Intermediate Microeconomics 220:203:B6 Instructor: Tibor Besedes Exam 2, June 19, 2003 Name:_______________________________________________ SSN:___________________

INSTRUCTIONS: Write your SSN under ID and fill in the proper boxes. Mark A as the test form. Choose the best answer and mark it on the scantron. When you are done, turn in the scantron only. You can keep the exam itself. Please, mind your own work. Good luck! 1. If we take the production function and hold the level of output constant, allowing the amounts of capital and labor to vary, the curve that is traced out is called: a. the total product. b. an isoquant. c. the average product. d. the marginal product. e. none of the above. Consider the following statements when answering this question; I. If a technology exhibits diminishing returns then it also exhibits decreasing return to scale. II. If a technology exhibits decreasing returns to scale then it also exhibits diminishing returns. a. I is true and II is false. b. I is false and II is true. c. Both I and II are true. d. Both I and II are false. 3. The difference between the economic and accounting costs of a firm are a. the accountant's fees b. the corporate taxes on profits c. the opportunity costs of the factors of production that the firm owns d. the sunk costs incurred by the firm e. the explicit costs of the firm Which of the following costs always declines as output increases? a. average cost b. marginal cost c. fixed cost d. average fixed cost e. average variable cost A firm uses two factors of production. Irrespective of how much of each factor is used, both factors always have positive marginal products which imply that a. isoquants are relevant only in the long run b. isoquants have negative slope c. isoquants are convex d. isoquants can become vertical or horizontal e. none of the above 1

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When labor usage is at 12 units, output is 36 units. From this we may infer that a. the marginal product of labor is 3. b. the total product of labor is 1/3. c. the average product of labor is 3. d. none of the above. In a constant-cost industry, an increase in demand will be followed by a. no increase in supply. b. an increase in supply that will not change price from the higher level that occurs after the demand shift. c. an increase in supply that will bring price down to the level it was before the demand shift. d. an increase in supply that will bring price down below the level it was before the demand shift. e. a decrease in demand to keep price constant. Consider the following statements when answering this question I. If the cost of producing each unit of output falls $5, then the short run market price falls $5. II. If the cost of producing each unit of output falls $5, then the long run market price falls $5. a. I and II are true. b. I is true and II is false. c. I is false and II is true. d. I and II are false.

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When the average product is decreasing, marginal product a. equals average product. b. is increasing. c. exceeds average product. d. is decreasing. e. is less than average product. According to the law of diminishing returns a. the total product of an input will eventually be negative. b. the total product of an input will eventually decline. c. the marginal product of an input will eventually be negative. d. the marginal product of an input will eventually decline. e. none of the above.

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For questions 11 and 12, consider the diagram below where a perfectly competitive firm faces a price of $40.

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At 67 units of output, profit is a. maximized and zero. b. maximized and negative. c. maximized and positive. d. not maximized, and zero. e. not maximized, and negative. At the profit-maximizing level of output, a. AVC is minimized. b. ATC is minimized. c. MC is minimized. d. Total cost is minimized. e. No costs are minimized. At output level Q2 a. average fixed cost is increasing. b. average variable cost equals average fixed cost. c. marginal cost is negative. d. average total cost is negative. e. none of the above.

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Consider the following statements when answering this question; I. A firm's marginal cost curve does not depend on the level of fixed costs. II. As output increases the difference between a firm's average total cost and average variable cost curves cannot rise. a. I is true and II is false. b. I is false and II is true. c. I and II are both true. d. I and II are both false.

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Consider the following statements when answering this question I. If the marginal product of labor falls whenever more labor is used, and labor is the only factor of production used by the firm, than at every output level the firm's short run average variable cost exceeds marginal cost. II. If labor obeys the law of diminishing returns, and is the only factor of production used by the firm, then at every output level short run average variable costs exceed marginal costs. a. I is true and II is false. b. I is false and II is true. c. I and II are both true. d. I and II are both false.

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In a certain textile firm labor is the only short term variable input. The manager notices that the marginal product of labor is the same for each unit of labor, which implies that a. the average product of labor is always greater that the marginal product of labor b. the average product of labor is always equal to the marginal product of labor c. the average product of labor is always less than the marginal product of labor d. as more labor is used, the average product of labor falls e. there is no unambiguous relationship between labor's marginal and average products Marginal product crosses the horizontal axis (is equal to zero) at the point where a. average product is maximized. b. total product is maximized. c. diminishing returns set in. d. output per worker reaches a maximum. e. all of the above are true. Assume that average product for six workers is fifteen. If the marginal product of the seventh worker is eighteen, a. marginal product is rising. b. marginal product is falling. c. average product is rising. d. average product is falling.

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A firm's short run average cost curve is U-shaped. Which of these conclusions can be reached regarding the firm's returns to scale? a. The firm experiences increasing returns to scale. b. The firm experiences increasing, constant, and decreasing returns in that order. c. The firm experiences first decreasing, then increasing returns to scale. d. The short run average cost curve reveals nothing regarding returns to scale. At the current level of output long run marginal cost is $50 and long run average cost is $75. This implies that: a. there are neither economies nor diseconomies of scale. b. there are economies of scale. c. there are diseconomies of scale. d. the cost-output elasticity is greater than one. At point A, the marginal product of labor is a. rising. b. at its minimum. c. at its maximum. d. diminishing.

