Question

1. Every firm in a competitive market has the production function

Q = K^.5L^.5and it is observed that long-run total market supply is described by the function P = .025Q. These facts suggest that

1. This is a decreasing cost industry
2. This is an increasing cost industry.
3. The price of at least one input increases as market demand for this good increases.
4. Some owners of resources used in the production of this product earn economic rents.
5. None of the above.

2. If the demand function for X is Q = AP^b and b= minus 2
   1. Consumer expenditure rises with price initially when price is low and price elasticity of demand is between Zero and minus one and then falls when price rises into the range where price elasticity of demand is less than 1.
   2. Consumer expenditure on the good increases as price falls
   3. Consumer expenditure on the good decreases as price falls
   4. Consumer expenditure is unchanged when price falls
   5. None of the above.

3. If the quantity demanded of a good is Q = 100 – 10P and long run total cost is C = 15Q² the long run profit maximizing output produced in a perfectly competitive market will be
   1. 30
   2. 50
   3. 28
   4. 100
   5. None of the above.

Answer 1

Every firm in a competetive market has the production function Q=K.5L and it is observed that long run total market supply is described by the function P=.025Q. These facts suggest that (a) This is a decreasing cost industry.

If the demand function for X isQ = APb and b = -2 (a) Consumer expenditure rises with price initially when price is low and price elasticity of demand is is between Zero and minus one and then falls when price rises in to the range where price elasticity of demand is less than 1 .

If the quantity demand of goods is Q=100 - 10P and long run total cost is C =15Q2 the long run profit maximising output produced in a perfectly competitive market will be (d) 100 .