2l'

Phyllis wants to buy two tickets to a concert. Tickets cost g1b each, and she expectsto wait 30 minutes in line to buy them. If her wage is $16 per hour, the economiccost of buying the two tickets is: a) $1 5 . b) $30. c) $38. d) $+0. e) None of the aboveis correct.

22.

a)

In the short run, when capital is fixed, marginal cost equals:

MPl. w (the wage rate).

b)
c) d) e)

(wXMPJ.

w/1VIP1. MP/w.

23.

If MC > AVC: a) AFC must be increasing with output. b) ATC must be increasing with output. c) AVC must be increasing with ourput. d) b) and c) e) a), b), and c) 24. Assume that capital input is drawn on the vertical axis and labor input on the horizontal axis. If machine-hours can be rented for g8/hour and labor can be hired for g32/hour, the slope of an isocostline is: a) - 4. b - 7/4. c - P, where P is the price of a unit of output. d - 4 P. e) More information is needed. The firm in the above question should chooseinputs such that: a) the MRTS equals 4. b) the MRTS equals.l/4. c) the MRTS equals P/4. d) the MRTS equals 4P. e) None of the aboveis correct. If the expansion path is a straight line through the origin, then: a) the production function exhibits constant returns to scale. b) the capital-labor ratio increasesas output increases. c) thecapital-labor ratio doesnot change as output increases. d) the production function exhibits decreasing returns to scale. e) a) and c) A sparkling water bottler finds that producing 2,000 casesof canned water and 8,000 cases bottled water in one plant is less costly than using two separate plants to produce the same total output. This production processexhibits: a) increasing returns to scale. b) economiesof,scope. c) diminishing returns. d) a) and b) e) b) and c)

25.

26.

27 .

28. .

Since their introduction in the late 1970s,videocassetterecorders have fallen dramatically in price. Per unit production costs have fallen as total cumulative production has grown. This is an example of: economiesof scope. a) increasing returns to scale. b) the learning curve. c) a) andb) d) a) and c) e) With constant returns to scale,long-run average total cost: is constant. a) equals long run marginal cost. b) equals short run marginal cost. c) a) and b) d) a) and c) e) If the MRTS is greater than the wage-rental ratio (w/r), then to minimize cost the firm should: a) increaseK and decrease L. b) decreaseK and increaseL. c) increaseboth K and L. d) decreaseboth K and L. e) Either b) or d) If firms in a new industry each have a learning curve with respect to their own output, then " a) the firm with the most sales in the past will have the highest average cost now. b) the frrm with the most current sales will have the highest average cost now. c) the firm with the most sales in the past will have the lowest average coet now. d) the firm with the most current sales will have the lowest average cost now. e) c) and d). Which of the following is true? a) If fixed costs are positive, the AVC and ATC curves move closer to each other as output increases. b) If there are no fixed costs,the ATC curve is a horizontal line. If fixed costs are positive, the output at which ATC is minimized is less than the c) output at which AVC is minimized d) a) and b) e) a), b), and c)

29.

30.

3f .

32.

ANSWERS

2L.

c)

To buy two tickets, Phyllis will have to spend $30 on the tickets plus half an hour waiting. With a time value of $16/hour, this half-hour has an opportunity cost of $8 for a total economiccost of $38. Marginal cost is the cost of producing one more unit of output. The cost of a unit of' labor is w. That additional unit of labor producesMP1 units of output. Marginal cost is therefore w/IVIP1. This is the only fact guaranteed by MC > AVC. Choicea) is ruled out becauseAFC is always decreasing as output increases. Since ATC and MC intersect to the right o[ minimum AVC, the ATC curve could be declining, eliminating b). The slope of an isocostline is - w/r = - 3218= -4. The firm should operate so that the MRTS equals the wage-rental ratio. IVL is constant in this case.The expansion path doesnot determine returns to scale. Economies of scope is a concept we use to compare separate production to joint production. The learning curve pertains t6 cost changesas cumulatiue production grows. Returns to scale are reflected in the shape of long-run cost curves. If there are constant returns to scale, then LAC and LMC are the same horizontal line. SMC is measured with capital fixed, so returns to scale do not tell us about SMC. Costs are minimized when MRTS = w/r. Therefore, the firm should move from point A to point B in Figure 74.5.
Capital (machine hours)

,s)

d)

23.

c)

24. 25. 26. 27.

28.

a) a) c) b)

c)

2s.

d)

30.

b)

j--

MRTS > w/r

MRTS = w/r

Labor (hours)

Figure 7A.5

31".

c)

By definition of a learning curve, average cost falls with cumulative output. Choice d) relates to scale economies,and we do not know whether or not production in this industry exhibits economiesof scale. Even if there are no fixed costs, ATC can be U-shaped if AVC is U-shaped (since the two curves would be identical), thus ruling out choice b). Choice c) is also false since AFC falls as output increases, which implies that minimum ATC occurs at a larger output level than minimum AVC.

32.

a)