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Moving down a typical isoquant, the slope of the isoquant a. becomes flatter. b. becomes steeper. c. remains constant. d. becomes linear. 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 a. use five fewer units of capital. b. use 0.8 fewer units of capital. c. use 1.25 fewer units of capital. d. add 1.25 units of capital.

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The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average total cost? a. 500 b. 5Q c. 5 d. 5 + (200/Q) e. none of the above 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. a. Both I and II are true. b. I is true and II is false. c. I is false and II is true. d. Both I and II are false.

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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. For 100 cookies, the average total cost is a. falling. b. rising. c. neither rising or falling. d. less than average fixed cost. Which of the following is NOT an expression for the cost minimizing combination of inputs? a. MRTS = MPL MPK. b. MPL/w = MPK/r. c. MRTS = w/r. d. MPL/MPK = w/r. e. None of these. A firm employs 100 workers, each at $10 per hour, and 50 units of capital, each at $21 per hour. The marginal product of labor is 3 and the marginal product of capital is 5. The firm a. is producing its current output level at the minimum cost. b. could reduce the cost of producing its current output level by employing more capital and less labor. c. could reduce the cost of producing its current output level by employing more labor and less capital. d. could increase its output at no extra cost by employing more capital and less labor. e. both (b) and (d) are true. The cost-output elasticity equals 1.4. This implies that: a. there are neither economies nor diseconomies of scale. b. there are economies of scale. c. there are diseconomies of scale. d. marginal cost is less than average cost. 6

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Every firm maximizes profit where a. average revenue equals average cost. b. average revenue equals average variable cost. c. total costs are minimized. d. marginal revenue equals marginal cost. e. marginal revenue exceeds marginal cost by the greatest amount. At the profit-maximizing level of output, marginal profit a. is also maximized. b. is zero. c. is positive. d. is increasing. e. may be positive, negative or zero. 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 = MC. e. P = AC. If a graph of a perfectly competitive firm shows that the MR=MC point occurs where MR is above AVC but below ATC, a. the firm is earning negative profit, and will shut down rather than produce that level of output. b. the firm is earning negative profit, but will continue to produce where MR=MC in the short run. c. the firm is still earning positive profit, so long as variable costs are covered. d. the firm is covering explicit, but not implicit, costs. e. the firm can cover all of fixed costs but only a portion of variable costs. In a short-run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus, a. average fixed cost is constant. b. marginal cost is above average variable cost. c. marginal cost is below average fixed cost. d. marginal cost is below average variable cost.

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The diagram below contains _____ cost curves. a. short run b. intermediate run c. long run d. both short run and long run

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Higher input prices result in a. upward shifts of MC and reductions in output. b. upward shifts of MC and increases in output. c. downward shifts of MC and reductions in output. d. downward shifts of MC and increases in output. e. increased demand for the good the input is used for. If a competitive firm has a U shaped marginal cost curve then a. the profit maximizing output will always generate positive economic profit b. the profit maximizing output will always generate positive producer surplus c. the profit maximizing output is found where MC=MR and MC is decreasing d. the profit maximizing output is found where MC=MR and MC is constant e. the profit maximizing output is found where MC=MR and MC is increasing The shutdown decision can be restated in terms of producer surplus by saying that a firm should produce in the short run so long as a. revenue exceeds producer surplus. b. producer surplus is positive. c. producer surplus exceeds fixed cost. d. producer surplus exceeds variable cost. e. profit and producer surplus are equal.

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For the following questions, consider the table below: Q 0 1 2 3 4 5 6 39. P $30 $30 $30 $30 $30 $30 $30 TR $0 $ 30 $ 60 $ 90 $120 $150 $180 MR --$30 $30 $30 $30 $30 $30 TC $ 15 $ 25 $ 40 $ 60 $ 85 $115 $150 MC --$10 $15 $20 $25 $30 $35

That the table shows a short-run situation is evident from a. the linear marginal revenue function. b. the constant price. c. the increasing marginal cost. d. the presence of positive costs at Q=0. e. the absence of marginal values at Q=0. If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the a. rate at which labor can be substituted for capital without changing output rate. b. average rate at which labor can be substituted for capital without changing rate. c. marginal product of labor. d. marginal product of capital. The diagram below shows an isoquant for the production of wheat. Which point has the highest marginal productivity of labor? a. point A. b. point B. c. point C. d. point D.

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A firm never operates a. at the minimum of its ATC curve. b. at the minimum of its AVC curve. c. on the downward-sloping portion of its ATC curve. d. on the downward-sloping portion of its AVC curve. e. on its long-run marginal cost curve. 9

For questions 43 and 44, consider the figure below:

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As the firm makes its long-run adjustment, which must be true? a. It takes advantage of increasing returns to scale. b. It suffers from decreasing returns to scale. c. It takes advantage of increasing marginal product. d. It takes advantage of economies of scale. e. It takes advantage of diseconomies of scale. As the competitive industry, not just the firm in question, moves toward long-run equilibrium, how much profit will the firm earn? a. $0. b. $306. c. $312. d. $1000. e. $1024.

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