Chapter 5 THEORY ON PRODUCER’S BEHAVIOR

Chapter 5 THEORY ON PRODUCER’S BEHAVIOR Input elasticity of output is equal to the ratio of marginal product divided by average product. Microeconomics Seventh Edition 7th N.Greogory Mankiw Business Administration (Faculty of Business Administration) Exercises for practice.

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CHAPTER 5: THEORY ON PRODUCER’S BEHAVIOR

PART 1: TRUE OR FALSE, EXPLAIN?

1 Input elasticity of output is equal to the ratio of marginal product devided by average product

2 Cobb-Doughlas production function Q = K0,3L0,7 indicates that capital elasticity of output is

greater than labour elasticity of output

3 When a production function becomes steeper, the marginal product is decreasing

4 When the total output is increasing, the marginal product of variable input can still decrease

but must be greater than zero

5 When quantity increases, average product never increases

6 Marginal product equals to average product curve at the highest value of marginal product

7 When marginal product is below average product, average product must be increasing

8 Total cost curve is upward sloping, starts from the origin

9 The vertical distance between TV and VC curve is diminish as quantity output increases

10 When marginal cost is greater than average total costs, average total costs must be falling

11 Average variable cost will increase when marginal cost increases

12 When marginal cost increases, average total cost also increases

13 If marginal cost is decreasing, total cost will go down as well

14 If the production function for a firm exhibits the law of diminishing marginal product, the

total cost curve for the firm will become flatter as the quantity of output expands

15 If, as the quantity produced increases, a production function first exhibits increasing

marginal product and later diminishing marginal product, the corresponding marginal cost

curve will be U-shaped

16 Average total cost curve crosses marginal cost curve at the minimum point of marginal cost

curve

17 Average variable cost curve intersects marginal cost curve at the minimum point of marginal

cost curve

18 The vertical distance between average total cost curve and average variable cost curve

remains unchanged when quantity output changes

19 All average cost curves in short run production are U-shaped

20 Marginal cost curve crosses all average cost curves at their minimum points

21 If marginal cost exceeds marginal revenue, firm should increase output and reduce the price

in order to increase profit

22 When firms want to maximize total revenue, they will sell higher quantity of products and

charge higher prices than when they want to maximize profit

23 Firm can maximize its profit by minimizing its cost

24 Explicit cost is smaller than economic cost and accounting cost

25 Economic profit is greater than accounting profit

PART 2: EXERCISES Exercise 1: A firm is facing with the demand curve Q = 24 – P and cost function:

ATC = 2Q + 10/Q ($) a) Calculate P, Q, TR, π and PS in case firm wants to maximize profit

b) Calculate P, Q, TR, π and PS in case firm wants to maximize total revenue

Exercise 2: A firm is facing with the demand curve P = 54 – 6Q and cost function:

MC = 15 + Q, FC = 8 ($) a) Calculate P, Q, TR, π and PS in case firm wants to maximize profit

b) Calculate P, Q, TR, π and PS in case firm wants to maximize total revenue

Exercise 3: A firm is facing with the demand curve P = 100 – Q and cost function:

VC = Q2 + 4Q, FC = 10 ($) a) Calculate P, Q, TR, π and PS in case firm wants to maximize profit

b) Calculate P, Q, TR, π and PS in case firm wants to maximize total revenue

c) Government impose a tax of 10$/unit on firm, Calculate optimal P, Q, TR and π in this case

Exercise 4: A firm is facing with the demand curve P = 52 – 2Q and cost function:

TC = 0,5Q2 + 2Q + 47,5 ($) a) Calculate P, Q, TR, π and PS in case firm wants to maximize profit

b) Calculate P, Q, TR, π and PS in case firm wants to maximize total revenue

c) Government impose a tax of 2,5$/unit on firm, calculate optimal P, Q, TR and π in this case

Exercise 5: A firm is facing with the demand curve P = 100 – 0,01Q and cost function:

TC = 50Q + 30000 ($) a) Calculate P, Q, TR, π and PS in case firm wants to maximize profit

b) Calculate P, Q, TR, π and PS in case firm wants to maximize total revenue

c) Government impose a tax of 10$/unit on firm, calculate optimal P, Q, TR and π in this case

Exercise 6: A firm has cost function: TC = 1

3Q3 – 2Q2 + 5Q + 225 ($)

a) Derive VC, FC, AVC, AFC, ATC and MC function of this firm

b) Calculate the minimum value of ATC, AVC and MC

c) Given wage = 200$, calculate the maximum value of APL and MPL

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PART 3: MULTIPLE CHOICE QUESTIONS

