Microeconomics: Quiz 3

Which of the following statements is correct regarding the long run and the long-run average total cost curve? There is more than one correct answer to this question. You must mark all of the correct answers to receive full credit. ☐ In the range of output where a firm has decreasing returns to scale, its LRATC curve is downward sloping. ☐ It is normal as a firm produces increasing amounts of output for it to experience - in order - increasing, then constant, and then decreasing returns scale. ☐ If a firm increases its use of all inputs by 20% and its output increased by 30% then the LRATC curve will be downward sloping in this range of output. ☐ In the long run, a firm has complete flexibility in its input choices. ☐ In the range of output where a firm has constant returns to scale, its LRATC curve is horizontal.

☐ In the range of output where a firm has decreasing returns to scale, its LRATC curve is downward sloping. ☑ It is normal as a firm produces increasing amounts of output for it to experience - in order - increasing, then constant, and then decreasing returns scale. ☑ If a firm increases its use of all inputs by 20% and its output increased by 30% then the LRATC curve will be downward sloping in this range of output. ☑ In the long run, a firm has complete flexibility in its input choices. ☑ In the range of output where a firm has constant returns to scale, its LRATC curve is horizontal.

Oil is used in the production of gasoline. Recently, Russia and Saudi Arabia have substantially increased oil production causing the cost of oil to decrease substantially. Simultaneously, due to the Covid-19 pandemic many people are working from home. Based on this information, what would you expect to happen to the price of gasoline? ☐ It will remain the same. ☐ It will increase. ☐ It will decrease. ☐ More information is needed to answer this question.

☐ It will remain the same. ☐ It will increase. ☑ It will decrease. ☐ More information is needed to answer this question.

According to the optimal input rule, a firm should continue to use additional units of an input as long as _______. ☐ MRP ≤ price of output ☐ MP > 0 ☐ MRP ≥ cost of input ☐ TP > 0 ☐ MP < MRP

☐ MRP ≤ price of output ☐ MP > 0 ☑ MRP ≥ cost of input ☐ TP > 0 ☐ MP < MRP

When a firm produces 200 units of output its average fixed cost is $200. if its average total cost at this output is $500, what is the firm's average variable cost at this output? ☐ More information is needed to answer this question. ☐ $3.00 ☐ None of the answers shown is correct. ☐ $700 ☐ $300

☐ More information is needed to answer this question. ☐ $3.00 ☐ None of the answers shown is correct. ☐ $700 ☑ $300

Which of the following statements about cost curves is correct? There is more than one answer to this question. You must mark all of the correct answers to receive full credit. ☐ The average fixed cost curve is a horizontal line. ☐ The total cost curve and the total variable cost curve have the same shape. ☐ The average variable cost curve and average total cost curves get closer as output increases but they never touch. ☐ The long run average total cost curve is a U-shaped curve. ☐ The slope of the total cost curve is marginal cost.

☐ The average fixed cost curve is a horizontal line. ☑ The total cost curve and the total variable cost curve have the same shape. ☑ The average variable cost curve and average total cost curves get closer as output increases but they never touch. ☑ The long run average total cost curve is a U-shaped curve. ☑ The slope of the total cost curve is marginal cost.

Suppose that the cost to hire a worker for one more hour is $15. The addition to output from hiring the worker for one more hour would be 5 units. The output produced can be sold for $4/unit. Which of the following statements is correct? ☐ The firm should not hire the worker for one more hour because MRP < wage rate. ☐ The firm should hire the worker for one more hour because it has increasing marginal returns. ☐ The firm should hire the worker for one more hour because MRP > wage rate. ☐ The firm should hire the worker for one more hour because the total output would increase. ☐ The firm should hire the worker for one more hour because the marginal product is positive.

☐ The firm should not hire the worker for one more hour because MRP < wage rate. ☐ The firm should hire the worker for one more hour because it has increasing marginal returns. ☑ The firm should hire the worker for one more hour because MRP > wage rate. ☐ The firm should hire the worker for one more hour because the total output would increase. ☐ The firm should hire the worker for one more hour because the marginal product is positive.

Assume a firm increases its use of ONE input and the addition to output decreases. Which of the following statements is correct? There is more than one answer to this question. You must mark all of the correct answers to receive full credit. ☐ The firm's long run average total cost increases. ☐ The firm has diminishing marginal returns. ☐ The firm's marginal cost increases. ☐ The firm's total output increases. ☐ The firm has decreasing returns to scale.

☐ The firm's long run average total cost increases. ☑ The firm has diminishing marginal returns. ☑ The firm's marginal cost increases. ☑ The firm's total output increases. ☐ The firm has decreasing returns to scale.

Assume that if a firm uses one more unit of one input it will have diminishing marginal returns. If the firm uses one more unit of that one input its total output will decrease. ☐ True ☐ False

☐ True ☑ False

A firm can only have one of the following costs when it has zero output. Which one is it? ☐ average variable cost ☐ fixed cost ☐ average fixed cost ☐ marginal cost ☐ average total cost

☐ average variable cost ☑ fixed cost ☐ average fixed cost ☐ marginal cost ☐ average total cost

When a firm produced no output its total cost was $1,000. When it produced 20 units of output its total cost was $2,500. What is the firm's total fixed cost? ☐ $1,000 ☐ $50 ☐ $2,500 ☐ $1,500 ☐ $500

☑ $1,000 ☐ $50 ☐ $2,500 ☐ $1,500 ☐ $500

In a graph of cost curves, what is the vertical distance between the ATC curve and the AVC curve? ☐ AFC ☐ TFC ☐ LRATC ☐ MC ☐ TC

☑ AFC ☐ TFC ☐ LRATC ☐ MC ☐ TC

identify the correct observations of cost curves in the following list. There is more than one answer to this question. You must mark all of the correct answers to receive full credit. ☐ Total variable cost continually increases as output increases. ☐ The average variable cost curve lies below the average total cost curve. ☐ Average total cost continually decreases as output increases. ☐ When marginal cost is below average total cost, average total cost decreases. ☐ The marginal cost curve passes through the minimum points of the average variable cost and average total cost curves.

☑ Total variable cost continually increases as output increases. ☑ The average variable cost curve lies below the average total cost curve. ☐ Average total cost continually decreases as output increases. ☑ When marginal cost is below average total cost, average total cost decreases. ☑ The marginal cost curve passes through the minimum points of the average variable cost and average total cost curves.

In the short run, when a firm has diminishing marginal returns its marginal cost curve slopes up. Similarly, in the long run, when a firm has decreasing returns to scale its long run average total cost curve slopes up. ☐ True ☐ False

☑ True ☐ False

The average fixed cost curve can get infinitely close to the vertical axis and the horizontal axis but it cannot touch either axis. ☐ True ☐ False

☑ True ☐ False

The logic behind the optimal purchase rule and the optimal input rule is the same: an activity should continue as long as the additional (marginal) benefit is at least as large as the additional (marginal) cost. ☐ True ☐ False

☑ True ☐ False