EC 203.01
PS: CH 23
FALL 2006
1. If there are constant returns to scale in a competitive industry, then the long-run industry
supply curve for that industry is horizontal. TRUE
2. The bicycle industry is made up of 100 firms with the long-run cost curve c(y) = 2 + (
)
and 60 firms with the long-run cost curve c(y) =
. No new firms can enter the industry.
What is the long-run industry supply curve at prices greater than $2?
a. y = 420p.
b. y = 400p. c. y = 200p. d. y = 300p. e. y = 435p. B
3. On a tropical island there are 100 potential boat builders, numbered 1 through 100. Each can
build up to20 boats a year, but anyone who goes into the boatbuilding business has to pay a fixed
cost of $19. Marginal costs differ from person to person. Where y denotes the number of boats
built per year, boat builder 1 has a total cost function c(y) = 19 + y. Boat builder 2 has a total cost
function c(y) = 19 + 2y, and more generally, for each i, from 1 to 100, boat builder i has a cost
function c(y) = 19 + iy. If the price of boats is 25,how many boats will be built per year?
a. 480 b. 120 c. 60 d. 720 e. Any number between 500 and 520 is possible. A
4. Consider a competitive industry with several firms all of which have the same cost function,
c(y) = y2 + 4 for y > 0 and c(0) = 0. The demand curve for this industry is D(p) = 50 2 p, where p
is the price. The long-run equilibrium number of firms in this industry is
a. 4.
b. 23. c. 25.
d. 46. e. 2.
B
5. An industry has 100 firms. These firms have identical production functions. In the short run,
each firm has fixed costs of $200. There are two variable factors in the short run and output is
given by y =
. The cost of factor 1 is $5 per unit and the cost of factor 2 is $4
per unit. In the short run, the industry supply curve is given by
a. Q = 100
.
b. the part of the line Q = 50(min{ 5, 12} ) for which pQ >
.
c. Q = 575
.
d. Q = 100
.
e. None of the above.
D
6. The cost per bushel of growing corn on a given acre of land depends partly on how intensely
the land is farmed and partly on the quality of the soil, the amount of rainfall, and the length of
the growing season. Suppose that the last three factors are summarized by a single index f for
fertility. Suppose that the long-run total cost of producing y hundred bushels of corn on an acre of
land of fertility f is c(y, f), where c(y, f) =
for y > 0 and c(0, f) = 0.
a. Write down a formula for the long-run average cost function per hundred bushels of corn from
an acre of land of quality f.
b. At what level of output is long-run average cost minimized on an acre of land of quality f?
c. What is the lowest price per hundred bushels at which an acre of land of quality f will be used
to produce corn?
a.
. b. 100 bushels. c.
.