Question 1

For the following, please answer "True" or "False" and explain why.
-The "Law of Diminishing Marginal Returns" could also be termed the "Law of Increasing Marginal Costs."

Accepted Answer

A) True 
 B)False  True

Question 2

A firm can minimize cost by

Accepted Answer

A)   picking the bundle of inputs where the lowest isocost line touches the isoquant.
B)   picking the bundle of inputs where the isoquant is tangent to the isocost line.
C)   picking the bundle of inputs where the last dollar spent on one input gives as much extra output as the last dollar spent on any other input.
D)   All of the above. D

Question 3

A firm pays $5 for each unit of capital.Labor costs $5 per hour for the first 10 hours and $10 per hour for every hour thereafter.Draw the isocost curves for total costs of $50 and $100.

Accepted Answer

The answer of A firm pays $5 for each unit...

Question 4

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 ᶠᶦʳᵐ ᶜᵃⁿ ᵒⁿˡʸ ᶦᵐᵖˡᵉᵐᵉⁿᵗ ᵒⁿᵉ ᵒᶠ ᵗʰᵉ ᵗʷᵒ ᵗᵉᶜʰⁿᵒˡᵒᵍᶦᵉˢ ᵃᵗ ᵃ ᵗᶦᵐᵉ.
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

The answer of Consider a firm with two technologies to...

Question 5

In the long run,the expansion path is

Accepted Answer

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

Question 6

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

Accepted Answer

A)   q.
B)   q/10.
C)   10/q.
D)   1.

Question 7

If average cost is decreasing,

Accepted Answer

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

Question 8

Economists proclaim that competitive firms make zero economic profit in the long run.This shows how

Accepted Answer

A)   detached economists are from the real world.
B)   unrealistic economic theory is.
C)   firms cover all their cost, both monetary and non-monetary.
D)   firms cover only monetary cost when economic profits are zero.

Question 9

The total cost of producing one unit is $50.The total cost of producing two units is $75.At a production level of two units,the cost function exhibits

Accepted Answer

A)   economies of scale.
B)   rising average costs.
C)   increasing marginal costs.
D)   constant returns to scale.

Question 10

Explain why the long-run total cost curve,not the short-run total cost curve,shows the lowest cost of producing any level of output.Is there an exception?

Accepted Answer

The answer of Explain why the long-run total cost curve,not...

Question 11

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

The answer of Evren wants to go into the donut...

Question 12

Many universities have either a top football program OR a top basketball program.Very few have both.These results suggest the presence of

Accepted Answer

A)   economies of scope.
B)   diseconomies of scope.
C)   returns to scale.
D)   the law of diminishing marginal returns.

Question 13

What is the last dollar rule for cost-minimization? Provide a brief explanation (in words)as well as the corresponding mathematical equality.If the firm is producing at a point where the isocost line is steeper than the isoquant,what does the last dollar rule imply (i.e.,where is the last dollar most productive,L or K)and how should the firm alter its capital and labor in the long run?

Accepted Answer

The answer of What is the last dollar rule for...

Question 14

-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

The answer of 
-At Albert's Pretzel Company,MPL = 1/L,and MPK...

Question 15

When the isocost line is tangent to the isoquant,then

Accepted Answer

A)   MRTS = w/r.
B)   the firm is producing that level of output at minimum cost.
C)   the last dollar spent on capital yields as much extra output as the last dollar spent on labor.
D)   All of the above.

Question 16

Variable 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.

Question 17

For the following, please answer "True" or "False" and explain why.
-Short-run average cost exceeds long-run average cost only when there are economies of scale.

Accepted Answer

A) True 
 B)False

Question 18

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

The answer of A firm produces output according to the...

Question 19

Explain why in the long run a firm that is cost minimizing will choose K and L where:
w/MPL = r/MPK
What does this tell you about the marginal cost of increasing output through hiring labor and the marginal cost of increasing output through adding capital?

Accepted Answer

The answer of Explain why in the long run a...

Question 20

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.

Exam 7: Costs

For the following, please answer "True" or "False" and explain why. -The "Law of Diminishing Marginal Returns" could also be termed the "Law of Increasing Marginal Costs."