Practice Quiz # 2
1. Explain the income and substitution effects and use the concepts to describe what
happens when the price of a product decreases. A student asserts in class that the income
and substitution effects lead to a decrease in the consumption of a normal good when the
price decreases. Do you agree with the statement? Explain.
2. Assume that a consumer purchases a combination of products Y and Z. The MUy is 50
and the Py is $25. The MUz is 20 and the Pz is $5. What should this consumer do to
maximize utility?
3. Jane quit her job at AT&T where she earned $29,000 a year. She cashed in $40,000 in
corporate bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to
buy the mini-bus and set up a commuter service between Lincoln and Omaha. There are
1000 people who will pay $400 a year each for the commuter service; $280 from each
person goes for gas, maintenance, insurance, depreciation, etc. (1) What are Jane’s total
revenues? (2) What are Jane’s explicit costs? (3) What is her accounting profit? (3)
What is her economic profit (or loss)?
4. Indicate whether the inputs below are variable (V) or fixed (F) in the short run.
Input
Meat
Fire insurance
Tires
Property tax
Gasoline
Depreciation
in
in
in
in
in
in
Output
hamburgers.
dry cleaning.
automobiles.
textile production.
trucking services.
aircraft production.
5. The table below shows the total production of a firm as the quantity of labor employed
increases. The quantities of all other resources employed are constant. Compute the
marginal and average products and enter them in the table.
Marginal
Average
Units
Total
product
product
of Labor
product
of labor
of labor
0
0
–––
–––
1
40
______
______
2
100
______
______
3
165
______
______
4
200
______
______
5
225
______
______
6
240
______
______
7
245
______
______
8
240
______
______
a. At what levels are there increasing returns to labor and at what levels are there
decreasing returns to labor?
b. Describe the relationship between the total product and marginal product.
c. Describe the relationship between marginal and average product.
6. In the table below you will find a schedule of a firm’s fixed cost and variable cost.
Complete the table by computing total cost, average fixed cost, average variable cost,
average total cost, and marginal cost.
Total
Total
Average
Average Average
Total fixed variable Total
fixed
variable
total
Marginal
product cost
cost
cost
cost
cost
cost
cost
0
$100 $ 0 $_____
–––
–––
–––
–––
1
100
100
_____ $______ $______ $______ $_____
2
100
180
_____ ______
______ ______
_____
3
100
240
_____ ______
______ ______
_____
4
100
320
_____ ______
______ ______
_____
5
100
440
_____ ______
______ ______
_____
6
100
600
_____ ______
______ ______
_____
7
100
800
_____ ______
______ ______
_____
8
100
1040
_____ ______
______ ______
_____
9
100
1340
_____ ______
______ ______
_____
10
100
1800
_____ ______
______ ______
_____
7. Answer the questions below on the basis of the diagram.
:
a.
b.
c.
d.
e.
f.
g.
AVC at 6,000 units of output?
ATC at 6,000 units of output?
AFC at 6,000 units of output?
TVC at 6,000 units of output?
TFC at all levels of output?
TC at 10,000 units of output?
When diminishing returns set in?
8. What factors explain economies of scale and diseconomies of scale?