BSc II – Section B
Microeconomics Winter 2009
Quiz 4 (B)
Lahore School of Economics
Microeconomics I
Winter Term 2009
Quiz 4: BSc. 2, Section B
The difference between the economic 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
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What
is the average total cost?
a.
b.
c.
d.
e.
500
5Q
5
5 + (200/Q)
none of the above
Use the following two statements to answer this question:
I.The average total cost of a given level of output is the slope of the line from the origin to the total
cost curve at that level of output.
II.The marginal cost of a given level of output is the slope of the line that is tangent to the variable
cost curve at that level of output.
a.
b.
c.
d.
Both I and II are true.
I is true, and II is false.
I is false, and II is true.
Both I and II are false.
For any given level of output:
a.
b.
c.
d.
e.
marginal cost must be greater than average cost.
average variable cost must be greater than average fixed cost.
average fixed cost must be greater than average variable cost.
fixed cost must be greater than variable cost.
none of the above is necessarily correct.
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BSc II – Section B
Microeconomics Winter 2009
Quiz 4 (B)
In the long run, which of the following is considered a variable cost?
a.
b.
c.
d.
e.
Expenditures for wages.
Expenditures for research and development.
Expenditures for raw materials.
Expenditures for capital machinery and equipment.
all of the above.
Suppose that the price of labor ( PL ) is $10 and the price of capital ( PK ) is $20. What is the equation
of the isocost line corresponding to a total cost of $100?
a.
b.
c.
d.
e.
PL + 20PK
100 = 10L + 20K
100 = 30(L+K)
100  30  PL  PK 
none of the above
An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in a
river. Use the following two statements to answer this question:
I.The more easily factors of production can be substituted for one another (for example, capital can
be used to reduce waste water), the more effective the fee will be in reducing effluent.
II.The greater the degree of substitution of capital for waste water, the less the firm will have to pay
in effluent fees.
a.
b.
c.
d.
Both I and II are true.
I is true, and II is false.
I is false, and II is true.
Both I and II are false.
Use the following two statements to answer this question:
I.Increasing returns to scale cause economies of scale.
II.Economies of scale cause increasing returns to scale.
a.
b.
c.
d.
Both I and II are true.
I is true, and II is false.
I is false, and II is true.
Both I and II are false.
When there are economies of scale,
a.
b.
c.
d.
e.
MC > AC, so cost-output elasticity is greater than AC.
MC < AC, so cost-output elasticity is less than AC.
MC < AC, so cost-output elasticity is greater than 1.
MC < AC, so cost-output elasticity is less than 1.
long-run marginal cost is declining.
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BSc II – Section B
Microeconomics Winter 2009
Quiz 4 (B)
At every output level, a firm's short-run average costs equals or exceeds its long-run average costs
because
a. diminishing returns apply in the short run
b. returns to scale only exist in the long run
c. opportunity costs are taken into account in the short run
d. there are at least as many possibilities for substitution between factors of production in
the long run as in the short run.
e. none of the above
Two firms, each producing different goods, can achieve a greater output than one firm producing
both goods with the same inputs. We can conclude that the production process involves
a.
b.
c.
d.
diseconomies of scope.
economies of scale.
decreasing returns to scale.
increasing returns to scale.
When a product transformation curve for a firm is bowed inward, there are _____________ in
production.
a.
b.
c.
d.
economies of scope
economies of scale
diseconomies of scope
diseconomies of scale
Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is
most likely to be a response to this discovery?
a.
b.
c.
d.
e.
Bubba adds more varied inputs to burger production.
Bubba expands burger production, focusing on that one good.
Bubba contracts burger production.
Bubba adds grilled chicken sandwiches to the menu.
Bubba cuts back on the diversity of the menu.
A variable cost function of the form: VC = 52 + 2Q + 3Q2 implies a marginal cost curve that is
a.
b.
c.
d.
constant
upward sloping.
U-shaped.
quadratic.
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BSc II – Section B
Microeconomics Winter 2009
Quiz 4 (B)
The "perfect information" assumption of perfect competition includes all of the following except
one. Which one?
a.
b.
c.
d.
e.
Consumers know their preferences.
Consumers know their income levels.
Consumers know the prices available.
Consumers can anticipate price changes.
Firms know their costs, prices and technology.
If current output is less than the profit-maximizing output, which must be true?
a.
b.
c.
d.
e.
Total revenue is less than total cost.
Average revenue is less than average cost.
Average revenue is greater than average cost.
Marginal revenue is less than marginal cost.
Marginal revenue is greater than marginal cost.
Subjective
1. The Longheel Press produces memo pads in its local shop. The company can rent its equipment
and hire workers at competitive rates. Equipment needed for this operation can be rented at $52
per hour, and labor can be hired at $12 per worker hour. The company has allocated $150,000 for
the initial run of memo pads. The production function using available technology can be expressed
as:
Q = 0.25K0.25L0.75,
where Q represents memo pads (boxes per hour), K denotes capital input (units per hour), and L
denotes labor input (units of worker time per hour). The marginal products of labor and capital are
as follows:
MPL = (0.75)(0.25)K0.25L-0.25
MPK = (0.25)(0.25)K-0.75L0.75
a. Construct the isocost equation. (2)
b. Determine the appropriate input mix to get the greatest output for an outlay of $150,000 for a
production run of memo pads. Also, compute the level of output. (2 + 2)
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BSc II – Section B
Microeconomics Winter 2009
Quiz 4 (B)
Solution:
a.
I = wL + rK
150,000 = 12L + 52K
b.
The appropriate input mix occurs where the
MPL  0.750.25K 0.25 L0.25
MPK  0.250.25K 0.75 L0.75
0.750.25K 0.25 L0.25
0.250.25K 0.75 L0.75

