Test 2 Economics 321 Chappell October, Last 4 digits SSN

Transcription

1 Test 2 Economics 32 Chappell October, 2007 Name Last 4 digits SSN Answer multiple choice questions on the form provided. Be sure to write your name and last 4 digits of your social security number on that form, and fill in the grid for the last 4 digits. Answer the analytical questions in the space provided on this test sheet. Multiple Choice: 5 3 points each; 45 points total Analytical Question : 20 points Analytical Question 2: 25 points Analytical Question 3: 0 points 00 total points

2 Multiple Choice (3 points each). ) Which expression correctly defines the marginal product of labor? ΔQ a) MPL = Δ Q b) MPL = K K = K L L = L c) ΔQ MPL = Δ d) ΔQ MPL = Δ L K = K K K = K 2) A total product curve plots what two variables? a) Labor and capital inputs b) Output and the price of the good. c) The price of capital and the price of labor. d) Output and the level of one input. 3) What does the term production set refer to? a) The set of inputs used in production. b) Combinations of inputs and outputs that are feasible according to the production function. c) Feasible production points that yield less than the maximum possible output for given amounts of inputs. d) Feasible production points that yield the maximum possible output for given amounts of inputs. 4) Suppose that a firm chooses capital and labor to minimize its costs of production. If the capital-labor ratio ( K / L) is very sensitive to the ratio of the wage rate to the rental rate ( w/ r), then: a) The elasticity of substitution is large in absolute value. b) The elasticity of substitution is small in absolute value. c) There are increasing returns to scale. d) There are decreasing returns to scale. 5) Suppose that as more labor is used in production, holding the quantity of capital fixed, that the marginal product of labor falls. This indicates that: a) There are increasing returns to scale. b) There are decreasing returns to scale. c) There are constant returns to scale. d) Returns to scale could be increasing, decreasing, or constant. 6) Suppose that all inputs are tripled. If output also triples then: a) There are increasing returns to scale. b) There are decreasing returns to scale. c) There are constant returns to scale. d) Returns to scale could be increasing, decreasing, or constant. 2

3 7) Which statement is correct? a) The marginal product of labor is measured by the slope of a ray from the origin to a point on the total product curve. b) The average product of labor is measured by the slope of the total product curve at a point. c) The average product of labor is measured by the slope of a ray from the origin to a point on the total product curve. d) None of the above. 8) Which statement correctly describes opportunity costs? a) Opportunity costs are fixed costs that are not sunk. b) Opportunity costs are implicit costs incurred when resources are used but when there is no explicit dollar payment paid for the resource. c) Opportunity costs are explicit costs paid in dollars. d) Opportunity costs include all costs associated with the use of a resource, including both explicit and implicit costs. 9) Which statement is correct? a) Fixed costs are always sunk. b) Fixed costs vary with output. c) Sunk costs are irrelevant for current period decision-making. d) All of the above. 0) Which of the production functions below has an elasticity of substitution equal to zero? b b a) Q= AK L b) Q= min ( K, L) c) Q= ak + bl a b d) Q= AK L ) Which statement about the relationship between short-run and long-run average cost curves is correct? a) At every quantity, the short-run average cost curve lies above the long-run average cost curve. b) At every quantity, the short-run average cost curve lies below the long-run average cost curve. c) At every quantity, the short-run average cost curve lies above or just touches the long-run average cost curve. d) At every quantity, the short-run average cost curve lies below or just touches the long-run average cost curve. 2) At a given output, if marginal cost exceeds average cost, then average cost: a) is rising. b) is falling. c) is neither rising nor falling. d) could be rising, falling, or neither. 3

4 3) Suppose that Q = 4, TFC = 20, SMC = 0, and SAC = 30. What is the value of STC? a) 40 b) 60 c) 00 d) 20 4) Suppose that Q = 4, TFC = 20, SMC = 0, and SAC = 30. What is the value of TVC? a) 40 b) 60 c) 00 d) 20 5) Economies of scale exist when a) MC TC > b) AC MC > c) AFC AVC > d) SAC STC > 4

5 Analytical Question (20 points) The diagram below shows an isocost-isoquant diagram.. Label the axes. 2. Derive an expression for the slope of the isocost line (list the expression and explain why that is the correct expression). 3. Derive an expression for the slope of an isoquant (list the expression and explain why that is the correct expression). 4. What is the condition for cost-minimization in the use of inputs to produce a given output in the long run? Why? 5

6 Analytical Question 2 (25 points) The upper panel of the diagram below shows a short-run total cost curve (STC) and the long-run total cost curve for a firm (TC).. What distinguishes the long-run from the short-run? 2. In the lower panel sketch the corresponding long-run average cost curve (AC). 3. In the lower frame, sketch a short-run average cost curve (for the same level of K characterizing the short-run total cost curve in the upper frame). 4. Label the vertical axis in the lower panel (including units). 5. True or False? For the diagram below, at an output of 20, short-run marginal cost and long-run marginal cost will be equal. Briefly explain you answer. $ STC TC Q Q 6

7 Analytical Question 2 Continue your answer as needed. 7

8 Analytical Question 3 (0 points) Consider the production function: Q= 2K L.5.5 Marginal products for this production function are:.5 K MPL = L L MPK = K.5 Also, input prices are given by: w = $2.50 r = $8.00 Currently the firm is using 25 units of capital and 6 units of labor to produce 40 units of output. Both inputs are variable. Which statement below is correct? Demonstrate why the answer you choose is correct.. The firm should use more capital and less labor to minimize the cost of production. 2. The firm should use less capital and more labor to minimize the cost of production. 3. The firm is using correct amounts of capital and labor to minimize the cost of production. 8

9 Notation TC Long-run Total Cost AC Long-run Average Cost MC Long-run Marginal Cost STC Short-run Total Cost TVC Total Variable Cost TFC Total Fixed Cost SAC Short-run Average Cost AVC Average Variable Cost AFC Average Fixed Cost SMC Short-run Marginal Cost 9