Question 1

After 2 years of operation,the workers in XYZ Co.become more adept because of their repeating work.As a result,the average cost of production is lowered due to

Accepted Answer

A) economies of scale. 
B) increasing returns to scale. 
C) increasing marginal returns. 
D) learning by doing. 
A) economies of scale. 
B) increasing returns to scale. 
C) increasing marginal returns. 
D) learning by doing.

Question 2

Carmela's pasta factory employs workers and pasta machines according to the following production function
f(L,K)= L.5K.5
The hourly cost of capital is $10 and the hourly cost of workers is $40.
a.Write out the Lagrangian for the cost-minimization problem.
b.Derive the optimal capital to labor ratio.Describe the long-run output expansion path.
c.Suppose Carmela wishes to produce 1000 units of pasta.How much labor and capital should she employ? How much will it cost to produce?
d.An order arrives doubling the amount of pasta Carmela needs to produce.Assuming she is unable to purchase more capital,how much will it cost to meet the new production level?
e.In the long-run,Carmela will be able to employ more capital as well as labor.If Carmela continues to produce 2000 units of output,how much will it cost in the long run?
f.In words,explain why the cost in the long run is different than in the short run.

Accepted Answer

a.The Lagrangian is:
L = 40L + 10K + λ[q

Question 3

In the long run,fixed costs are

Accepted Answer

A) sunk. 
B) avoidable. 
C) larger than in the short run. 
D) not included in production decisions. 
A) sunk. 
B) avoidable. 
C) larger than in the short run. 
D) not included in production decisions.

Question 4

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,the firm's cost function is

Accepted Answer

A) TC = (w/r)∗ q. 
B) TC = (w + r)/q. 
C) TC = (w + r). 
D) TC = (w + r)∗ q. 
A) TC = (w/r)∗ q. 
B) TC = (w + r)/q. 
C) TC = (w + r). 
D) TC = (w + r)∗ q.

Question 5

Suppose that capital and labor must be kept in a fixed proportion to produce a particular good.For example,digging a trench requires one worker who has one shovel.What does this imply about returns to scale?

Accepted Answer

A) There are constant returns to scale. 
B) There are increasing returns to scale. 
C) There are decreasing returns to scale. 
D) Nothing. 
A) There are constant returns to scale. 
B) There are increasing returns to scale. 
C) There are decreasing returns to scale. 
D) Nothing.

Question 6

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 7

Which of the following statements is NOT TRUE?

Accepted Answer

A) AC = AFC + AVC 
B) C = F + VC 
C) AVC = wage/MPL 
D) AFC = AC - AVC 
A) AC = AFC + AVC 
B) C = F + VC 
C) AVC = wage/MPL 
D) AFC = AC - AVC

Question 8

If a pharmaceutical firm is researching ways to improve its heartburn medicine and discovers a technique that will improve its allergy medicine,one could conclude that economies of scope exist in that industry.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following does NOT represent a possible shape of the long-run average cost curve?

Accepted Answer

A) downward sloping 
B) upward sloping 
C) U-shaped 
D) vertical 
A) downward sloping 
B) upward sloping 
C) U-shaped 
D) vertical

Question 10

If average cost is positive,

Accepted Answer

A) marginal cost equals average cost. 
B) marginal cost exceeds average cost. 
C) marginal cost is less average cost. 
D) Not enough information is provided. 
A) marginal cost equals average cost. 
B) marginal cost exceeds average cost. 
C) marginal cost is less average cost. 
D) Not enough information is provided.

Question 11

Sam and Erica are starting a new restaurant in Portland,Oregon.While Sam plans to do the cooking himself,he will need to employ workers and machinery to produce food.He estimates his production function as:
q = 15L.25K
Sam is able to accumulate $10,000 to finance the business.Workers cost $10 and capital costs $50.
a.If Sam wishes to produce the most output with the finances available,how much labor and capital should Sam employ? Use a Lagrangian to solve this problem.
b.Does this bundle of capital and labor also minimize the costs? Explain using a graph.

Accepted Answer

a.The Lagrangian is L = 15L^.25K + λ[10000 -

Question 12

Explain why the marginal cost curve intersects a U-shaped average cost curve at its minimum point.

Accepted Answer

At low quantities,the average cost curve

Question 13

Determine the output expansion path (equation)for a Cobb-Douglas production function f(L,K)= 10LaK1-a.How does the shape of the output expansion path change as "a" changes?

Accepted Answer

Using the MRTS = w/r:
aK/(1 -

Question 14

If a firm buys a building so as to have office space for its workers,the monthly opportunity cost of the building is best measured as

Accepted Answer

A) the monthly mortgage payment the firm must pay. 
B) the price the firm paid divided by twelve. 
C) zero. 
D) the rent the firm could earn if it rented the building to another firm. 
A) the monthly mortgage payment the firm must pay. 
B) the price the firm paid divided by twelve. 
C) zero. 
D) the rent the firm could earn if it rented the building to another firm.

Question 15

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q.Which of the following statements is TRUE at all levels of production?

Accepted Answer

A) MC = AVC 
B) MC = AC 
C) MC > AFC 
D) All of the above. 
A) MC = AVC 
B) MC = AC 
C) MC > AFC 
D) All of the above.

