EC – 11 Microeconomics, Midterm #2
Version A
Name:_________________________
Student ID #: ___________________
The following exam consists of two parts. Part I is a
multiple choice section with 15 questions worth 4
points each. Part II is a short answer section with 2
questions (each with multiple parts) worth 20 points
each. Please take your time and carefully read each
question. Also make sure that your answer is clearly
marked.
You have 75 minutes to complete this exam and the
use of approved calculators is permitted. Good Luck!
Part I: Multiple Choice Questions
1) Consider a firm with the production function: Q = 3(L2)(K1/2). According to this
production process, this firm experiences,
a.
b.
c.
d.
e.
decreasing returns to scale
constant returns to scale.
increasing returns to scale.
neither increasing nor decreasing returns to scale
juxtaposition of scale.
2) Consider the following 2 statements and choose the correct response to these
statements:
I. If at some level of output the marginal product curve is rising, then the average
product must also be increasing.
II. If at some level of output total product is increasing, then average product must
also be increasing.
a.
b.
c.
d.
e.
I and II are both true.
I and II are both false.
I is true and II is false
I is false and II is true
There is not enough information in these statement to judge correctness
The picture below shows an isoquant map for output that requires both capital and labor
in production. For both inputs, assume diminishing marginal products.
Capital
A
B
C
D
Labor
3) According to the isoquant map shown above, which of the following is false?
a. There is more total output being produced at point C relative to point D.
b. The marginal product of labor at point D is less than the marginal product
of labor at point B.
c. The marginal rate of technical substitution at point D is different from the
marginal rate of technical substitution at point B.
d. The average product of capital is the same for point A and point C.
e. (b) and (d) are both false
4) If at the cost-minimizing input allocation, the marginal rate of technical
substitution does no equal the ratio of input prices, then which of the following
are plausible explanations?
a.
b.
c.
d.
e.
Inputs must be used in fixed proportions
One of the inputs is completely unproductive (i.e. has a MP = 0)
Inputs are perfectly substitutable
(a) and (c) are possible.
All of the above are possible.
The picture below shows total production of a good where labor is the only factor of
production.
Total
Output
Labor
L*
5) According to the picture above, how many instances occur where MPL = APL?
a. 0
b. 1
c. 2
d. 3
e. Cannot be determined from this graph.
6) Of the following scenarios, which is not possible?
A firm has ____________ returns to scale, and _____________ of scale
a.
b.
c.
d.
e.
increasing…economies
decreasing…diseconomies
constant…neither economies nor disceconomies
increasing…diseconomies
all of the above are possible
7) Which of the following statements regarding economies of scale is false?
a. Economies of scale implies a downward sloping long run average cost
curve.
b. Economies of scale implies cost-output elasticity is less than 1.
c. Economies of scale implies that doubling costs will less than double
output.
d. Economies of scale implies that a firm will expand production in the longrun.
e. A firm with economies of scale for a given level of output q*, is not
minimizing short run average costs at q*.
8) The equation below describes the percentage of cost savings a firm realizes for
joint production of two goods relative to individual production of those same two
goods:
In this formula, C(q1) is the cost of producing output q1, C(q2) is the cost of
producing output q2, and C(q1, q2) is the joint cost of producing both outputs.
Which of the following statements regarding this formula is true?
a. If SC = 0, then it implies that returns to scope are average.
b. This formula informs us about whether a firm prefers to substitute Labor
for Capital in their production choice.
c. If SC < 0 then a firm would realize diseconomies of scale.
d. If SC > 0 then a firm would realize economies of scope.
e. (c) and (d) are true.
9) The difference between the economic costs and accounting costs of a firm are
a.
b.
c.
d.
e.
the accountant’s fees
the corporate taxes on profits
the opportunity costs of the factors of production that the firm owns
the sunk costs incurred by the firm
the explicit costs of the firm
FIRM
Dollars
MC
ATC
P = MR
$20
$13
$12
50
25
INDUSTRY
75
Output (Q)
Price ($$)
SR Supply = 10 + 0.005Q
$20
Demand = 40 – 0.01Q
2000
Output (Q)
For questions 10 and 11, consider the above graphs showing a single competitive firm
(top graph), in a perfectly competitive industry (bottom graph)
10) Which of the following is true concerning profit and producer surplus in the
industry (and firms within) described above?
a.
b.
c.
d.
e.
