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Managerial Economics
Quiz 2
First question
Multiple Choice Questions
1. Suppose the marginal product of labor is 8 and the marginal product of capital is 2. If the
wage rate is $4 and the price of capital is $2, then in order to minimize costs the firm should use
A. more capital and less labor.
B. more labor and less capital.
C. three times more capital than labor.
D. none of the statements associated with this question are correct.
2. Suppose the production function is given by Q = 3K + 4L. What is the average product of
capital when 10 units of capital and 10 units of labor are employed?
A. 3.
B. 4.
C. 7.
D. 45.
3-. For the cost function C(Q) = 100 + 2Q + 3Q2, the marginal cost of producing 2 units of
output is
A. 2.
B. 3.
C. 12.
D. 14.
3--. For the cost function C(Q) = 100 + 2Q + 3Q2, the total variable cost of producing 2 units of
output is
A. 16.
B. 12.
C. 4.
D- none of the above
4- Which of the following statements is incorrect?
A. Fixed costs do not vary with output.
B. Sunk costs are those costs that are forever lost after they have been paid.
C. Fixed costs are always greater than sunk costs.
D. Fixed costs could be positive when sunk costs are zero.
5. You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs.
The firm produces and sells a given output. If w = $40, r = $100, MPL = 20, and MPK = 40
the firm:
A. is cost minimizing.
B. should use less L and more K to cost minimize.
C. should use more L and less K to cost minimize.
D. is profit maximizing but not cost minimizing.
6. You are the manager of a firm that sells its product in a competitive market at a price of
$40. Your firm's cost function is C = 60 + 4Q2. Your firm's maximum profits are
A. 36.
B. 60.
C. 40.
D. 80
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7- You are the manager of a firm that produces output in two plants. The demand for your
firm's product is P = 120 - 6Q, where Q = Q1 + Q2. The marginal cost associated with
producing in the two plants are MC1 = 2Q1 and MC2 = 4Q2. What price should be charged
to maximize profits?
A. 60.
B- 66.
C. 70.
D. 76.
8- You are the manager of a firm that produces output in two plants. The demand for your
firm's product is P = 120 - 6Q, where Q = Q1 + Q2. The marginal cost associated with
producing in the two plants are MC1 = 2Q1 and MC2 = 4Q2. What price should be charged
in order to maximize revenues?
A. 6.
B. 2.
C. 24.
D. 60.
9- Chris raises cows and produces cheese and milk because he enjoys:
A. economies of scale.
B. economies of scope.
C. cost complementarity.
D. none of the statements associated with this question are correct.
10- Which of the following features is common to both perfectly competitive markets and
monopolistically competitive markets?
A. Firms produce homogeneous goods.
B. Prices are equal to marginal costs in the long-run.
C. Long run profits are zero.
D. Prices are above marginal costs in the long-run.
11- Which of the following conditions is true when a producer minimizes the cost of
producing a given level of output?
A. The MRTS is equal to the ratio of input prices.
B. The marginal product per dollar spent on all inputs is equal.
C. The marginal products of all inputs are equal.
D. The MRTS is equal to the ratio of input prices and the marginal product per dollar spent on all
inputs is equal.
12. Isoquants are normally drawn with a convex shape because:
A. Inputs are perfectly substitutable.
B. Inputs are perfectly complementary.
C. Inputs are not perfectly substitutable.
D. Inputs are not perfectly complementary.
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13-. Changes in the price of an input cause:
A. Isoquants to become steeper.
B. Slope changes in the isocost line.
C. Parallel shifts of the isocost lines.
D. Changes in both the isoquants and isocosts of equal magnitude.
14-. Which of the following sets of economic data is minimizing the cost of producing a
given level of output?
A. MPL = 20, MPK = 40, w = $16, r = $32.
B. MPL = 20, MPK = 40, w = $32, r = $16.
C. MPL = 40, MPK = 20, w = $16, r = $32.
D. MPL = 40, MPK = 40, w = $16, r = $32.
15- What is implied when the total cost of producing Q1 and Q2 together is less than the
total cost of producing Q1 and Q2 separately?
A. Economies of scale.
B. Diminishing average fixed costs.
C. Cost complementarity.
D. Economies of scope.
16-. Which of the following cost functions exhibits cost complementarity?
