MICRO Exam 2 Review

Suppose a plant manager ignores some implicit marginal costs of production so that the perceived MC curve is below the actual MC curve. What is the likely outcome from this error?

Firm produces more than optimal quantity and earns lower profits.

Suppose capital and labor are perfect substitutes in a long-run production process. If labor costs$15 per hour and the rental rate of capital is $20 per hour, what can we say about the profit-maximizing choice of labor and capital inputs?

We will only use labor in the production process.

In a constant-cost industry, an increase in demand will be followed by...

an increase in supply that will bring price down to the level it was before the demand shift.

Assume that average product for six workers is fifteen. If the marginal product of the seventh worker is fourteen,

average product is falling.

Which of the following relationships is NOT valid. a. When marginal cost is below average total cost, the latter is falling. b. When marginal cost is above average variable cost, AVC is rising. c. Rising marginal cost implies that average total cost is also rising.

c. rising total cost implies that average total cost is also rising.

In an increasing-cost industry, expansion of output:

causes input prices to rise as demand for them grows.

If the market price for a competitive firm's output doubles, then:

the marginal revenue doubles.

The cost-output elasticity equals 1.5. This implies that: • there are neither economies nor diseconomies of scale. • there are economies of scale. • marginal cost exceeds average cost. • there are diseconomies of scale.

there are diseconomies of scale.

Which of the following costs always declines as output increases?

Average fixed cost

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:

$25.00

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average total cost?

5 + (200/Q)

Which of the following statements is true regarding the differences between economic and accounting costs?

Accounting costs include only explicit costs.

A firm employs 10 workers at a wage rate of $12 per hour, and 10 units of capital at a rate of $20 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm... A. could reduce the cost of producing its current output level by employing more capital and less labor. B. Could reduce the cost of producing its current output level by employing more labor and less capital. C. could increase its output at no extra cost by employing more capital and less labor. D. is producing its current output level at the minimum cost.

D. is producing its current output level at the minimum cost.

When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that... A. the firm's marginal cost curve must be flat. B. the firm's marginal costs of production never fall below $5. C. the firm's average cost of production was less than $10. D. the firm's total cost of producing 100 tons is less than $1000. E. the minimum value of the firm's average variable cost lies between $5 and $10.

E. the minimum value of the firm's average variable cost lies between $5 and $10.

Consider the following statements when answering this question. I. Increases in the rate of income tax decrease the opportunity cost of attending college. II. The introduction of distance learning, which enables students to watch lectures at home, decreases the opportunity cost of attending college.

I and II are both true.

When there are economies of scale,

MC < AC, so cost-output elasticity is less than 1.

You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. • Three employees can generate an average product of 4 cars per person in each hour, and • five employees can generate an average product of 3 cars per person in each hour. What is the marginal product of labor as you increase the labor from three to five employees? • MP = 3 cars • MP = 15 cars • MP = -1 cars • MP = 1.5

MP = 1.5 cars

You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. Three employees can generate an average product of 6 cars per person in each hour, and four employees can generate an average product of 5 cars per person in each hour. What is the marginal product of labor as you increase the labor from three to four employees?

MP = 2 cars

Which of the following is NOT an expression for the cost minimizing combination of inputs?

MRTS = MPL /MPK

Which of the following is NOT an expression for the cost minimizing combination of inputs? • MPL/w = MPK/r. • MRTS = w/r .• MPL/MPK = w/r. • MRTS = MPL /MPK.

MRTS = Mpl/MPk

Which of the following is NOT a necessary condition for long-run equilibrium under perfect competition?

Prices are relatively low

Which of the following is NOT a necessary condition for long-run equilibrium under perfect competition? • No firm has an incentive to enter the market. • No firm has an incentive to exit the market. • Each firm earns zero economic profit. • Each firm is maximizing profit. • Prices are relatively low.

Prices are relatively low

In 1985, Alice paid $20,000 for an option to purchase ten 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

In a constant-cost industry, an increase in demand will be followed by • no increase in supply.• an increase in supply that will not change price from the higher level that occurs after the demand shift. • an increase in supply that will bring price down below the level it was before the demand shift. • a decrease in demand to keep price constant. • an increase in supply that will bring price down to the level it was before the demand shift.

an increase in supply that will bring price down to the level it was before the demand shift.

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of$20 per hour. The marginal product of labor is 2, and the marginal product of capital is 5. The firm:

could reduce the cost of producing its current output level by employing more capital and less labor.

In a production process, all inputs are increased by 10%; but output increases less than 10%. This means that the firm experiences

decreasing returns of scale

Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as a. P = MR. b. P = AVC. c. AR = MR. d. P = AC. e. P = MC.

e. P = MC

A firm's producer surplus equals its economic profit when A. average variable costs are minimized. B. average fixed costs are minimized. C. marginal costs equal marginal revenue. D. total revenues equal total variable costs. E. fixed costs are zero.

fixed costs are zero.

An isocost line reveals the...

input combinations that can be purchased for a given total cost.

The function which shows combinations of inputs that yield the same output is called a(n):

isoquant curve

The short-run supply curve for a competitive firm is...

its MC curve above the minimum point of the AVC curve.

The supply curve for a competitive firm is... •its entire MC curve. • the upward-sloping portion of its MC curve. • its MC curve above the minimum point of the ATC curve. • its MR curve. • its MC curve above the minimum point of the AVC curve.

its MC curve above the minimum point of the AVC curve.

A firm maximizes profit by operating at the level of output where:

marginal revenue equals marginal cost.

Two soft-drink firms, Fizzle & Sizzle, operate on a river. Fizzle is farther upstream, and gets cleaner water, so its cost of purifying water for use in the soft drinks is lower than Sizzle's by $500,000 yearly. Fizzle and Sizzle:

may or may not be perfect competitors, but their position on the river has nothing to do with it

Fixed costs are fixed with respect to changes in:

output

The shutdown decision can be restated in terms of producer surplus by saying that a firm should produce in the short run as long as A. revenue exceeds producer surplus. B. producer surplus exceeds fixed cost. C. producer surplus exceeds variable cost. D. profit and producer surplus are equal. E. producer surplus is positive.

producer surplus is positive.

Consider a competitive market in which the market demand for the product is expressed as P = 75 - 1.5Q, and the supply of the product is expressed as P = 25 +0.50Q. Price, P, is in dollars per unit sold, and Q represents rate of production and sales in hundreds of units per day. The typical firm in this market has a marginal cost of MC = 2.5 + 10q. In equilibrium, The rate of sales of the typical firm is

q=3.5 (hundreds per day)

At the current level of output, • long-run marginal cost is $50 and • long-run average cost is $75. This implies that:• there are neither economies nor diseconomies of scale .• there are diseconomies of scale. • the cost-output elasticity is greater than one. • there are economies of scale.

there are economies of scale

Higher input prices result in A. upward shifts of MC and increases in output. B. downward shifts of MC and reductions in output. C. downward shifts of MC and increases in output. D. increased demand for the good the input is used for. E. upward shifts of MC and reductions in output.

upward shift of MC and reductions in output.

Higher input prices result in...

upward shifts of MC and reductions in output.