week+6

CUSP 200 Group Problems CH 10 and 11 Student: ___ 1. The long-run average cost curve is horizontal when production exhibits:

A. diminishing marginal returns. B. diseconomies of scale. C. economies of scale.
 * D. constant returns to scale.**

Reason: Top of p. 219

2. Refer to the graph above. A firm that produces 900 units of output using the plant size associated with SATC3 minimizes:

B. long-run average total cost only. C. short-run average total cost only. D. neither long-run nor short-run average total cost.
 * A. both long-run and short-run average total cost.**

Reason: It be going through the lowest point of the long-run average cost. It's also at te lowest curve itself, for short-run. woohoo.

3. The law of diminishing marginal productivity does not apply in the long-run because:

A. some inputs are fixed in the long-run. B. some inputs are variable in the long-run. D. all inputs are fixed in the long-run.
 * C. no inputs are fixed in the long-run.**

Reason: In the long run, all inputs vary.

4. Refer to the graph above. A firm planning to produce 1500 units of output would choose the scale of operation represented by:

A. SATC1. B. SATC2. C. SATC3.
 * D. SATC4.**

Reason: Only model that works for that many units.



5. Refer to the graph above. The least-cost method of producing 1,000 units of output is shown at point:

A. A. B. B. C. C.
 * D. D.**

Reason: they got to produce 1000 units of output, so they're stuck on the curve q=1000. That straight line you see is called an isocost line - a line which represents a combination of factors of production that, in total, cost the firm an equal amount. So yeah... E, D, and A cost the same. Yet, only D can satisfy both conditions of cost and quantity.

6. In order to manufacture 1,000 pairs of shoes in a week, a firm must use at least 1,500 workers and 5 machines or 100 machines and 150 workers. Which method is technically efficient?

A. 1,500 workers and 5 machines. B. 150 workers and 100 machines. D. neither is technically efficient.
 * C. both are technically efficient.**

Reason: Both workers and machines are resources, so a minimum requirement of either is technically efficient.

7. Suppose a firm finds that an additional dollar spent on labor increases output more than an additional dollar spent on machines. Under these conditions, the firm:

A. is technically efficient. B. is economically efficient. D. should substitute machines for labor if it wants to increase economic efficiency.
 * C. should substitute labor for machines if it wants to increase economic efficiency.**

Reason: The one I'm substituting with goes before... gosh darn it.

8. If a firm is able to lower total costs by specializing in marketing and distribution while outsourcing production, it is taking advantage of:

A. less developed nations. C. economies of scale. D. technical efficiency.
 * B. economies of scope.**

Reason: A is true. Assuming A is wrong for being too obvious and having to do with ethics, not economics, we're left with B, C, D. D deals with minimal inputs for a given output. C deals with long-run average costs decreasing as output increases. Economies of Scope deals with interdependence of product production. E.g. if you are a furniture company called AEKI and own your shipping company, you'll be able to cut costs in shipping. If you're IKEA, you won't worry for shipping because it'll cost you too much to maintain the price down, so you let the rich kids pay for enormous shipping costs or let the poor kid buy from your store directly.

9. In the early 2000s, sea lions were depleting the stock of steelhead trout. One idea to scare sea lions away from the Washington coast was to launch fake killer whales, predators of sea lions. The cost of making the first whale is $16,000 ($5,000 for materials and $11,000 for the mold). The mold can be reused to make additional whales, so additional whales cost $5,000 each. Based on these numbers, the average total cost of making 5 fake killer whales would be:

A. $5,000. B. $11,000. C. $7,200.
 * D. $36,000.**

Reason: The first whale cost $16,000, $5,000 in materials and $11,000 for the mold. The same mold will be used to make the next 4 whales. The next 4 whales cost will cost $5,000 each for the materials. $16,000+4($5,000)=$36,000



10. Refer to the graph above. The output range in region "c" is associated with:

A. diminishing marginal productivity. B. constant returns to scale. C. economies of scale.
 * D. diseconomies of scale.**

Reason: definition of diseconomics - production exhibitng increasing long-run average cost as output increases.