Individual firm π = $0, producer surplus for the market = 10,000
Individual firm π = $400, producer surplus for the market = 10,000
Individual firm π = $525, producer surplus for the market = 10,000
Individual firm π = $400, producer surplus for the market = 20,000
Individual firm π = $525, producer surplus for the market = 20,000
11) What is not true concerning the market described in the previous graphs?
a. If the firm above chooses to compete with a price of $12 instead of $20,
they forgo all available producer surplus.
b. Because it is a perfectly competitive industry, economic profits will
eventually be zero for all firms in this industry.
c. The upward sloping short run market supply curve indicates that is an
increasing-cost industry.
d. (a) and (c) are not true.
e. None of the above are true.
12) Consider the following 2 statements and choose the correct response to these
statements:
I. If for some level of output the marginal cost of producing the last unit exceeds
the marginal revenue it generated, the firm can increase profits by reducing
their output.
II. A firm’s output choice such that marginal revenue equals marginal cost (MR =
MC) is profit maximizing except where price exceeds average variable cost.
a.
b.
c.
d.
e.
I and II are both true.
I and II are both false.
I is true and II is false
I is false and II is true
There is not enough information in these statement to judge correctness
13) Which of the following correctly completes the following statement?
“The difference between the long run and the short run, is that in the long run
_____________ while in the short run _____________.
a.
b.
c.
d.
e.
firms may enter or exit the market…firms may only enter the market.
all inputs are flexible choices…all inputs choices are fixed.
price are ultimately determined by consumers…firms are price takers.
there are no fixed costs…fixed costs may be positive.
All of the above are correct statements.
14) Which of the following always declines as output increases?
a.
b.
c.
d.
e.
average cost
marginal cost
fixed cost
average fixed cost
average variable cost
15) Consider the following 2 statements and choose the correct response to these
statements:
I. For a U-shaped long run average cost (LAC) curve, the slope of the LAC
curve equals the slope of the short run marginal cost curve at the minimum of
the LAC.
II. The short run average cost curve is simply the lower envelope of all possible
long run marginal cost curves.
a.
b.
c.
d.
e.
I and II are both true.
I and II are both false.
I is true and II is false
I is false and II is true
There is not enough information in these statement to judge correctness
Part II: Short Answer Questions
Short Answer Question #1:
Consider a firm’s production function:
Q(K,L) = 8(K1/8)(L1/4)
Suppose that the wage rate (w) is $4 and the rental rate (r) is $6.
a. If in the short run this firm is using 256 units of K, how many much will it
spend to produce 32 units of Q? (Hint: 24 = 16 and 28 = 256)
b. What is the marginal product of labor for this firm? What is the marginal
product of capital? Would you say that these marginal products increasing or
diminishing? Support your answer.
c. Based on your answer to (a), would you say that marginal rate of technical
substitution of L for K should be increasing, constant or diminishing? Support
your answer by solving for the MRTS.
d. What is the optimal capital-to-labor ratio in this case? Use this information to
graph a long-run expansion path at this vector of prices. Label your axes and
at least 3 points on the expansion path.
e. Suppose that this firm has set of goal for themselves to produce 7,000 units.
Set up the Lagrangian expression as a constrained (cost) minimization
problem and show the relevant first order conditions. For your answer, you
do not need to solve this system (i.e. for values of K, L and λ).
Short Answer Question #2:
Patrick and Danica are owners of competing tire stores across the street from one another.
Each of them recognizes that they but one store among many, in an extremely
competitive market. Although they share many costs of production, they have each
different management styles, which lead to different cost functions. These cost functions
are shown below:
Patrick’s Total Cost Function:
Danica’s Total Cost Function:
C(q) = q3 – 8q2 + 30q + 5
C(q) = 2q3 – 12q2 + 60q + 5
Using the information shown above:
a.)
Write an expression for the MC, ATC and AVC of each firm.
b.)
For what range of prices will Danica shutdown in the short-run?
c.)
If Patrick is a profit maximizing producer and he is currently
producing where q = 5, what is the market price? What is his profit?
d.)
Using the entire marginal cost curve for a firm as the individual firm
supply curve what is the producer surplus generated for Patrick in your answer to part
(c)?
e.)
Given your answers to (b) and (c) speculate on which management
style (if any) may come to dominate this industry. Justify your answer.