HOMEWORK #4
Due by June 23, 2004
ECON 301
Summer 2004
1)
Economic costs of an input include
(a)
(b)
(c)
(d)
only implicit costs.
only explicit costs.
both implicit and explicit costs.
whatever management wishes to report to the shareholders.
2)
Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting
this job to work fulltime in her own business. She will invest her savings of $50,000 (which
currently has an annual 10% rate of return) into the business. Her annual opportunity cost
of this new business is
(a) $0.
(b) $40,000.
(c) $45,000.
(d) $90,000.
3)
The Nifty Gum Co. has purchased a large parcel of land for $1 million. The company
recently discovered that the land is contaminated and is worthless to all possible buyers.
The opportunity cost of the land is
(a)
(b)
(c)
(d)
4)
$0.
$1 million.
some amount greater than $0 but less than $1 million.
equal to the cost of the factory that was planned to be built there.
A firm’s marginal cost can always be thought of as the change in total cost if
(a) the firm produces one more unit of output.
(b) the firm buys one more unit of capital.
(c) the firm’s average cost increases by $1.
(d) the firm moves to the next highest isoquant.
5)
Suppose a firm can only vary the quantity of labor hired in the short run. An increase in the
cost of capital will
(a) increase the firm’s marginal cost.
(b) decrease the firm’s marginal cost.
(c) have no effect on the firm’s marginal cost.
(d) More information is needed to answer the question.
6)
Suppose the total cost of producing T-shirts can be represented as TC  50  2q. The
average cost of the 5th T-shirt is
(a) 2.
(b) 12.
(c) 52.
(d) 60.
7)
Suppose the total cost of producing T-shirts can be represented as TC  50  2q. Which of
the following statements is TRUE at all levels of production?
(a) MC  AVC
(b) MC  AC
(c) MC > AFC
(d) All of the above.
8)
Suppose the short-run production function is q  10 * L. If the wage rate is $10 per unit of
labor, then AVC 
(a) q.
(b) q/10.
(c) 10/q.
(d) 1.
9)
Suppose the short-run production function is q  10 * L. If the wage rate is $10 per unit of
labor, then MC 
(a) q.
(b) q/10.
(c) 10/q.
(d) 1.
10)
Suppose the short-run production function is q  L0.5. If the marginal cost of producing the
tenth unit is $5, what is the wage per unit of labor?
(a) $10
(b) $5
(c) $2.5
(d) Cannot be determined without more information.
11)
In the short run, the point at which diminishing marginal returns to labor begin is the point
at which the marginal cost curve
(a)
(b)
(c)
(d)
peaks.
bottoms out.
is upward sloping.
is downward sloping.
12)
A specific tax of $1 per unit of output will affect a firm’s
(a) average total cost, average variable cost, average fixed cost, and average marginal cost.
(b) average total cost, average variable cost, and average fixed cost.
(c) average total cost, average variable cost, and average marginal cost.
(d) average marginal cost only.
13)
In the long run, fixed costs are
(a)
(b)
(c)
(d)
14)
sunk.
avoidable.
larger than in the short run.
not included in production decisions.
If an isocost line crosses the isoquant twice, a cost minimizing firm will
(a) use a different isocost line to select the bundle of inputs.
(b) use the input bundle associated with the intersection on the higher point of the isoquant.
(c) use the input bundle associated with the intersection on the lower point of the isoquant.
(d) both b and c.
15)
If the isoquants are straight lines or L-shaped, then a cost-minimizing firm will
(a) not be able to minimize costs.
(b) find the lowest isocost line touching the relevant isoquant.
(c) find the highest isocost line touching the relevant isoquant.
(d) choose not to produce any output.
16)
Suppose MPL  0.5 * (q/L) and MPK  0.5 * (q/K). In the long run, the firm will hire equal
amounts of capital and labor
(a) all of the time.
(b) only when w  r.
(c) only when w  0.5 * r.
(d) at no point in time.
17)
Suppose that each worker must use only one shovel to dig a trench, and shovels are useless
by themselves. In the long run, an increase in the price of shovels will result in
(a)
(b)
(c)
(d)
18)
fewer shovels being purchased to produce the same number of trenches.
more workers being hired to produce the same number of trenches.
the firm wishing to produce more trenches.
no change in the firm’s input mix.
Suppose that each worker must use only one shovel to dig a trench, and shovels are useless
by themselves. In the long run, the firm’s cost function is
(a)
(b)
(c)
(d)
TC  (w/r) * q.
TC  (w  r)/q.
TC  (w  r).
TC  (w  r) * q.
19)
The production of cigarettes is highly automated; however, a worker is required to monitor
each machine. Machines and workers do not interact with one another. Given this
information, there are most likely
(a)
(b)
(c)
(d)
20)
economies of scale.
economies of scope.
constant returns to scale.
increasing returns to scale.
Assuming that w and r are both positive, if the long-run expansion path is horizontal, then
(a)
(b)
(c)
(d)
MPK  0.
MRTS is a function of capital only.
w  r.
All of the above.
Figure 7.1
21)
Figure 7.1 shows the long-run expansion path. The long-run average cost curve will be
(a) horizontal.
(b) downward sloping.
(c) upward sloping.
(d) vertical.
22)
If a production function is represented as q  LαKβ, the long-run average cost curve will be
horizontal as long as
(a)
(b)
(c)
(d)
a  b  0.
a  b  1.
q > 0.
L  K.
23)
In the short run, the expansion path is
(a)
(b)
(c)
(d)
horizontal.
vertical.
diagonal.
indeterminate.
Calculation
24)
You have two career options. You can work for someone else for $50,000 a year. You can
run your own business, your annual revenue is $100,000, and explicit costs are $40,000
annually. Explain which career option a profit-maximizer would select and why.
25)
Suppose capital and labor are perfect substitutes resulting in a production function of q  K
 L. That is, the isoquants are straight lines with a slope of 1. Derive the long-run total
cost function TC  C(q) when the wage rate is w and the rental rate on capital is r.
26)
Suppose the production function is q  12 L0.25 K0.75. Determine the long-run capital-tolabor ratio (K/L) if the cost a unit of capital (r) is three times the cost of a unit of labor (w).
27)
A firm pays $5 for each unit of capital. Labor costs $5 per hour for the first 10 hours and
$10 per hour for every hour thereafter. Draw the isocost curves for total costs of $50 and
$100.
28)
A local non-profit group prints a weekly newsletter. Professional typists earn $10 per hour
and can type 2 pages per hour. Unpaid volunteers can type only 1 page per hour. Measuring
hours of professional typist services on the vertical axis and hours of unpaid volunteer
typist services on the horizontal axis, draw the relevant isoquant and isocost curves if the
newsletter is 10 pages long. What input mix is chosen by the non-profit group if they wish
to minimize the cost of the newsletter? If the group will reimburse volunteers for expenses
(lunch, driving), how much must the reimbursement be for your answer to change?