Question

1. Explain how the following event would affect the cost curves:

Hourly wages for employees increase.

A) Marginal cost, average variable cost, and average total cost will decrease. Average fixed cost will not change.

B) Marginal cost, average variable cost, and average fixed cost will increase. Average total cost will not change.

C) Marginal cost, average variable cost, and average total cost will increase. Average fixed cost will decrease.

D) Marginal cost, average variable cost, and average total cost will increase. Average fixed cost will not change.

2. Because of the law of diminishing marginal returns, the marginal product curve must eventually

A) decrease

B) increase

C) increase but at a decreasing rate

3. In a perfectly competitive market, the marginal revenue curve for an individual firm is:

A) downward sloping.

B) upward sloping.

C) horizontal.

D) vertical.

4) A firm has a standard shaped, continuous, total cost function. The average total cost (ATC) function is at its lowest point where MC=ATC.

A) True

B) False

5)

Consider a firm that uses capital and labor as inputs and sells 6,000 units of output per year at the going market price of $10. Also assume that total labor costs to the firm are $47,500 annually. Assume further that the total capital stock of the firm is currently worth $100,000, that the return to investors with comparable risk is 15 percent annually, and that there is no depreciation. (Think of this firm like a corporation with shareholders - you do not need to include the opportunity cost of the owner's time.)

What is this firm's economic profit?

A) $2,500

B) $12,500

C) - $87,500 (a loss of $87,500)

D) - $2,500 (a loss of $2,500)

E) $62,500

Answer 1

1 - Option D

Marginal cost , average variable cost and average total cost will increase. Average fixed cost will remain same.

2 - Option A

Decrease

This will denotes the law of diminshing marginal returns

3 - Option C

Horizontal

This is because the price is constant and equal to MR in competitive firm

4 - True

The MC curve intersects the ATC curve at its minimum point

5 - Option D

-2500 (a loss of 2500)

Economic profit = 60000-47500-15000

= 60000-62500

= $ -2500