Exam 2 Practice

Question 1

Say you own a Mexican restuarant. Your production formula of burritos is Q= 5KL^2, where K is the amount of burritos and K is the amount of capital and L is the amount of Labor. How many workers would you need to minimize the cost of producing 100 burritos when the capital is 20?

Answer 1

1

Question 2

You can study up to four hours. If you don’t study at all you will get a 70. One hour would give you an 80, the second hour increased your score to 89, the third to 92. If you studied the fourth hour your score would be 87. In which hour did diminishing returns set in?

Answer 2

The second because your gain is less than the previous hour

Question 3

Which of the following production functions exhibits increasing returns to scale?

Answer 3

Q=(K^1/2)(L^2/3)

Question 4

Say at the current output level marginal costs = $20 and the average total cost = $10. From this information we know that the

Answer 4

average total costs are increasing

Question 5

The MC curve slopes upward due to

Answer 5

diminishing returns

Question 6

When the price is P1, in order to maximize profits this firm must produce a quantity equal to

Answer 6

q1

Question 7

At the output where MC=ATC=P, the firm

Answer 7

has no economic profit

Question 8

The annual insurance premiums for Michael’s Machine Shop have permanently risen because of a recent thefts, but there is no change in the premiums paid by competitors. If machine shops are a competitive constant-cost industry, then in the long run

Answer 8

Michael’s Machine shop will be driven out of business

Question 9

Any firm, competitive or not, desiring to maximize profits will choose its quantity according to the rule, produce that quantity at which

Answer 9

marginal revenue= marginal cost

Question 10

Different firms in a competitive industry will have differing shutdown points when

Answer 10

they have different cost curves

Question 11

Assume chiropractic care is provided by a competitive industry. A new government regulation requires each chiropractor to take a costly exam for certification every year. What happens to the price of chiropractic care?

Answer 11

There is no change in the short run, but chiropractors will exit and prices will rise in the long run

Question 12

Consider a perfectly competitive firm with MC=10+q. If market demand is Q=100 - P and the current industry output is 80 units, then the firm will produce

Answer 12

10 units

Question 13

If marginal cost exceeds marginal revenue, then a reduction in output will create higher profits

Answer 13

TRUE

Question 14

The short run is any period of time less than one year, while the long run refers to a period of time one year or more in length

Answer 14

FALSE

Question 15

A firm has passed the point of diminishing marginal returns if and only if additional labor lowers its output.

Answer 15

FALSE

Question 16

In deriving the marginal product of labor, we consider the increase in output of an additional worker using additional capital.

Answer 16

FALSE

Question 17

As long as profits remain positive, a firm will want to increase the quantity produced.

Answer 17

FALSE

Question 18

A competitive firm will exit an industry in the long run if the market price falls below the firm’s break-even price.

Answer 18

TRUE

Question 19

In a competitive equilibrium, the industry’s output is produced at the lowest possible cost because each firm has the goal of minimizing its cost.

Answer 19

FALSE

Question 20

If the market price is currently above the shut-down price, the firm will be making positive profits.

Answer 20

FALSE