A. -4 Q1Q2 + 8 Q1.
B. -4 Q2 + 8 Q1.
C. 6Q1Q2 - Q1.
D. 4Q2Q1 + 8Q1.
17-. For the multiproduct cost function C(Q1,Q2) = 100 + 2Q1Q2 + 4Q12, what is the
marginal cost function for good one?
A. MC1 = 2Q2 + 4Q1 - Q22.
B. MC1 = 2Q2 + 8Q1.
C. MC1 = 100 + 2Q1Q2 + 4Q12.
D. MC1 = 4Q12 - 2 Q22.
18- Which of the following cost functions exhibits economies of scope when three (3) units
of good one and two (2) units of good two are produced?
A. C = 50 - 5Q1Q2 + 0.5Q12 + Q22.
B. C = 10 + 4Q1Q2 + Q12 + Q22.
C. C = 15 + 5Q1Q2 + 2Q1 + 4Q2.
D. C = 5 + Q1Q2 + Q12 Q22.
19-. The isoquants are normally drawn with a convex shape because inputs are
A. not perfectly substitutable.
B. perfectly substitutable.
C. perfect complements.
D. normal goods.
20-. The marginal cost curve (draw the curves)
A. lies always below the average total cost curve (ATC).
B. lies always above the average variable cost curve (AVC).
C. intersects the ATC and AVC at their maximum points.
D. intersects the ATC and AVC at their minimum points.
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21-. Economies of scope exist when
A. C(Q1) + C(Q2) < C(Q1,Q2).
B. C(Q1) - C(Q2) < C(Q1,Q2).
C. C(Q1) + C(Q2) > C(Q1,Q2).
D. C(Q1) - C(Q2) > C(Q1,Q2).
22. Cost complementary exits in a multiproduct cost function when
A. the average cost of producing one output is reduced when the output of another product is
increased.
B. the average cost of producing one output is increased when the output of another product is
increased.
C. the marginal cost of producing one output is increased when the output of another product is
decreased.
D. the marginal cost of producing one output is reduced when the output of another product is
increased.
23- Suppose the cost function is C(Q) = 50 + Q - 10Q2 + 2Q3. At 10 units of output, the
average cost curve is
A. in the increasing stage.
B. in the declining stage.
C. at the minimum level.
D. at the maximum level.
24- Economies of scale exist whenever long-run average costs
A. increase as output is increased.
B. decrease as output is increased.
C. remain constant as output is increased.
D. none of the statements associated with this question are correct.
25-. Suppose the long-run average cost curve is U-shaped. When LRAC is in the increasing
stage, there exist
A. economies of scope.
B. diseconomies of scope.
C. economies of scale.
D. diseconomies of scale.
26-. Which of the following cost functions exhibits cost complementarity?
A. -3Q2 + 4Q1.
B. 5Q1Q2 - Q1.
C. Q2Q1 + 2Q1. D. -5Q1Q2 + 7Q1.
27-. Which of the following cost functions exhibits economies of scope over the specified
output range?
A. C(Q1,Q2) = 2 - 0.5Q1Q2 - (Q1)2 + (Q2)2, for all Q1 > 0 and Q2 > 0.
B. C(Q1,Q2) = 2 - 3Q1Q2 - (Q1)2 + (Q2)2, for all Q1 > 0 and Q2 > 0.
C. C(Q1,Q2) = 2 - 0.5Q1Q2 - (Q1)2 + (Q2)2, for all Q1 < 2 and Q2 < 2.
D. C(Q1,Q2) = 2 - 3Q1Q2 - (Q1)2 + (Q2)2, for all Q1 > 4 and Q2 > 4.
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28=. Consider a monopoly where the inverse demand for its product is given by P = 200 5Q. Based on this information, the marginal revenue function is
A. MR(Q) = 400 - 2.5Q.
B. MR(Q) = 400 - 10Q.
C. MR(Q) = 200 - 10Q.
D. MR(Q) = 200 - 2.5Q.
29- Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q.
Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q2. At the profitmaximizing combination of output and price, consumer surplus is
A. $32.
B. $64.
C. $128.
D. can’t be determined with the given information.
30-. Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q.
Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q2. At the profitmaximizing combination of output and price, monopoly profit is
A. $32.
B. $64
C. $92.
D. $128.
Second Question
1- The following table summarizes the short-run production function for your firm.
Your product sells for $5 per unit, labor costs $5 per unit, and the rental price of
capital is $20 per unit. Complete the following table, and then answer the
accompanying questions.
