Question 1

Which of the following statements best explains why long-run average cost is never greater than short-run average cost?

Accepted Answer

A)  In the long run, tangency of the isocost and isoquant is attainable. This is not necessarily true in the short run. 
B)  In the long run, diseconomies of scale might not occur, but in the short run diminishing marginal returns do. 
C)  In the long run, the cost of capital declines because the firm is able to pay down some of its debts. 
D)  In the long run, the average cost curve need not be U-shaped, but in the short run it is. 
A)  In the long run, tangency of the isocost and isoquant is attainable. This is not necessarily true in the short run. 
B)  In the long run, diseconomies of scale might not occur, but in the short run diminishing marginal returns do. 
C)  In the long run, the cost of capital declines because the firm is able to pay down some of its debts. 
D)  In the long run, the average cost curve need not be U-shaped, but in the short run it is.

Question 2

For the following, please answer "True" or "False" and explain why.
-Short-run costs are never equal or lower than long-run cost.

Accepted Answer

A) True 
 B)False

Question 3

Consider a general cost function C(q),with Average Cost=C(q)/q.Prove using calculus that the quantity which minimizes the Average Cost function is also at the point where the Marginal Cost equals the Average Cost.To do this,first derive the necessary condition for the AC to be at a minimum.

Accepted Answer

Consider a cost function C(q).Then AC(q)

Question 4

Applications to MBA programs rose during the economic downturn in 2008.This is best explained by:

Accepted Answer

A)  The opportunity cost of attending an MBA dropped for most applicants due to poor job prospects. 
B)  More teachers were available to teach MBA classes due to the lower opportunity cost of teaching. 
C)  The explicit costs of attending an MBA program fell in 2008. 
D)  The implicit costs of attending an MBA program rose in 2008. 
A)  The opportunity cost of attending an MBA dropped for most applicants due to poor job prospects. 
B)  More teachers were available to teach MBA classes due to the lower opportunity cost of teaching. 
C)  The explicit costs of attending an MBA program fell in 2008. 
D)  The implicit costs of attending an MBA program rose in 2008.

Question 5

Consider a general Cobb-Douglas production function
q = ALᵃKᵇ
where A,a and b are positive constants.
Using this production function,derive the short-run cost function for a fixed capital stock,K₀,wage rate w,and capital rental rate r.

Accepted Answer

The production function is
q =

Question 6

The long run average cost curve may initially slope downward due to

Accepted Answer

A)  decreasing average fixed costs. 
B)  increasing marginal returns. 
C)  economies of scale. 
D)  All of the above. 
A)  decreasing average fixed costs. 
B)  increasing marginal returns. 
C)  economies of scale. 
D)  All of the above.

Question 7

Suppose MPL = 0.5 ∗ (q/L)and MPK = 0.5 ∗ (q/K).In the long run,the firm will hire equal amounts of capital and labor

Accepted Answer

A)  all of the time. 
B)  only when w = r. 
C)  only when w = 0.5 ∗ r. 
D)  at no point in time. 
A)  all of the time. 
B)  only when w = r. 
C)  only when w = 0.5 ∗ r. 
D)  at no point in time.

Question 8

Marginal cost is equal to

Accepted Answer

A)  the increase in total cost from increasing the amount of labor by one unit. 
B)  the increase in variable cost from increasing the amount of labor by one unit. 
C)  Both A and B. 
D)  Neither A nor B. 
A)  the increase in total cost from increasing the amount of labor by one unit. 
B)  the increase in variable cost from increasing the amount of labor by one unit. 
C)  Both A and B. 
D)  Neither A nor B.

Question 9

If the average cost of producing a good is increasing as a firm produces more of the good,then which of the following must be TRUE?

Accepted Answer

A)  AFC is falling. 
B)  AVC is rising. 
C)  MC > AVC. 
D)  All of the above. 
A)  AFC is falling. 
B)  AVC is rising. 
C)  MC > AVC. 
D)  All of the above.

Question 10

What are the functions for MC and AC if TC = 100q + 100q²? Are the returns to scale increasing,decreasing,or constant?

Accepted Answer

MC = 100 + 200q
AC = 100 + 100

Question 11

For the following, please answer "True" or "False" and explain why.
-Four years after graduating from college you must decide if you want to go on as an accountant (your college major)or if you want to make a career change and become a singer.The cost of your education will matter for your decision.

