quantity of shirts to produce will be: -Equal to 15 -Less than 10 -Less than 15 -Greater than 15

less than 15

The difference between the price a seller charges and her average total cost (ATC) is: -producer surplus -excess supply -profit per unit. -marginal revenue. -average fixed cost.

profit per unit.

What factors affect price elasticity?

the proportion of income spent on the good or service. the availability of substitutes. the time before a purchase must be made.

Explain how a firm in the short run will respond to each of the following changes: b. An increase in the marginal cost of the variable input.

will increase MCL. There is no shift in MRP or DL as this is a movement up along the existing demand for labor curve. The firm will decrease use of the variable input and cut output.

Explain how a firm in the short run will respond to each of the following changes: c. An increase in the productivity of the variable input.

will increase MPL will also shift the MRP or DL outward. The firm will increase use of labor (L) and raise output (Q).

Explain how a firm in the short run will respond to each of the following changes: a. An increase in the price of the good or service that it sells.

will increase MR, which will shift the MRP or DL curve outward. The firm will use more labor and increase output.