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a. Which inputs are fixed inputs? Which are the variable inputs?
b. How much are your fixed costs?
c. What is the variable cost of producing 20 units of output?
d. How many units of the variable input should be used to maximize profits?
e. What are your maximum profits?
f. Over what range of variable input usage do increasing marginal returns exist?
g. Over what range of variable input usage do decreasing marginal returns exist?
h. Over what range of variable input usage do negative marginal returns exist?
2-. Your firm produces two products, Q1 and Q2. An economic consulting firm has
estimated your cost function to be
a. Are there economies of scope?
b. Are there cost complementarities?
c. Your market for Q1 if not very good, and an overseas firm has offered to buy the division
of your company that produces Q1. What will happen to your marginal cost of producing
Q2 if you sell the division?
3-You are the manager of a firm that sells output at a price of $40 per unit. You are
interested in hiring a new worker who will increase your firm's output by 2,000 units per
year. Several other firms also are interested in hiring this worker.
a. What is the most you should be willing to pay this worker to come to your firm?
b. What will determine whether or not you actually have to offer this much to the worker
to induce him to join your firm?
4- You are the general manager of TU modems Inc., and your accounting department has
provided you with the following information about the total cost of producing three
potential quantities of a commercial-grade modem:
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The market is saturated with modems, and your sales department has been able to identify
only one potential buyer of your modems. This customer has numerous alternative options
and as a result is only willing to pay $300 per modem for an order of 100,000 modems. You
must decide whether to sign a contract under these terms or simply shut down your
operations. What is your optimal decision?
5- The XYZ company produces output using labor (which it purchases on an as-needed
basis in the market for unskilled workers at a wage of $5 per hour) and one machine
(which it is obligated to lease at a rental rate of $300 per hour). The planning horizon
precludes XYZ from renting or purchasing any additional machines, as the current
machine has a capacity of 80 units of output per hour, which exceeds the projected demand
for the firm's product. The firm has no alternative use for the machine it leases, and the
contract precludes it from subleasing it to another party. The company currently employs
one worker who produces 10 units of output per hour. A recent report from the
engineering department reveals that, given the plant's current capacity, two workers could
produce 20 units of output per hour, three workers could produce 30 units of output per
hour, and four workers could produce a total of 40 units of output per hour.
a. Complete the following table………………………………………………………………….:
b. Suppose that XYZ can sell up to 40 units of output per hour at a price of $.60 per unit
but cannot even get a penny for units produced in excess of 40 units per hour. How much
output should XYZ produce each hour in order to maximize profits?
c. At what price would XYZ find it profitable to shut down its operation?
6- To open a new business, a manager must obtain a license from the city for $20,000. The
license is transferable, but only $3,000 is refundable in the event the firm does not use the
license.
a. What are the firm's fixed costs? Sunk costs?
b. Suppose the manager obtains a license but then decides against opening the business. If
another firm offers the manager $2,000 for the license, should the manager accept the
offer?
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7- The management of Morris Industries is considering a plan to terminate a new
employee. The action stemmed from documented evidence supplied by the firm's
accounting department that this new employee did not add as much to the firm's overall
output as did a worker hired two weeks earlier. Based on this evidence, do you agree that
the latest worker hired should be fired? Explain.
Third Question
If you have some data and information for an electricity Company as follow:
The cost function: C = 100 + 2Q + 3Q2, Where C and Q are the total cost and
the total output respectively.
Reverse demand function on the firm's product :
price and quantity respectively.
P = 82 - Q
,where P, and Q are
Based on these data and information:
What is the type of this market and why???
How much the quantity should be produced and sold which maximize the company
profit?? And how much its price??
How much the total revenue, the total cost and the total profit???(Explain by using suitable
graph in the short term).
If this company decided to sell its product in two markets, do you think this policy could
achieve higher profits? And why? What are the necessary conditions should satisfy to
success its policy??
Fourth Question
There are some data and information are available for a food company as
represented in the following table
Price
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10
10
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Quantity
100
120
140
160
190
200
If equilibrium quantity is 160 units, where the supernormal profit equal zero, Based on
these data and information answer:
1. What is the type of this market? And why?
2. Graphically determine the firm's equilibrium?
3. Drive graphically the market supply curve in the food industry at prices $ 15,20,
and $20 respectively.
Good Luck
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