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Multiple Choice questions

1. Suppose a firm is producing 100 units of output, incurring a total cost of $10 000 and total
variable cost of $6000. It can be concluded that average fixed cost is
A) $0. !) $60. ") $100. #) $160. $) $0
%. Assume !ra&ilian soccer pla'er (e'mar is averaging three goals per game going into the last
game of the season in )hich he collects four goals, thereb' changing his season*s average. +o use
an analog' in economics, it could be said that
A) Soccer has nothing to do )ith economics.
!) Average product increases )hen marginal product increases.
") Average product increases )hen average product exceeds marginal product.
#) Average product increases )hen total product increases.
$) Average product increases )hen marginal product exceeds average product.
,. +he point of diminishing marginal productivit' is the point )here
A) +he total product begins to fall.
!) +he marginal product begins to fall at an increasing rate.
") -arginal product has reached a maximum.
#) +he marginal product curve lies belo) the average product curve.
$) Average product has reached a maximum.
. +he opportunit' cost of using an asset is &ero if
A) +he asset )as given to the firm for free.
!) (o mone' )as spent to ac.uire the asset.
") +he asset is alread' o)ned b' the firm.
#) +he asset has &ero sun/ costs associated )ith it.
$) +he asset has no alternative uses.
0. 1hich of the follo)ing is most li/el' a long2run decision3
A) +he hours a store should sta' open.
!) 4o) man' )arehouses to build.
") +he price at )hich to sell the product.
#) +he number of )or/ers to hire.
$) +he amount of inventor' to stoc/.
6. 1hen marginal cost is rising, )e /no) that
A) Average fixed cost must be rising.
!) -arginal product must be falling.
") Average variable cost must be rising.
#) Average total cost must be rising.
$) -arginal product must be &ero.
5. Average, marginal, and total product curves
A) $xpress relationships bet)een ph'sical inputs and ph'sical outputs.
!) #emonstrate that in the short run, all inputs are variable.
") #emonstrate that each of these measures of output increase as more inputs are applied.
#) 6elate the prices of inputs 7factors of production) to the prices of products.
$) 6elate the price of output to the .uantit' supplied.
8. 1hich of the follo)ing is the best definition of marginal revenue product3
a. +he extra revenue that results from a unit increase in the input.
b. +he extra revenue that results from an increase in output.
c. +he extra revenue that results from a unit decrease in excess inputs.
d. +he extra product that results from a unit increase in the input.
e. +he extra product that results from an increase in technical efficienc'.
9. Suppose :odi;s )idget business is using t)o inputs, labour and capital. 1hat )ould happen if the price
of labour rises3
A) +he firm;s average total cost curve )ill shift up)ard.
!) :odi )ill <)ind2up< her business.
") +he firm;s marginal cost curve )ill remain unchanged.
#) +he firm;s average fixed cost curve )ill shift up)ard.
$) :odi )ould hire more labour.
10. Suppose that a firm has limited amounts of some input to ration among several facilities that produce
the same product. 1hat decision rule should it follo) in allocating the input3
a. Allocate so that marginal products of all facilities are &ero.
b. Allocate so that marginal products of all facilities are rising.
c. Allocate so that marginal products of all facilities are e.ual.
d. Allocate so that average products of all facilities are e.ual.
e. Allocate so that total products of all facilities are e.ual.
Computational/Discussion questions
Question one: =ill in the blan/s in the follo)ing table.
Units of
Output
Fixed
Cost
Variable
Cost
Total
Cost
Marinal
Cost
!"erae
Fixed Cost
!"erae
Variable
Cost
!"erae
Total Cost
0 100 0 100
1 %0
% 100 10
, 05
155
0 %0%
6 %,6
5 150
8 %%6
9 %98
10 100 ,90
b. #ra) a graph that sho)s marginal cost, average variable cost, and average total cost, )ith cost on
the vertical axis and .uantit' on the hori&ontal axis.
c# A firm has a fixed production cost of $0,000 and a constant marginal cost of production of $000
per unit produced. $hat is the firm%s total cost function& !"erae cost&
Question '
"onsider t)o non2specific industries that are moderatel' concentrated )ith relativel' high barriers to
entr'. Suppose that the t)o industries are .uite similar except that in the first industr', firms can ad>ust
their capacit' ver' .uic/l' in response to ne) orders )hile in the second industr', firms must plan in
advance for an' increase in capacit'. 7An example might be local deliver' services )here the first
industr'*s main inputs of production can be rented on short notice, e.g. small truc/s, and )or/ers can be
hired on a temporar' basis, )hile the second industr'*s main inputs must be speciall' e.uipped and
special ordered in advance.)
7a) All else e.ual, )hich industr' )ould be more attractive 7i.e. )hich industr' )ould be li/el' to
have higher profit margins)3 $xplain )h'.
7b) "onsider the effect of a short2term increase in demand 7i.e. at an' price level consumers are
)illing to bu' more). In )hich industr' )ould short2term profit margins increase the most3
$xplain )h'.
Question (
#etermine the net present value for a pro>ect that costs $10,000 and )ould 'ield after2tax cash flo)s of
$16,000 the first 'ear, $18,000 the second 'ear, $%1,000 the third 'ear, $%,,000 the fourth 'ear, $%5,000
the fifth 'ear, and $,,,000 the sixth 'ear. ?our firm;s cost of capital is 1%.00@.