11. Suppose that the firms in the perfectly competitive oat industry are currently receiving a price of $2 per bushel for their product and there are constant returns to scale. The minimum possible average total cost of producing oats in the long run is $1 per bushel. Other things being equal, it follows that:

A. the price of oats will be $2 in the long run. B. the price of oats will be somewhere between $1 and $2 in the long run. D. it is not possible to determine the price of oats in the long run from the information given.
 * C. the price of oats will be $1 in the long run.**

Reason: In a perfetly competitive industry, the price of producing a product (and marketing, shipping, blah, blah) equals the cost of the product to the consumer, so there is no profit. Wicked, I know. Since the average total cost will stay at $1, then the price will stay at $1... with that in mind, i doubt that even in a perfectly competitive market the above will hold true. But this is theoretical, so C.



12. Refer to the graph below.

The perfectly competitive firm depicted is currently:

A. earning positive economic profit. B. earning zero economic profit. D. incurring a loss that is larger than total fixed cost, so the firm should shut down.
 * C. incurring a loss, but the loss is smaller than it would be if the firm shut down.**

Reason: We see the firm is operation at a loss, P, being the price of its product, and ATC being the average total cost of such product... so why not shut down? In the short run, the firm must pay its fixed costs, which is ATC-AVC... ATC-AVC is greter than the difference between the ATC and price. So, by producing the company loses more than if it closes down.

13. Refer to the graph above. If the firm increases output from 30 to 40, total revenue will increase by:

A. more than total cost, so profit will increase B. more than total cost, so profit will decrease C. less than total cost, so profit will increase
 * D. less than total cost, so profit will decrease**

Reason:. The marginal revenue is the line of demand, at $5. When the company increases output by 10 (from 30 to 40), the marginal revenue will increase by $50. What will the marginal cost increse by? At 30, the marginal cost is $2. That's $60 total. At 40, it's $3, which is $120 total. So the increase in cost is $60. It'll cut profits.

14. Marginal revenue is equal to:

A. total revenue divided by its output. B. marginal cost. D. the change in total profits associated with a change in quantity.
 * C. the change in total revenue associated with a change in quantity.**

Reason: Definition p. 242

15. Suppose a perfectly competitive firm can increase its profits by reducing its output. Then it must be the case that the firm's:

A. marginal revenue equals its marginal cost. B. price exceeds its marginal cost. C. price exceeds its marginal revenue.
 * D. marginal cost exceeds its marginal revenue.**

Reason: If the marginal costs exceeds your marginal revenue, you're working on a negative profit. By cutting down production, you decrease that negative profit.

16. Refer to the graphs below.



Which graph depicts a perfectly competitive firm that will minimize short-run losses by producing zero output?

A. Graph I B. Graph II C. Graph III
 * D. Graph IV**

Reason: To minimize losses or maximie profit, a firm needs to produce where marginal cost = marginal revenue (P). The only grap at which MR = MC close to 0 is IV.

17. In a perfectly competitive increasing-cost industry:

A. factor prices do not change as industry output increases. C. factor prices fall as industry output increases. D. there is no way to predict what will happen to factor prices as industry output increases.
 * B. factor prices rise as industry output increases.**

Reason: As industry output increases, demand for the factors of production rises, so the price of those factors rises.

18. A perfectly competitive firm in the long run earns:

A. positive economic profits but zero normal profits. C. positive economic profits and positive normal profits. D. zero economic profits and zero normal profits.
 * B. positive normal profits but zero economic profits.**

Reason: Economic profits would be zero in the long run, but normal profits equal the opportunity cost, which is covered within the economic profit, so normal profit will be positive... otherwise, none would do business.

19. Refer to the graph above. Assuming that the industry continues to operate under conditions of perfect competition and that the cost curves do not shift, in the long run this firm will produce:

A. 800 units of output. B. 1,000 units of output. C. 1,200 units of output. D. 1,400 units of output.

Reason: No graph.

20. During a recession, the price of restaurant meals falls by over ten percent. The most likely cause is:

B. a shift of the supply curve to the left. C. a shift of the supply curve to the right. D. a shift of the demand curve to the right.
 * A. a shift of the demand curve to the left.**

Reason: less folks want to eat out, since it's more expensive. Demand drops, equilibrium drops, price of meals drops.