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.