Question 1

Long-run average cost is never greater than short-run average cost because in the long run

Accepted Answer

A) capital costs equal zero. 
B) the firm can move to the lowest possible isocost curve. 
C) wages always increase over time. 
D) wages always decrease over time. 
A) capital costs equal zero. 
B) the firm can move to the lowest possible isocost curve. 
C) wages always increase over time. 
D) wages always decrease over time.

Question 2

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 3

An accountant may amortize the expense of a durable good by dividing the total amount spent on the good by the number of years the good is expected to last.An economist may amortize the expense of a durable and never fully account for the total expense.

Accepted Answer

A) True 
 B)False

Question 4

Suppose the short-run production function is q = 10 ∗ L.If the wage rate is $10 per unit of labor,then AFC equals

Accepted Answer

A) 0. 
B) 1. 
C) 10/q. 
D) It cannot be determined from the information provided. 
A) 0. 
B) 1. 
C) 10/q. 
D) It cannot be determined from the information provided.

Question 5

Suppose Ralph hires workers at his supermarket at a wage of $12/hour.Ralph currently has 10 checkstands (i.e. ,capital)with a rental rate of $10/hour.Production of customers served (i.e. ,output)is determined by the hourly production function
f(L,K)= 0.5L3/4K2
For the questions that follow,the number of checkstands is fixed.Show your work clearly.
a.If Ralph wants to serve 400 customers per hour,how many workers must he employ? How much will it cost to serve 400 customers per hour?
b.Derive Ralph's short-run cost function with the 10 checkstands.
c.Derive the equations for the MC,AC,AVC,and AFC.

Accepted Answer

a.0.5L^3/4(10)² = 400 L^3/4 = 80 L=16 0

Question 6

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 7

A firm produces output according to the following function:
q = f (L,K)= L1/2 K1/3
The cost of labor is $9 per hour and the rental cost of capital is $4 per hour.
a.With the given prices,use the Lagrangian method to compute the optimal (cost-minimizing)capital to labor ratio (K/L)for the firm.
b.Suppose the firm wishes to produce 72 units of output.How much capital and how much labor does the firm employ?
c.What is the total cost of producing 72 units of output?
d.Suppose that the firm suddenly decides to double the quantity of output but only has a day to complete the order.Therefore,in that time,the amount of capital is fixed but labor hours are not.How much will it cost to produce 144 units of output? How much would it cost if the firm could also vary capital? Compute as well as providing a graph (isocost/isoquant)illustrating the optimal bundles.

Accepted Answer

a.The Lagrangian is:
L = 9L + 4K + λ[q -

Question 8

Short-run costs are never equal or lower than long-run cost.

Accepted Answer

A) True 
 B)False

Question 9

A firm currently employs five units of capital.When the firm adds a sixth unit of capital,it is able to reach a lower average cost for a greater quantity of output.What does this tell you about the shape of the long-run average cost curve and are economies of scale occurring? Explain briefly.Does this necessarily imply increasing or decreasing returns to scale in production or is it ambiguous? Explain briefly.

Accepted Answer

Because the average cost is decreasing a

Question 10

A specific tax of $1 per unit of output will affect a firm's

Accepted Answer

A) average total cost,average variable cost,average fixed cost,and marginal cost. 
B) average total cost,average variable cost,and average fixed cost. 
C) average total cost,average variable cost,and marginal cost. 
D) marginal cost only. 
A) average total cost,average variable cost,average fixed cost,and marginal cost. 
B) average total cost,average variable cost,and average fixed cost. 
C) average total cost,average variable cost,and marginal cost. 
D) marginal cost only.

Question 11

Joey notices that by employing an additional hairdresser,he will be able to increase the number of haircuts in his salon by 15 haircuts per day.The daily salary he will need to pay the hairdresser is $200.How much is the cost for an additional haircut? Describe the general relationship between the marginal product and marginal cost curves.

Accepted Answer

Since employing an additional hairdresse

Question 12

Consider a firm with two technologies to choose between when producing output.The cost function when using technology 1 is given by:
c1(q)= 3600 + 65q + 36q2
The cost function when using technology 2 is given by:
c2(q)= 900 + 900q +q2
Assume that the firm can only implement one of the two technologies at a time.
a.If the firm wishes to produce output at the lowest per-unit cost,which technology should it choose and how much output should it produce?
b.Which technology should the firm choose if it wishes to produce 15 units of output? What about 25 units of output?

Accepted Answer

a.Compute the minimum points for the ave

Question 13

To dig a trench,each worker needs a shovel.Workers can use only one shovel at a time.Workers without shovels do nothing,and shovels cannot operate on their own.Graphically determine the number of shovels and workers used by a firm to dig two trenches when:
a.w = 10 and r = 10
b.w = 10 and r = 5

Accepted Answer

@#IMG-DLM& See the above figure.Because

Question 14

Evren wants to go into the donut business.For $500 per month he can rent a bakery complete with all the equipment he needs to make a dozen different kinds of donuts (K = l,r = 500).He must pay unionized donut bakers a monthly salary of $400 each.He projects his monthly production function to be
Q = 5KL
where Q is tons of donuts.
a.With the current level of capital,what is the marginal product of labor? Is the marginal product diminishing? Explain.
b.If Evren wishes to make 25 tons of donuts,how many bakers are required given the current level of capital? How much will it cost to produce this (total cost)?
c.Derive Evren's short-run cost function with K=1.
d.Derive the marginal cost curve from your answer to c.and show the relationship between the marginal cost and marginal product of labor.

