ECP6705 - Exam 2

In the long run, monopolistically competitive firms produce a level of output such that

ATC > minimum of average costs, P > MC, P = ATC.

Which of the following industries is best characterized as monopolistically competitive?

Cereal

Suppose you are a manager of a factory. You purchase five (5) new machines at one million dollars each. If you can resell two of the machines for $500,000 each and three of the machines for $200,000 each, what are the sunk costs of purchasing the machines?

$3.4 million, though this is not sunk cost, this is depreciation

Compute the marginal revenue when the price elasticity of demand is −0.25.

−3P, meaning marginal revenue is negative and 3 times greater than price.

Which of the following cost functions exhibits cost complementarity?

−4Q1Q2 + 8Q1

Fixed costs exist only in:

The short run

slope of isocost line

-w/r

Using Cobb-Douglas production function, Q=F(K,L)= K^1/2 L^1/2, what is the average product of labor when 4 units of labor and 9 units of capital are employed?

1.5

You are the manager of a monopoly that faces a demand curve described by P = 230 − 20Q. Your costs are C = 5 + 30Q. The profit-maximizing price is:

130

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

14

Suppose a monopolist knows the own price elasticity of demand for its product is í3 andthat its marginal cost of production is constant MC(Q) = 10. To maximize its profit, themonopoly price is:

15 per unit

The production function is Q = K.6 L.4. The marginal rate of technical substitution is

2/3 K L-1

Assume that a firm's marginal cost is $10 and the elasticity of demand is -2. We can conclude that the firm's profit maximizing price is approximately

20

You are the manager of a firm that sells its product in a competitive market at a price of$48. Your firm's cost function is C = 60 + 2Q2. Your firm's maximum profits are

228

You are the manager of a firm that sells its product in a competitive market at a price of $50. Your firm's cost function is C = 40 + Q2. The profit-maximizing output for your firm is:

25

What is the value marginal product of labor if: P = $10, MPL = 25, and APL = 40?

250

For the cost function C(Q) = 200 + 3Q + 8Q2 + 4Q3, what is the average fixed cost of producing six units of output?

33.33

You are the manager of a monopoly that faces a demand curve described by P = 85 í 5Q.Your costs are C = 20 + 5Q. The profit-maximizing price is:

45

You are the manager of a firm that sells its product in a competitive market at a price of$40. Your firm's cost function is C = 60 + 4Q2. The profit-maximizing output for yourfirm is:

5

You are the manager of a monopoly that faces a demand curve described by P = 230 í20Q. Your costs are C = 5 + 30Q. The profit-maximizing output for your firm is

5

A firm produces output sold at a price of $10. The prod. function is Q=F(K,L)= K^1/2 L^1/2, if capital is fixed at 1 unit in the SR, how much labor should the firm employ to maximize profits if the wage rate is $2?

6.25

Suppose the production function is given by Q = 3K + 4L. What is the average product of capital when 10 units of capital and 10 units of labor are employed?

7

Suppose the production function is given by Q = 4K + 6L. What is the average product of capital when 10 units of capital and 5 units of labor are employed?

7

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

You are the manager of a monopoly that faces a demand curve described by P = 85 í 5Q.Your costs are C = 20 + 5Q. The profit-maximizing output for your firm is:

8

Which curve(s) does the marginal cost curve intersect at the (their) minimum point?

Average total cost curve and average variable cost curve

Economies of scope exist when

C(Q1) + C(Q2) > C(Q1, Q2)

Economies of scope exist when:

C(Q1) + C(Q2) > C(Q1, Q2)

The main difference between monopolistic competition and perfect competition is:

Differentiated products

suppose the inverse demand function for a monopolists products is (P=100-2Q), and cost function is (C(Q)=10+2Q. Determine profit-max. price and quantity and max. profits: *Note: -for linear cost function, coeff. on Q=MC -for linear inverse demand: MR schedules is twice as steep

MC=2 Max Output=24.5 Max Price=51 Max Profits=$1,190.5

the cost function for a firm is, C(Q)=20+3Q^2, determine the MC, AFC, AVC, ATC when Q=10

MC=6Q AFC=2 AVC=VC(Q)=3Q^2=30 ATC=32

Which of the following sets of economic data is minimizing the cost of producing agiven level of output?

