Micro Midterm - HW 8 - Gunay
Your firm owns an old truck that is used to make local deliveries. The truck is fully depreciated and only costs $1.20 per hour to operate, but you could rent it to another firm for $15.00 per hour. What is the opportunity cost of operating this truck in your business?
$16.20 per hour
The production function q = 22K^0.6*L^0.2 exhibits
(choose values for K and L then solve for q. Then double these values and see if q doubles or not) Constant returns to scale.
Suppose that the price of labor (PL) is $10 and the price of capital (PK) is $20. What is the equation of the isocost line corresponding to a total cost of $100?
100 = 10L + 20K
What is the difference between economic and accounting costs?
Accounting costs include only explicit costs.
If you know the average total cost and the average variable cost for a given level of output, which cost can you NOT determine?
All costs can be determined given this information. (FC, AFC, VC, TC)
In a production process, all inputs are increased by 10% but output increases less than 10%. This means that the firm experiences...
Decreasing returns to scale
What is the user cost of capital?
Economic depreciation + (interest rate)(value of capital)
What are some examples of variable costs in the long run?
Expenditures for: raw materials, capital machinery and equipment, wages, and research and development
True or False: "Decreasing returns to scale" and "diminishing returns to a factor of production" are two phrases that mean the same thing.
False
True or False: Diminishing returns to all factors of production implies decreasing returns to scale
False
C = L^0.5*M^0.75 This production function exhibits...
Increasing returns to scale for all output levels
Assume that the marginal cost (MC) of production is increasing. Can you determine whether the average variable cost (AVC) is increasing or decreasing? Explain.
Regardless of whether MC is decreasing, AVC could be increasing or decreasing depending on whether MC is greater than or less than AVC.
The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced. The total cost to produce 100 cookies is... The average total cost is... (falling or rising)
TC: $25.00 ATC: Falling
Give an example of a sunk cost
The amount a company originally paid for specialized equipment for a plant
The difference between the economic and accounting costs of a firm are...
The opportunity costs of the factors of production that the firm owns
Why are isocost lines straight lines?
The slope of isocost lines equals the ratio of input prices, and this ratio is fixed
It is possible to have diminishing marginal returns to a single factor of production and constant returns to scale at the same time. Discuss.
The statement is true. Diminishing marginal returns to a single factor applies to the short run when all other inputs are held fixed. On the other hand, returns to scales applies to the long run when all inputs can be increased.
which costs are always increasing as output increases?
Total cost and variable cost
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200+5Q What is the variable cost? What is the fixed cost?
VC: 5Q FC: 200
An isocost line shows...
all the input combinations that can be purchased at a given total cost
Which cost always declines as output increases?
average fixed cost
At the point where average variable cost reaches its minimum value...
average variable cost equals marginal cost
If the marginal cost of production is greater than the average variable cost of production, then...
average variable cost is rising because the cost of the last unit produced is adding more to total variable cost than previous units did on average.
True or false: The average cost curve and the average variable cost curve reach their minima at the same level of output
false
True or false: The average cost curve and the marginal cost curve reach their minima at the same level of output
false
True or false: rising marginal cost implies that average total cost is also rising
false
true or false: the marginal cost curve intersects the average total cost and average variable cost curves at their minimum value
false
true or false: when a firm has positive fixed costs, the output level associated with the minimum average variable cost is less than the output associated with the minimum average total costs
false
If the marginal cost of production is diminishing as more units of output are produced, then the marginal product of labor is... (zero, increasing, diminishing, negative, or constant)
increasing
An isocost line reveals the...
input combinations that can be purchased for a given total cost
Increasing returns to scale in production means
less than twice as much of all inputs are required to double output
Jose rents office space for $20,000 per year. He uses the office to fill out tax returns for 1,000 clients per year. If the office rent increases to $25,000 per year, the marginal cost of filling out tax returns will...
not change
Fixed costs are fixed with respect to changes in
output
When an isocost line is just tangent to an isoquant, we know that...
output is being produced at minimum cost
When the cost minimizing combination of inputs is being used and there is no corner solution...
the isocost line is tangent to the isoquant line
The owner of a small retail store does her own accounting work. How would you measure the opportunity cost of her work?
the monetary amount that her time would have been worth in its next best use
The total cost of producing a given level of output is minimized when...
the ratio of marginal product to input price is equal for all inputs
At the optimum combination of two inputs...
the slopes of the isoquant and isocost curves are equal, the marginal rate of technical substitution equals the ratio of input prices, and costs are minimized for the production of a given ouput
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.
True or false: when marginal cost is below average total cost, the latter is falling
true
true or false: a firm's marginal cost curve does not depend on the level of fixed costs
true
true or false: as output increases, the difference between a firm's average total cost and average variable cost curves cannot rise
true
true or false: when marginal cost is above average variable cost, AVC is rising
true
Does it make sense to consider the returns to scale of a production function in the short run?
No, we cannot change all of the production inputs in the short run.
