Quiz #4 -- March 18, 2015 Use the following to answer question 1. Figure 6.3 1. (Figure 6.3) Which of the following statements is TRUE? I. II. More output is produced at point A than at point B. The ratio of the marginal product of labor to the marginal product of capital is higher at point A than at point B. III. The MRTSLK is equal at points A and B. A) B) C) D) I, II, and III II only III only II and III 2. Why are the slopes of isocost lines constant? A) because firms must use capital and labor inputs in fixed proportions B) because firms can hire as much of an input as they desire without changing wages or rental rates C) because firms must use less labor if employing more capital D) because the marginal rate of technical substitution of labor for capital is constant Page 1 3. Suppose a firm is producing 2,475 units of output by hiring 50 workers (W = $20 per hour) and 25 units of capital (R = $10 per hour). The marginal product of labor and marginal product of capital are 40 and 25, respectively. Is the firm minimizing the cost of producing 2,475 units of output? A) Yes, the ratio of the number of workers to the wage equals the ratio of the number of units of capital to the rental rate. B) No, the firm should use more labor and less capital. C) No, the firm should use more capital and less labor. D) No, the firm should use more of both labor and capital. 4. The production function given by Q = 10(0.7K2 + 0.3L2 )0.5 has ______ returns to scale. A) constant B) instant C) increasing D) decreasing 5. Which of the following statements is TRUE? I. II. III. IV. A) B) C) D) Accounting profit = total revenue – accounting cost. Economic cost = accounting cost – opportunity cost. Economic profit = accounting profit + opportunity cost. Economic profit = total revenue – economic cost. I and IV I, II, III, and IV II and IV I, III, and IV 6. Suppose that you close down your coffee shop and sell your coffee maker for $500. If you originally bought the coffee maker for $4,000 and it lost $1,000 because of depreciation (i.e., age and use), the sunk cost of the coffee maker is: A) $3,500. B) $3,000. C) $2,500. D) $1,500. Page 2 Use the following to answer question 7. Figure 7.3 7. (Figure 7.3) The firm's total cost is given by curve ______ on the following graph. A) B) C) D) A B C D Page 3 8. Which of the following statements is TRUE? I. II. III. A) B) C) D) MC = ΔTC/ΔQ MC = ΔVC/ΔQ Marginal cost falls as diminishing returns to labor set in. I, II, and III I and II II and III I and III 9. Charlie's Umbrellas has a production function given by Q = 10K0.5L0.5, where MPL = 5K0.5/ L0.5 and MPK = 5L0.5/K0.5. Charlie is using 9 units of capital (K) in the short run. The wage (W) is $80 per day and the rental rate per unit of capital (R) is $5 per day. What is Charlie's total cost of producing 60 umbrellas? A) $445 B) $365 C) $108 D) $276 Page 4 Use the following to answer question 10. Figure 7.9 10. (Figure 7.9) Suppose the firm is currently producing at point A. If the firm wants to produce more output, it will: A) not be able to because capital is fixed. B) move to point W in the short run and point Z in the long run. C) move to a point between W and Z in the short run. D) move to point Z in the short run and point W in the long run. Page 5