Accepted Answer

A) True 
 B)False

Question 12

Suppose a firm can only vary the quantity of labor hired in the short run.An increase in the cost of capital will

Accepted Answer

A)  increase the firm's marginal cost. 
B)  decrease the firm's marginal cost. 
C)  have no effect on the firm's marginal cost. 
D)  More information is needed to answer the question. 
A)  increase the firm's marginal cost. 
B)  decrease the firm's marginal cost. 
C)  have no effect on the firm's marginal cost. 
D)  More information is needed to answer the question.

Question 13

Sam's company produces output with labor and capital.At the current quantities of labor and capital,the following information is obtained: the output produced by spending one more dollar on labor exceeds the output produced by spending one more dollar on capital.In the long run,is Sam minimizing costs? If not,explain how capital and labor should change (holding output constant)and how this relates to the MRTS = w/r condition.

Accepted Answer

The last dollar rule is not sa

Question 14

For the following, please answer "True" or "False" and explain why.
-The marginal cost curve intersects the average fixed cost curve at its minimum.

Accepted Answer

A) True 
 B)False

Question 15

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month.Joey's dad is thinking of increasing the rent to $400 per month.As a result Joey's marginal cost of cutting grass will

Accepted Answer

A)  increase by $100 divided by the amount of grass cut. 
B)  increase by $100. 
C)  decrease by $100. 
D)  not change. 
A)  increase by $100 divided by the amount of grass cut. 
B)  increase by $100. 
C)  decrease by $100. 
D)  not change.

Question 16

Suppose firm has a constant marginal product of labor - one additional worker adds four units of output given any initial quantity of workers.What do the average variable and marginal costs look like for this firm? Provide a graph of the MC and AVC.

Accepted Answer

MC = w/MP

Question 17

Suppose the cost of producing two goods,x and y,can be represented as C = ax + by + cxy.If there are economies of scope,then which of the following must be true?

Accepted Answer

A) c > 0 B) a + b = -c C) c = 0 D) c < 0 A) c > 0 B) a + b = -c C) c = 0 D) c < 0

Question 18

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,an increase in the price of shovels will result in

Accepted Answer

A)  fewer shovels being purchased to produce the same number of trenches. 
B)  more workers being hired to produce the same number of trenches. 
C)  the firm wishing to produce more trenches. 
D)  no change in the firm's input mix. 
A)  fewer shovels being purchased to produce the same number of trenches. 
B)  more workers being hired to produce the same number of trenches. 
C)  the firm wishing to produce more trenches. 
D)  no change in the firm's input mix.

Question 19

A paper company dumps nondegradable waste into a river that flows by the firm's plant.The firm estimates its production function to be:
Q = 6KP,
where Q = annual paper production measured in pounds,K = machine hours of capital,and P = gallons of polluted water dumped into the river per year.The firm currently faces no environmental regulation in dumping waste into the river.Without regulation,it costs the firm $7.50 per gallon dumped.The firm estimates a $30 per hour rental rate on capital.The firm produces 600 million pounds of paper per year.For this problem,consider the long-run production of output.
a.Determine the firm's optimal ratio of wastewater to capital.
b.Given the firm's output of 600 million lbs,how much capital and wastewater should the firm employ?
c.How much will it cost the firm to produce the 600 million lbs of paper?
d.The state environmental protection agency plans to impose a $7.50 fee for each gallon that is dumped (this is in addition to the current cost of $7.50).Assuming that the firm intends to maintain its same output level,how much capital and wastewater should the firm employ?
e.How much will the firm pay in fees? What happens to the firm's cost as a result of the fee?

Accepted Answer

a.MRTS = K/P
w/r = 7.5/30 = 1/4
At the o

Question 20

Fixed costs are

Accepted Answer

A)  a production expense that does not vary with output. 
B)  a production expense that changes with the quantity of output produced. 
C)  equal to total cost divided by the units of output produced. 
D)  the amount by which a firm's cost changes if the firm produces one more unit of output. 
A)  a production expense that does not vary with output. 
B)  a production expense that changes with the quantity of output produced. 
C)  equal to total cost divided by the units of output produced. 
D)  the amount by which a firm's cost changes if the firm produces one more unit of output.

Which of the following statements best explains why long-run average cost is never greater than short-run average cost?

For the following, please answer "True" or "False" and explain why. -Short-run costs are never equal or lower than long-run cost.

