Micro Test 2

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

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

Accounting costs include only explicit costs.

Use the following two statements to answer this question: I. If the marginal product of labor is zero, the total product of labor is at its maximum. II If the marginal product of labor is at its maximum, the average product of labor is falling.

1 is true, 2 is false

Use the following two statements to answer this question: I. Isoquants cannot cross one another. II. An isoquant that is twice the distance from the origin represents twice the level of output

1 is true, 2 is false

Generally, long-run elasticities of supply are

greater than short-run elasticities, because firms can make alterations to plant size and input combinations to be more flexible in production.

A production function defines the output that can be produced

if the firm is technically efficient

An isocost line reveals the

input combinations that can be purchased with a given outlay of funds.

The textbook for your class was not produced in a perfectly competitive industry because

it is not costless to enter or exit the textbook industry, upper-division microeconomics texts are not all alike, and there are so few firms in the industry that market shares are not small, and firms' decisions have an impact on market price.

Generally, economies of scope are present when

joint output is greater from a single firm producing two goods than could be achieved by two different firms each producing a single product (assuming equivalent production inputs in both situations).

Marginal revenue, graphically, is

the slope of the total revenue curve at a given point.

When the TR and TC curves have the same slope,

they are the furthest from each other.

Marginal product crosses the horizontal axis (is equal to zero) at the point where

total product is maximized

A firm's marginal product of labor is 4 and its marginal product of capital is 5. If the firm adds one unit of labor, but does not want its output quantity to change, the firm should

use 0.8 fewer units of capital

Suppose the long-run cost function is C = 3q. What is the cost-output elasticity for this case?

1

A perfectly competitive hardware manufacturer has total revenue of $85 million, total variable costs of $45 million, and fixed costs of $10 million. What is the firm's producer surplus?

$40 million

Writing total output as Q, change in output as (delta)Q, total labor employment as L, and change in labor employment as (delta)L, the marginal product of labor can be written algebraically as

(delta)Q/(delta)L

Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be

-4/5

The total cost (TC) of producing computer software diskettes (Q) is given as: What is the fixed cost?

200

The total cost (TC) of producing computer software diskettes (Q) is given as: What is the marginal cost?

5

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

5 + (200/Q)

The total cost (TC) of producing computer software diskettes (Q) is given as: . What is the variable cost?

5Q

Use the following two statements to answer this question: I. "Decreasing returns to scale" and "diminishing returns to a factor of production" are two phrases that mean the same thing. II Diminishing returns to all factors of production implies decreasing returns to scale.

Both 1 and 2 are false

In the long run, which of the following is considered a variable cost?

Expenditures for research and development Expenditures for raw materials Expenditures for wages

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

P = MC

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 = 1.5 cars

Joe owns a coffee house and produces coffee drinks under the production function q = 5KL where q is the number of cups generated per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). What is the marginal product of labor?

MP=5K

Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000, and the interest rate is 10 percent. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all of his expenses) if he farms the land this year. What should he do?

Sell to ABC Corperation

Which of the following is true regarding the relationship between returns to scale and economies of scope?

There is no definite relationship between returns to scale and economies of scope.

The authors explain that a firm earning a zero economic profit in the long run has earned a competitive return on their investment. What do they mean by "competitive" return in this context?

The firm's return is at least as larger as could be earned in another investment.

At the current level of output, long-run marginal cost is $50 and long-run average cost is $75. This implies that:

There are economies of scale

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

A firm's expansion path is

a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices.

The short run is

a time period in which at least one input is fixed.

If the law of diminishing returns applies to labor then

after some level of employment, the marginal product of labor must fall.

Firms often use patent rights as a:

barriers to entry

Use the following two statements to answer this question: I. The average cost curve and the average variable cost curve reach their minima at the same level of output. II. The average cost curve and the marginal cost curve reach their minima at the same level of output.

both 1 and 2 are false

Consider the following statements when answering this question I. The marginal cost curve intersects the average total cost and average variable cost curves at their minimum values. II. When a firm has positive fixed costs, the output level associated with minimum average variable costs is less than the output associated with minimum average total costs.

both 1 and 2 are true

Use the following two statements to answer this question: I. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output. II. The marginal cost of a given level of output is the slope of the line that is tangent to the variable cost curve at that level of output.

both 1 and 2 are true

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm

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

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

In long-run competitive equilibrium, a firm that owns factors of production will have an

economic profit = $0 and accounting profit > $0.

The cost-output elasticity is used to measure:

economies of scale.

In a short-run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus,

marginal cost is below average variable cost

In a short-run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus,

marginal cost is below average variable cost.

The total cost (TC) of producing computer software diskettes (Q) is given as: What is the average fixed cost?

none of the above

In the short run, a perfectly competitive firm earning positive economic profit is

on the upward-sloping portion of its ATC.

Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making? I. "Even though I hate my MBA classes, I can't quit because I've spent so much money on tuition." II. "To break into the market for soap our firm needs to spend $10M on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account."

only 2

The demand curve facing a perfectly competitive firm is

perfectly horizontal and the same as its average revenue curve and its marginal revenue curve.

The demand curve facing a perfectly competitive firm is

perfectly horizontal.

If a competitive firm has a U-shaped marginal cost curve then

the profit maximizing output is found where MC = MR and MC is increasing.

Joe owns a small coffee shop, and his production function is q = 3KL where q is total output in cups per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). If Joe's capital is currently fixed at K=3 machines, what is his short-run production function?

q=9L

A farmer uses L units of labor and K units of capital to produce Q units of corn using a production function F(K,L). A production plan that uses K=L=10 to produce Q' units of corn where Q<F(10,10) is said to be

technically feasible and inefficient.

We manufacturer automobiles given the production function q = 5KL where q is the number of autos assembled per eight-hour shift, K is the number of robots used on the assembly line (capital) and L is the number of workers hired per hour (labor). If we use K=10 robots and L=10 workers in order to produce q = 450 autos per shift, then we know that production is:

technologically inefficient

The marginal rate of technical substitution is equal to:

the absolute value of the slope of an isoquant and the ratio of the marginal products of the inputs.

When labor usage is at 12 units, output is 36 units. From this we may infer that

the average product of labor is 3.

If a graph of a perfectly competitive firm shows that the point occurs where MR is above AVC but below ATC,

the firm is earning negative profit, but will continue to produce where in the short run.

If the isoquants are straight lines, then

the marginal rate of technical substitution of inputs is constant.

The difference between the economic and accounting costs of a firm are

the opportunity costs of the factors of production that the firm owns.