Assignment 3

Part I- Multiple-choice questions

1. Fixed costs facing any firm in the short run include:

a. any cost whose total is established at the time the input is purchased.
b. the minimum cost of producing any given quantity of output under the most favorable
operating conditions.
c. any cost whose per unit charge has been settled for some future period, such as a long-term
wage contract with a labor union.
d. total expenses which must be covered even if nothing is produced.

2. If the marginal product of an input is positive, but decreasing as more and more of the input is employed, then:

a. total product has reached a maximum and is declining.
b. total product is increasing but at a slower and slower rate.
c. average product must be declining.
d. the firm should produce less output.

3. A production function describes:

a. how input prices change as the firm changes its output level.
b. how much output you will get from a given amount of inputs.
c. the level of output that firms should optimally produce at each price level.
d. a relationship between prices and quantity demanded.

4. The average product of an input is given by the following ratio:

a. change in total product/total product.
b. change in the employment of one input/change in the employment of all inputs.
c. total employment of all inputs/total employment of one input.
d. total product/total employment of one input.

5. The law of diminishing returns holds that:

a. the total product of any input must eventually reach a maximum and fall as the employment of that input increases.
b. the average product of any input must eventually reach a minimum and rise as the employment of all inputs increases proportionately.
c. the marginal product of any input should eventually begin to decline as the employment of that input increases.
d. the average product of any input should fall before it rises as the employment of that input increases.

6. Consider the production functions shown in the graph above. Which function displays diminishing marginal returns to capital?

a. (a)
b. (b)
c. (c)
d. (d)

7. Marginal costs facing any firm considering a change in output represent:

a. extraordinary overtime charges that must sometimes be paid to increase output.
b. the cost incurred even if the firm produces zero output.
c. the difference between the total cost actually incurred to produce any given output and the smallest possible total cost of producing that output.
d. the increase in total cost that accrues from a 1-unit increase in quantity produced.
e. the increase in total cost that accrues from any increase in quantity produced, whether 1 unit or more.

8. Total cost in a certain plant, at an output level of 1000 units daily, is $4900. If production is reduced by 1 unit, total cost would be $4890. Within this output range:

a. average cost is greater than marginal cost.
b. average cost and marginal cost are approximately equal.
c. marginal cost is greater than average cost. 3

Use the figure below to answer questions 9 through 11.

9. At five units of output, the average fixed cost is:

a. $5.
b. $20.
c. $26.
d. $100.
e. $130.

10. The marginal cost of the fifth unit (i.e. increase in output from 4 to 5 units) of output is:

a. 0.
b. $2.00.
c. $2.60.
d. $6.00.
e. $30.00.

11. The average variable cost of five units of output is:

a. 0.
b. $2.00.
c. $2.60.
d. $6.00.
e. $30.00.

12. In a certain plant, marginal cost is $2.00 at 400 units of output and it is $2.50 at 500 units of output. If output increases within this 400-to-500 range, then average cost:

a. must rise.
b. must fall.
c. must remain constant.
d. may fall, may rise, but cannot remain constant throughout this output range.
e. must fall and then rise.

13. Firm X currently employs labor and capital such that the marginal product of capital is twice the marginal product of labor. If the price of a unit of labor is $8.00 and the price of a unit of capital is $4.00, Firm X can reduce costs while producing the same level of output by

a. substituting labor for capital (use more labor and less capital).
b. substituting capital for labor (use more capital and less labor).
c. decreasing its use of both capital and labor.
d. increasing its use of both capital and labor.
e. maintaining its employment of capital and labor at current levels.

14. The (absolute) value of the slope of a production isoquant (equal-product curve) is equal to the

a. amount of one input used divided by the amount of the other input.
b. ratio of the marginal utilities of the two inputs.
c. ratio of the marginal products of the two inputs.
d. ratio of the marginal costs of the two inputs.

15. The production function alone will tell a firm:

a. what it will cost to produce any given quantity of output.
b. the maximum-profit level of output.
c. the various combinations of inputs that should be used in order to produce any given quantity of output most efficiently, i.e., at the least money cost.
d. the various combinations of inputs that could be used in order to produce any given quantity of output.

II. Problem-solving questions

The following data describe a short-run production function for ABC, Inc., which hires workers to produce widgets. Use the table below to complete questions 16 through 18.

Quantity of Total
Labor (Workers) Product (Daily)
0 0
10 50
20 150
30 350
40 500
50 600
60 650
70 650
80 640
90 620

16. Calculate the marginal product of the first 10 workers.

17. Calculate the average product of the first 50 workers.

18. The diminishing returns set in sometime between________ and _________workers.

Your Answer: Between_________ and _________ workers

(Please specify a 10-worker range. For example, between 50 and 60 workers.)

Consider the data in the table below for Question 19-20. Farmer Smith rents 15 acres of wheatland and employs variable labor.

(1) (2) (3) (4) (5)

Output Land inputs Labor inputs Land rent Labor wage

(tons of wheat) (acres) (workers) ($ per acre) ($ per worker)
0 15 0 12 5
1 15 6 12 5
2 15 11 12 5
3 15 15 12 5
4 15 21 12 5
5 15 31 12 5
6 15 45 12 5
7 15 63 12 5

19. Calculate the AC when output = 4.

Calculate the MC when output increases from 3 to 4.

(Round your answer to two decimal places if it is not an integer. Please do NOT include $ in your answer.)

Your Answer: AC= __________
MC= __________

20. Now assume that the price of labor (i.e. labor wage) doubles.

What is the new AVC when output = 4 ?

Calculate the new MC when output increases from 3 to 4.

(Round your answer to two decimal places if it is not an integer. Please do NOT include $ in your answer.)

Your Answer: AVC= _________
MC= _________

Part III. Essay

21. Why is it that the MC curve always intersects the AC curve at the minimum point of the AC curve? Why is this important?