ECON-310: MC1

Assignment Overview: This assignment is designed to develop standard skills related to the production process and costs.

Required Research:
Baye, Chapter 5.
Class Notes/Slides

Assumptions and Agreements:
1. This assignment must be completed by 9:30 a.m. on September 3.
2. Answers should be submitted on Sakai, using the Tests & Quizzes section
3. Each individual must submit answers.
4. Individuals can discuss the assignment with any other member(s) of the class, the T.A., or the instructor.
5. Read every possible answer. In some cases, an answer is a combination of other answers. If the other answers are
correct, then make sure to select the combination answer.
6. The short answer questions will not be graded. However, they are a good example of questions which will be on your
midterms. Ungraded does not mean unimportant!



1. Suppose the marginal product of labor is 2 and the marginal product of capital is 6. If the wage rate is $4
and the price of capital is $2, then in order to minimize costs the firm should use

A. more labor and less capital.
B. more capital and less labor.
C. three times more capital than labor.
D. none of the statements associated with this question are correct.

2. You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces
and sells a given output. If w = $40, r = $100, MPL = 4, and MPK = 10 the firm:

A. should use less K and more L to cost minimize.
B. should use more K and less L to cost minimize.
C. is profit maximizing but not cost minimizing.
D. is cost minimizing.

3. If the production function is Q = K
.5
L
.5
and capital is fixed at 1 unit, then the average product of labor when L
= 36 is
A. 1/3.
B. 1/6.
C. 6.
D. none of the statements associated with this question are correct.

4. Which of the following conditions is true when a producer minimizes the cost of producing a given level of
output?
A. The MRTS is equal to the ratio of input prices.
B. The marginal product per dollar spent on all inputs is equal.
C. The MRTS is equal to the ratio of input prices and the marginal product per dollar spent on all inputs is
equal.
D. The marginal products of all inputs are equal.


5. What is the value marginal product of labor if: P = $10, MPL = 5, and APL = 40?
A. $40.
B. $5.
C. $50.
D. $400.

6. It is profitable to hire units of labor as long as the value of marginal product
A. equals price.
B. exceeds wage.
C. is less than wage.
D. exceeds average product.



7. Changes in the price of an input cause:
A. Isoquants to become steeper.
B. Slope changes in the isocost line.
C. Parallel shifts of the isocost lines.
D. Changes in both the isoquants and isocosts of equal magnitude.

8. In order to minimize the cost of producing a given level of output, a firm manager should use more inputs
when:
A. Its price falls.
B. Its price rises.
C. The price of other inputs fall.
D. Its price remains the same.

9. Which of the following sets of economic data is minimizing the cost of producing a given level of output?
A. MPL = 20, MPK = 40, w = $16, r = $32.
B. MPL = 40, MPK = 20, w = $16, r = $32.
C. MPL = 20, MPK = 40, w = $32, r = $16.
D. MPL = 40, MPK = 40, w = $16, r = $32.






10. Refer to Table 1. What is the average variable cost of producing 125 units of output?
A. 14.
B. 8.
C. 11.7.
D. 11.2.

11. Refer to Table 1. What is the average total cost of producing 160 units of output?
A. 12.98.
B. 16.31.
C. 22.04.
D. 19.38.

Table 1

12. As the usage of an input increases, marginal product
A. initially decreases then begins to increase.
B. initially increases then begins to decline.
C. consistently increases.
D. consistently decreases.

13. If the price of labor decreases, in order to minimize the costs of producing a given level of output, the firm
manager should use
A. less of labor and more of capital.
B. less of labor and less of capital.
C. more of labor and more of capital.
D. more of labor and less of capital.

14. Average fixed cost
A. initially declines, reaches a minimum and then begins to increase as output increases.
B. declines continuously as output is expanded.
C. increases continuously as output increases.
D. keeps constant as output is expanded.

15. Cost complementary exits in a multiproduct cost function when
A. the average cost of producing one output is reduced when the output of another product is increased.
B. the average cost of producing one output is increased when the output of another product is increased.
C. the marginal cost of producing one output is increased when the output of another product is decreased.
D. the marginal cost of producing one output is reduced when the output of another product is increased.