3K 3

L 13
K=
12
52
3L
L

3  13 13
Thus, for each unit of K used, 13 units of labor are used. The total amount of labor used per time
period is
150,000 = 12L + 52(L/13)
= 12L + 4L
= 16L
= 9,375
The amount of capital used per time period is
K = L/13 = 9375/13 = 721.15.
The output rate is


Q = 0.25 K 0.25 L0.25

0.25
= 0.25(721.15) (9375) 0.75
= 0.25(5.182)(952.749)
= 1,234.29 boxes per hour.
2. A production process using two inputs, labor and capital, can be written as:
Q = 5LK
MPK = 5L
MPL = 5K
where Q represents output per day (tons). The unit costs of inputs are $150 for labor (L) and $1,000
for capital (K). Determine the least cost combination of L and K when output is produced at the
rate of 1,000 tons per day. Determine the required outlay for 1,000 tons per day. (5 + 3)
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BSc II – Section B
Microeconomics Winter 2009
Quiz 4 (B)
Solution:
The least cost combination of inputs occurs where the ratio of prices of inputs equals the marginal
rate of technical substitution of one input for another.
The price ratio is PL/PK = 150/1,000 = 0.15.
Now find the combination of L and K that will make MRTS equal to 0.15.
MPL 5K

 0.15
MPK 5L
K  0.15L
MRTS =
The output rate is 1000 = Q, thus
1000 = 5LK = 5L(0.15L) = 0.75L2
L = 1,333.33 = 36.51 units.
K = 0.15(36.51) = 5.48 units.
The total outlay needed to purchase inputs to satisfy this production rate is:
I = PLL + PKK
I = 150(36.51) + 1,000(5.48)
= $5,476.50 + 5,480
I = $10,956.50 total outlay per day.
3. Duane breeds parrots for a living. He has discovered that the production function for parrot
chicks (Q) is:
Q = K1/2L1/2
where K is capital (for example nest boxes, cages and the like) and L is parrot food. The marginal
products of capital and labor are as follows:
MPK = .5K-1/2L1/2
MPL = .5K1/2L-1/2
The price of K is $8 and the price of L is $2.
a. What is the average product of capital? (2)
b. Does capital obey the "law of diminishing returns?" Explain. (2)
c. Suppose that Duane wants 144 parrot chicks and that he has a fixed amount of K. In fact, K =
16. How much L should be employed to minimize costs, and what is the total cost? (4)
d. Lastly, determine the OPTIMAL K/L RATIO. (2)
6
BSc II – Section B
a. APK =
Microeconomics Winter 2009
Quiz 4 (B)
Q L.5

K K.5
b. Yes, capital obeys "the law of diminishing returns" because as K increases, MP K decreases (K is in the
denominator).
c. If K = 16, then Q = 4L 0. 5.
Thus, for Q = 144, L = 1,296 and TC = (1296 *2) + (16 * 8) = 2,720.
d. MPL / MPK = w/r
.5K1/2L-1/2 / .5K-1/2L1/2 = 2/8
K/L = 2/8
K/L=¼
K = 0.25L
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