Consider a general cost function C(q),with Average Cost=C(q)/q.Prove using calculus that the quantity which minimizes the Average Cost function is also at the point where the Marginal Cost equals the Average Cost.To do this,first derive the necessary condition for the AC to be at a minimum.

Applications to MBA programs rose during the economic downturn in 2008.This is best explained by:

Consider a general Cobb-Douglas production function q = ALᵃKᵇ where A,a and b are positive constants. Using this production function,derive the short-run cost function for a fixed capital stock,K₀,wage rate w,and capital rental rate r.

The long run average cost curve may initially slope downward due to

Suppose MPL = 0.5 ∗ (q/L)and MPK = 0.5 ∗ (q/K).In the long run,the firm will hire equal amounts of capital and labor

Marginal cost is equal to

If the average cost of producing a good is increasing as a firm produces more of the good,then which of the following must be TRUE?

What are the functions for MC and AC if TC = 100q + 100q²? Are the returns to scale increasing,decreasing,or constant?

For the following, please answer "True" or "False" and explain why. -Four years after graduating from college you must decide if you want to go on as an accountant (your college major)or if you want to make a career change and become a singer.The cost of your education will matter for your decision.

Suppose a firm can only vary the quantity of labor hired in the short run.An increase in the cost of capital will

For the following, please answer "True" or "False" and explain why. -The marginal cost curve intersects the average fixed cost curve at its minimum.

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month.Joey's dad is thinking of increasing the rent to $400 per month.As a result Joey's marginal cost of cutting grass will

Suppose firm has a constant marginal product of labor - one additional worker adds four units of output given any initial quantity of workers.What do the average variable and marginal costs look like for this firm? Provide a graph of the MC and AVC.

Suppose the cost of producing two goods,x and y,can be represented as C = ax + by + cxy.If there are economies of scope,then which of the following must be true?

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,an increase in the price of shovels will result in

Fixed costs are

Introduction

Supply and Demand

A Consumers Constrained Choice

Demand

Consumer Welfare and Policy Analysis

Firms and Production

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Uncertainty

Property Rights, externalities, rivalry, and Exclusion

Asymmetric Information

Contracts and Moral Hazards

Filters

Exam 7: Costs

Which of the following statements best explains why long-run average cost is never greater than short-run average cost?

For the following, please answer "True" or "False" and explain why. -Short-run costs are never equal or lower than long-run cost.

Consider a general cost function C(q),with Average Cost=C(q)/q.Prove using calculus that the quantity which minimizes the Average Cost function is also at the point where the Marginal Cost equals the Average Cost.To do this,first derive the necessary condition for the AC to be at a minimum.

Applications to MBA programs rose during the economic downturn in 2008.This is best explained by:

Consider a general Cobb-Douglas production function q = ALᵃKᵇ where A,a and b are positive constants. Using this production function,derive the short-run cost function for a fixed capital stock,K₀,wage rate w,and capital rental rate r.

The long run average cost curve may initially slope downward due to

Suppose MPL = 0.5 ∗ (q/L)and MPK = 0.5 ∗ (q/K).In the long run,the firm will hire equal amounts of capital and labor

Marginal cost is equal to

If the average cost of producing a good is increasing as a firm produces more of the good,then which of the following must be TRUE?

What are the functions for MC and AC if TC = 100q + 100q²? Are the returns to scale increasing,decreasing,or constant?

Suppose a firm can only vary the quantity of labor hired in the short run.An increase in the cost of capital will

For the following, please answer "True" or "False" and explain why. -The marginal cost curve intersects the average fixed cost curve at its minimum.

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month.Joey's dad is thinking of increasing the rent to $400 per month.As a result Joey's marginal cost of cutting grass will

Suppose firm has a constant marginal product of labor - one additional worker adds four units of output given any initial quantity of workers.What do the average variable and marginal costs look like for this firm? Provide a graph of the MC and AVC.

Suppose the cost of producing two goods,x and y,can be represented as C = ax + by + cxy.If there are economies of scope,then which of the following must be true?

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,an increase in the price of shovels will result in

Fixed costs are

Introduction

Supply and Demand

A Consumers Constrained Choice

Demand

Consumer Welfare and Policy Analysis

Firms and Production

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Uncertainty

Property Rights, externalities, rivalry, and Exclusion

Asymmetric Information

Contracts and Moral Hazards

Filters