MPL = 20, MPK = 40, w = $16, r = $32

cost minimizing input rule

MPl/w = MPk/r

In a competitive industry with identical firms, long-run equilibrium is characterized by:

MR = MC

In a competitive industry with identical firms, long-run equilibrium is characterized by

MR = MC = min ATC

The absolute value of the slope of the isoquant

MRTSkl = (MPl/MPk)

The rate at which L and K can subs. for eachother

Marginal rate of technical substitution (MRTS)

Which of the following market structures would you expect to yield the greatest productvariety?

Monopolistic competition

A lawn service rents 5 small mowers and 2 large mowers for clients. The marginal product of a small mower is 3 lawns/day and large mower is 6 lawns/day. Rental price for small mower is $10/day, large mower is $25/day. Is the lawn service utlizing small and large mowers in a cost minimizing manner?

No, use fewer large mowers and more small mowers (MPs/Ps>MPl/Pl)

In the long run, perfectly competitive firms produce a level of output such that:

P = MC and P = minimum of AC

Which of the following is true under monopoly

P > MC

Suppose perfectly competitive market conditions are characterized by the followinginverse demand and inverse supply functions: P = 100 í 5Q and P = 10 + 5Q. Thedemand curve facing an individual firm operating in this market is:

a horizontal line at $55

economies of scale exist when:

average total costs decline as output increases

how will a firms marginal revenue in a perfectly competitive market look in a table?

constant

Bette's Breakfast, 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. Bette should:

continue producing in the short run, but plan to go out of business in the long run

Economies of scale exist whenever long-run average costs

decrease as output is increased

The source(s) of monopoly power for a monopoly may be

economies of scope, economies of scale, patents.

Suppose the cost function is C(Q) = 50 + Q − 10Q2 + 2Q3. At 10 units of output, the average cost curve is:

in the increasing stage

The short run is defined as the time frame

in which there are fixed factors of production

why are isoquants typically drawn with a convex shape?

inputs (K,L) are not perfectly substitutable

The combinations of inputs that will cost teh firm the same amount comprise an:

isocost line

The average product of labor depends on how many units of

labor and capital are used

If the price of labor increases, in order to minimize the costs of producing a given level of output, the firm manager should use:

less of labor and more of capital

The ________ elastic a firm's demand curve, the greater its ________.

less; monopoly power

Which of the following features is common to both perfectly competitive markets and monopolistically competitive markets?

long run profits are zero

The minimum average cost of producing alternate levels of output, allowing for optimal selection of all variables of production is defined by the:

long-run average total cost curve

The change in total output attributable to the last unit of an input is the:

marginal product

The isoquants are normally drawn with a convex shape because inputs are:

not perfectly substitutable

There is a market supply curve in a:

perfectly competitive market

Differentiated goods are NOT a feature of a:

perfectly competitive market and monopolistic market.

A perfectly competitive firm faces a

perfectly elastic demand function

If the last unit of input increases total product, we know that the marginal product is:

positive

The recipe that defines the maximum amount of output that can be produced with Kunits of capital and L units of labor is the

production function

You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces and sells a given output. If w = $40, r = $100, MPL = 20, and MPK = 40 the firm:

should use more L and less K to cost minimize

You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces and sells a given output. If w = $40, r = $100, MPL = 20, and MPK= 40 the firm

should use more L and less K to cost minimize

The long run is defined as:

the horizon in which the manager can adjust all factors of production.

at the cost minimizing input mix

the slope of the isoquant equals the slope of the isocost line. (MRTSkl=w/r)

economies of scope exist when

total cost of producing Q1 and Q2 together is less than the total cost of producing Q1 and Q2 separately

Variable factors of production are the inputs that a manager

may adjust in order to alter production

There is no market supply curve in

monopolistically competitive and monopolistic markets

The absolute value of the slope of the isoquant is the:

marginal rate of technical substitution

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

Costs that are forever lost after they have been paid are

sunk costs