Question 16

In the short run,the point at which average cost is minimized,the line from the origin to the point on the

Accepted Answer

A) total cost curve is tangent to the curve. 
B) total cost curve has the largest slope. 
C) total variable cost curve has the largest slope. 
D) total variable cost curve has the smallest slope. 
A) total cost curve is tangent to the curve. 
B) total cost curve has the largest slope. 
C) total variable cost curve has the largest slope. 
D) total variable cost curve has the smallest slope.

Question 17

A consumer purchases a book by driving across town to a bookstore,standing in line for five minutes to pay the cashier,and then pays $5.The same book is purchased by another consumer who spends two minutes placing the order over the Internet for $10.The book necessarily cost the first consumer less.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following will cause the average fixed cost curve of making cigarettes to shift?

Accepted Answer

A) a $5 million penalty charged to each cigarette maker 
B) a $1 per pack tax on cigarettes 
C) a $3 per hour wage increase 
D) an increase in the demand for cigarettes 
A) a $5 million penalty charged to each cigarette maker 
B) a $1 per pack tax on cigarettes 
C) a $3 per hour wage increase 
D) an increase in the demand for cigarettes

Question 19

Sarah earns $40,000 per year working for a large corporation.She is thinking of quitting this job to work full time in her own business.She will invest her savings of $50,000 (which currently has an annual 10% rate of return)into the business.Her annual opportunity cost of this new business is

Accepted Answer

A) $0. 
B) $40,000. 
C) $45,000. 
D) $90,000. 
A) $0. 
B) $40,000. 
C) $45,000. 
D) $90,000.

Question 20

This question has you determine the effect of a tax on labor on the long-run cost function.Consider a firm with the production function f(L,K)= LK.The wage rate and rental rate on capital are w and r,respectively.
a.Using the Lagrangian,derive the long-run cost function for this firm.
b.Suppose the government taxes labor at by an amount t per unit of labor.Rewrite the long-run cost function including the tax.Hint: the effective wage rate is now w + t.
c.Compute the marginal effect of the tax on the long-run cost function.To do so,compute the partial derivative of the cost function with respect to t.Does an increase in the tax increase the cost linearly?

Accepted Answer

a.The Lagrangian is
L = wL + rK + λ[q -

After 2 years of operation,the workers in XYZ Co.become more adept because of their repeating work.As a result,the average cost of production is lowered due to

In the long run,fixed costs are

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,the firm's cost function is

Suppose that capital and labor must be kept in a fixed proportion to produce a particular good.For example,digging a trench requires one worker who has one shovel.What does this imply about returns to scale?

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

Which of the following statements is NOT TRUE?

If a pharmaceutical firm is researching ways to improve its heartburn medicine and discovers a technique that will improve its allergy medicine,one could conclude that economies of scope exist in that industry.

Which of the following does NOT represent a possible shape of the long-run average cost curve?

If average cost is positive,

Explain why the marginal cost curve intersects a U-shaped average cost curve at its minimum point.

Determine the output expansion path (equation)for a Cobb-Douglas production function f(L,K)= 10L^aK^1-a.How does the shape of the output expansion path change as "a" changes?

If a firm buys a building so as to have office space for its workers,the monthly opportunity cost of the building is best measured as

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q.Which of the following statements is TRUE at all levels of production?

In the short run,the point at which average cost is minimized,the line from the origin to the point on the

A consumer purchases a book by driving across town to a bookstore,standing in line for five minutes to pay the cashier,and then pays $5.The same book is purchased by another consumer who spends two minutes placing the order over the Internet for $10.The book necessarily cost the first consumer less.

Which of the following will cause the average fixed cost curve of making cigarettes to shift?

Sarah earns $40,000 per year working for a large corporation.She is thinking of quitting this job to work full time in her own business.She will invest her savings of $50,000 (which currently has an annual 10% rate of return)into the business.Her annual opportunity cost of this new business is

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

After 2 years of operation,the workers in XYZ Co.become more adept because of their repeating work.As a result,the average cost of production is lowered due to

In the long run,fixed costs are

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,the firm's cost function is

Suppose that capital and labor must be kept in a fixed proportion to produce a particular good.For example,digging a trench requires one worker who has one shovel.What does this imply about returns to scale?

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

Which of the following statements is NOT TRUE?

If a pharmaceutical firm is researching ways to improve its heartburn medicine and discovers a technique that will improve its allergy medicine,one could conclude that economies of scope exist in that industry.

Which of the following does NOT represent a possible shape of the long-run average cost curve?

If average cost is positive,

Explain why the marginal cost curve intersects a U-shaped average cost curve at its minimum point.

Determine the output expansion path (equation)for a Cobb-Douglas production function f(L,K)= 10LaK1-a.How does the shape of the output expansion path change as "a" changes?

If a firm buys a building so as to have office space for its workers,the monthly opportunity cost of the building is best measured as

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q.Which of the following statements is TRUE at all levels of production?

In the short run,the point at which average cost is minimized,the line from the origin to the point on the

Which of the following will cause the average fixed cost curve of making cigarettes to shift?

Sarah earns $40,000 per year working for a large corporation.She is thinking of quitting this job to work full time in her own business.She will invest her savings of $50,000 (which currently has an annual 10% rate of return)into the business.Her annual opportunity cost of this new business is

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

Determine the output expansion path (equation)for a Cobb-Douglas production function f(L,K)= 10L^aK^1-a.How does the shape of the output expansion path change as "a" changes?