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Part I．Multiple-choice questions

- Fixed costs facing any firm in the short run include:

- any cost whose total is established at the time the input is purchased.
- the minimum cost of producing any given quantity of output under the most favorable

operating conditions.

- any cost whose per unit charge has been settled for some future period, such as a long-term

wage contract with a labor union.

- total expenses which must be covered even if nothing is produced.

- If the marginal product of an input is positive, but decreasing as more and more of the input is

employed, then:

- total product has reached a maximum and is declining.
- total product is increasing but at a slower and slower rate.
- average product must be declining.
- the firm should produce less output.

- A production function describes:

- how input prices change as the firm changes its output level.
- how much output you will get from a given amount of inputs.
- the level of output that firms should optimally produce at each price level.
- a relationship between prices and quantity demanded.

- The average product of an input is given by the following ratio:

- change in total product/total product.
- change in the employment of one input/change in the employment of all inputs.
- total employment of all inputs/total employment of one input.
- total product/total employment of one input.

- The law of diminishing returns holds that:

- the total product of any input must eventually reach a maximum and fall as the employment

of that input increases.

- the average product of any input must eventually reach a minimum and rise as the

employment of all inputs increases proportionately.

- the marginal product of any input should eventually begin to decline as the employment of

that input increases.

- the average product of any input should fall before it rises as the employment of that input

increases. 2

- Consider the production functions shown in the graph above. Which function displays

diminishing marginal returns to capital?

- (a)
- (b)
- (c)
- (d)

- Marginal costs facing any firm considering a change in output represent:

- extraordinary overtime charges that must sometimes be paid to increase output.
- the cost incurred even if the firm produces zero output.
- the difference between the total cost actually incurred to produce any given output and the

smallest possible total cost of producing that output.

- the increase in total cost that accrues from a 1-unit increase in quantity produced.
- the increase in total cost that accrues from any increase in quantity produced, whether 1 unit

or more.

- Total cost in a certain plant, at an output level of 1000 units daily, is $4900. If production is

reduced by 1 unit, total cost would be $4890. Within this output range:

- average cost is greater than marginal cost.
- average cost and marginal cost are approximately equal.
- marginal cost is greater than average cost. 3

Use the figure below to answer questions 9 through 11.

- At five units of output, the average fixed cost is:

- $5.
- $20.
- $26.
- $100.
- $130.

- The marginal cost of the fifth unit (i.e. increase in output from 4 to 5 units) of output is:

- 0.
- $2.00.
- $2.60.
- $6.00.
- $30.00.

- The average variable cost of five units of output is:

- 0.
- $2.00.
- $2.60.
- $6.00.
- $30.00.

- In a certain plant, marginal cost is $2.00 at 400 units of output and it is $2.50 at 500 units of

output. If output increases within this 400-to-500 range, then average cost:

- must rise.
- must fall.
- must remain constant.
- may fall, may rise, but cannot remain constant throughout this output range.
- must fall and then rise.

4

- Firm X currently employs labor and capital such that the marginal product of capital is twice the

marginal product of labor. If the price of a unit of labor is $8.00 and the price of a unit of capital

is $4.00, Firm X can reduce costs while producing the same level of output by

- substituting labor for capital (use more labor and less capital).
- substituting capital for labor (use more capital and less labor).
- decreasing its use of both capital and labor.
- increasing its use of both capital and labor.
- maintaining its employment of capital and labor at current levels.

- The (absolute) value of the slope of a production isoquant (equal-product curve) is equal to the

- amount of one input used divided by the amount of the other input.
- ratio of the marginal utilities of the two inputs.
- ratio of the marginal products of the two inputs.
- ratio of the marginal costs of the two inputs.

- The production function alone will tell a firm:

- what it will cost to produce any given quantity of output.
- the maximum-profit level of output.
- the various combinations of inputs that should be used in order to produce any given

quantity of output most efficiently, i.e., at the least money cost.

- the various combinations of inputs that could be used in order to produce any given quantity

of output.

5

- Problem-solving questions

The following data describe a short-run production function for ABC, Inc., which hires workers to

produce widgets. Use the table below to complete questions 16 through 18.

Quantity of Total

Labor (Workers) Product (Daily)

0 0

10 50

20 150

30 350

40 500

50 600

60 650

70 650

80 640

90 620

- Calculate the marginal product of the first 10 workers.

Your Answer: __________

- Calculate the average product of the first 50 workers.

Your Answer: __________

- The diminishing returns set in sometime between________ and _________workers.

Your Answer: Between_________ and _________ workers

(Please specify a 10-worker range. For example, between 50 and 60 workers.)

6

Consider the data in the table below for Question 19-20. Farmer Smith rents 15 acres of wheatland

and employs variable labor.

(1) (2) (3) (4) (5)

Output Land inputs Labor inputs Land rent Labor wage

(tons of wheat) (acres) (workers) ($ per acre) ($ per worker)

0 15 0 12 5

1 15 6 12 5

2 15 11 12 5

3 15 15 12 5

4 15 21 12 5

5 15 31 12 5

6 15 45 12 5

7 15 63 12 5

- Calculate the AC when output = 4.

Calculate the MC when output increases from 3 to 4.

(Round your answer to two decimal places if it is not an integer. Please do NOT include $ in

your answer.)

Your Answer: AC= __________

MC= __________

- Now assume that the price of labor (i.e. labor wage) doubles.

What is the new AVC when output = 4 ?

Calculate the new MC when output increases from 3 to 4.

(Round your answer to two decimal places if it is not an integer. Please do NOT include $ in

your answer.)

Your Answer: AVC= _________

MC= _________

Part III. Essay

- Why is it that the MC curve always intersects the AC curve at the minimum point of the AC

curve? Why is this important?

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