16. Suppose the cost function is C(Q) = 70 + Q - 3Q
2
+ 2Q
3
. What are the fixed costs when 10 units are
produced?
A. $70.
B. $178.
C. $1710.
D. $1780.

17. Suppose the cost function is C(Q) = 70 + Q - 3Q
2
+ 2Q
3
. What is the variable cost when 10 units are
produced?
A. $70.
B. $178.
C. $1710.
D. $1780.

18. When there are economies of scope between two products which are separately produced by two firms,
merging into a single firm can
A. accomplish an increase in sales.
B. accomplish a reduction in costs.
C. lead to an increase in cost.
D. lead to a reduction in sales.


19. Economies of scale exist whenever long-run average costs
A. increase as output is increased.
B. decrease as output is increased.
C. remain constant as output is increased.
D. none of the statements associated with this question are correct.

20. The long-run average cost curve defines the minimum average cost of producing alternative levels of
output, allowing for optimal selection of
A. fixed factors of production.
B. variable factors of production.
C. all factors of production.
D. sunk cost factors of production.

21. Suppose the long-run average cost curve is U-shaped. When LRAC is in the decreasing stage, there exist
A. diseconomies of scope.
B. economies of scope.
C. diseconomies of scale.
D. economies of scale.

22. Larger firms producing a single product can produce a product at lower average cost than small firms
producing the same product when
A. Economies of scale exist.
B. Diseconomies of scale exist.
C. Economies of scope exist.
D. Cost complementarities exist.

23. Which of the following "costs" could a firm that wants to remain in business avoid if it halted current
production?
A. Fixed costs.
B. Variable costs.
C. Sunk costs.
D. Opportunity costs.

24. Which of the following is NOT a good example of an industry with high fixed costs and relatively low
marginal costs?
A. A company which invests billions in a blockbuster drug, which they then are able to mass produce at a low
cost
B. An NFL team, if the product is a ticket for a seat in their stadium for a game
C. An artist who spends years on each masterpiece, where the product is the masterpiece

a



25. Refer to Table 2. The production function for good X in the above table exhibits decreasing marginal
returns to capital over what output range?
A. Between 0 and 1,524.
B. Between 0 and 2,991.
C. Between 2,391 and 3,048.
D. Between 2,016 and 2,945.

Table 2



26. Refer to the figure above. In the long run, the firm can operate on which of the following average total cost
curves?
A. ATCA
B. ATCB
C. None of the above are correct
D. All of the above are correct

27. Refer to the figure above. This firm experiences diseconomies of scale at what output levels?
A. output levels below M.
B. output levels between M and N.
C. output levels above N.
D. All of the above are correct, if the firm is operating in the long run.


SAMPLE SHORT-ANSWER QUESTIONS

28. Congress is considering legislation that will provide additional investment tax credits to businesses.
Effectively, an investment tax credit reduces the cost to firms of using capital in production. Would you expect
labor unions to lobby for or against such a bill? (Hint: What impact would such a plan have on the capital-to-
labor ratio at the typical firm?)

29. There are over 5,000 banks in the United States - more than 10 times the number per person than in other
industrialized countries. A recent study suggests that the long-run average cost curve for an individual bank is
relatively flat. If Congress took steps to consolidate banks, thereby reducing the total number to 2,500, what
would you expect to happen to costs within the banking industry? Explain.

30. The total costs for Morris Industries are summarized in the following table. Based on this information, fill
in the missing entries in the table for fixed cost, variable cost, average fixed cost, average variable cost,
average total cost, and marginal cost.




31. The maker of Turbotax produces software that prepares federal income tax returns. In addition, it
produces software that prepares various state income tax returns. Why doesn't it pay for the firm to specialize
in federal software?

32. The management of Morris Industries is considering a plan to terminate a new employee. The action
stemmed from documented evidence supplied by the firm's accounting department that this new employee
did not add as much to the firm's overall output as did a worker hired two weeks earlier. Based on this
evidence, do you agree that the latest worker hired should be fired? Explain.