Accepted Answer

a.TP = 5L,so MP = dTP/dL = 5.It is not d

Question 15

Consider the following two situations.
(i)You purchase a $10 movie ticket in advance over the Internet,but when arriving at the theater,you realize that you lost the ticket.The only way to see the movie is to purchase a new ticket.
(ii)On the way to seeing a movie,you drop a $10 bill.You still can afford the movie,but you have lost the $10.
How should you,a rational person,respond to the two situations?

Accepted Answer

A) You should still see the movie in both situations. 
B) You should respond the same way to each situation,whether it is to see the movie or not. 
C) In the first situation,you should skip the movie;in the second,you should still see the movie. 
D) In each situation,you should not see the movie. 
A) You should still see the movie in both situations. 
B) You should respond the same way to each situation,whether it is to see the movie or not. 
C) In the first situation,you should skip the movie;in the second,you should still see the movie. 
D) In each situation,you should not see the movie.

Question 16

-At Albert's Pretzel Company,MPL = 1/L,and MPK = 1/K.The isoquant for 100 pounds of pretzels daily is shown in the above figure.Albert minimizes the cost of producing 100 pounds of pretzels daily by hiring five units of labor and 10 units of capital when w = 50 and r = 25.When r rises to 100,what is the minimum cost of producing 100 pounds of pretzels daily in the short run? in the long run?

Accepted Answer

In the short run,the input mix cannot ch

Question 17

The marginal cost curve intersects the average fixed cost curve at its minimum.

Accepted Answer

A) True 
 B)False

Question 18

In the long run,the expansion path is

Accepted Answer

A) horizontal. 
B) vertical. 
C) diagonal. 
D) Not enough information. 
A) horizontal. 
B) vertical. 
C) diagonal. 
D) Not enough information.

Question 19

-The above figure shows the long-run expansion path.With an increase in the wage rate,the long run expansion path will

Accepted Answer

A) remain unchanged. 
B) shift up. 
C) shift down. 
D) become flatter. 
A) remain unchanged. 
B) shift up. 
C) shift down. 
D) become flatter.

Question 20

Suppose capital and labor are perfect substitutes resulting in a production function of
q = K + L.That is,the isoquants are straight lines with a slope of -1.Derive the long-run total cost function TC = C(q)when the wage rate is w and the rental rate on capital is r.

Accepted Answer

The firm will always hire the

Long-run average cost is never greater than short-run average cost because in the long run

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?

An accountant may amortize the expense of a durable good by dividing the total amount spent on the good by the number of years the good is expected to last.An economist may amortize the expense of a durable and never fully account for the total expense.

Suppose the short-run production function is q = 10 ∗ L.If the wage rate is $10 per unit of labor,then AFC equals

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.

Short-run costs are never equal or lower than long-run cost.

A specific tax of $1 per unit of output will affect a firm's

To dig a trench,each worker needs a shovel.Workers can use only one shovel at a time.Workers without shovels do nothing,and shovels cannot operate on their own.Graphically determine the number of shovels and workers used by a firm to dig two trenches when: a.w = 10 and r = 10 b.w = 10 and r = 5

The marginal cost curve intersects the average fixed cost curve at its minimum.

In the long run,the expansion path is

-The above figure shows the long-run expansion path.With an increase in the wage rate,the long run expansion path will

Suppose capital and labor are perfect substitutes resulting in a production function of q = K + L.That is,the isoquants are straight lines with a slope of -1.Derive the long-run total cost function TC = C(q)when the wage rate is w and the rental rate on capital is r.

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

Long-run average cost is never greater than short-run average cost because in the long run

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?

An accountant may amortize the expense of a durable good by dividing the total amount spent on the good by the number of years the good is expected to last.An economist may amortize the expense of a durable and never fully account for the total expense.

Suppose the short-run production function is q = 10 ∗ L.If the wage rate is $10 per unit of labor,then AFC equals

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.

Short-run costs are never equal or lower than long-run cost.

A specific tax of $1 per unit of output will affect a firm's

To dig a trench,each worker needs a shovel.Workers can use only one shovel at a time.Workers without shovels do nothing,and shovels cannot operate on their own.Graphically determine the number of shovels and workers used by a firm to dig two trenches when: a.w = 10 and r = 10 b.w = 10 and r = 5

The marginal cost curve intersects the average fixed cost curve at its minimum.

In the long run,the expansion path is

-The above figure shows the long-run expansion path.With an increase in the wage rate,the long run expansion path will

Suppose capital and labor are perfect substitutes resulting in a production function of q = K + L.That is,the isoquants are straight lines with a slope of -1.Derive the long-run total cost function TC = C(q)when the wage rate is w and the rental rate on capital is r.

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