1 A production function is a relationship between

A inputs and quantity of output

B inputs and revenue

C inputs and costs

D inputs and profit

2 The short run is a time period in which

A all resources are fixed

B the level of output is fixed

C the size of the production plant is variable

D some resources are fixed and others are variable

3 Which of these assumptions is often realistic for a firm in the short run?

A The firm can vary both the size of its factory and the number of workers it employs

B The firm can vary the size of its factory, but not the number of workers it employs

C The firm can vary the number of workers it employs, but not the size of its factory

D The firm can vary neither the size of its factory nor the number of workers it employs

4 When a firm’s only variable input is labor, then the slope of the production function

measures the

A quantity of labor

B quantity of output

C total cost

D marginal product of labor

5 The marginal product of an input in the production process is the increase in

A total revenue obtained from an additional unit of that input

B profit obtained from an additional unit of that input

C total revenue obtained from an additional unit of that input

D quantity of output obtained from an additional unit of that input

6 When adding another unit of labor leads to an increase in output that is smaller than

increases in output that resulted from adding previous units of labor, we have the

property of

A diminishing labor

B diminishing output

C diminishing marginal product

D negative marginal product

7 Diminishing marginal product suggests that the marginal

A cost of an extra worker is unchanged

B cost of an extra worker is less than the previous worker’s marginal cost

C product of an extra worker is less than the previous worker’s marginal product

D product of an extra worker is greater than the previous worker’s marginal product

8 The law of diminishing marginal product of labor occurs when

A every additional worker hired reduces the quantity produced by the firm

B every additional worker hired reduces the total costs of the firm

C every additional worker hired contributes a smaller increase in production than

previously hired workers

D every additional worker hired contributes a smaller increase in total costs than

previously hired workers

9 The marginal product of labor is equal to the

A incremental cost associated with a one unit increase in labor

B incremental profit associated with a one unit increase in labor

C increase in labor necessary to generate a one unit increase in output

D increase in output obtained from a one unit increase in labor

10 The marginal product of labor can be defined as

A change in profit/change in labor

B change in output/change in labor

C change in labor/change in output

D change in labor/change in total cost

11 Suppose a certain firm is able to produce 160 units of output per day when 15 workers

are hired The firm is able to produce 176 units of output per day when 16 workers are

hired (holding other inputs fixed) Then the marginal product of the 16th worker is

A 10 units of output

B 11 units of output

C 16 units of output

D 176 units of output

12 Let L represent the number of workers hired by a firm and let Q represent that firm’s

quantity of output Assume two points on the firm’s production function are (L = 12, Q =

122) and (L = 13, Q = 130) Then the marginal product of the 13th worker is

A 8 units of output

B 10 units of output

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C 122 units of output

D 130 units of output

13 On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires

2 workers He is able to produce 4,400 bushels of wheat when he hires 3 workers Which

of the following possibilities is consistent with the property of diminishing marginal

product?

A The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers

B The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers

C The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers

D All of the above are correct

14 When the total product curve is falling, the

A marginal product of labor is zero

B marginal product of labor is negative

C average product of labor is increasing

D average product of labor must be negative

15 When marginal product reaches its maximum, what can be said of total product?

A total product must be at its maximum

B total product starts to decline even if marginal product is positive

C total product is increasing if marginal product is still positive

D total product levels off

The figure below depicts a production function for a firm that produces cookies Use the

figure to answer questions 16 and 17

16 As the number of workers increases,

A total output increases, but at a decreasing rate

B marginal product increases, but at a decreasing rate

C marginal product increases at an increasing rate

D total output decreases

17 With regard to cookie production, the figure implies

A diminishing marginal product of workers

B diminishing marginal cost of cookie production

C decreasing cost of cookie production

D increasing marginal product of workers

18 Which of the following statements about a production function is correct for a firm

that uses labor to produce output?

A The production function depicts the relationship between the quantity of labor and the

quantity of output

B The slope of the production function measures marginal cost

C The quantity of output is measured along the horizontal axis

D All of the above are correct

19 If a production function exhibits diminishing marginal product, its slope

A is linear (a straight line)

B becomes steeper as the quantity of the input increases

C becomes flatter as the quantity of the input increases

D could be any of these answers

20 One assumption that distinguishes short-run cost analysis from long-run cost analysis

for a profit-maximizing firm is that in the short run,

A output is not variable

B the number of workers used to produce the firm's product is fixed

C the size of the factory is fixed

D there are no fixed costs

21 Fixed costs can be defined as costs that

A vary inversely with production

B vary in proportion with production

C are incurred only when production is large enough

D are incurred even if nothing is produced

22 Which is not a fixed cost?

A monthly rent of $1,000 contractually specified in a one-year lease

B an insurance premium of $50 per year, paid last month

C an attorney's retainer of $50,000 per year

D a worker's wage of $15 per hour

23 If a firm produces nothing, which of the following costs will be zero?

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A total cost

B fixed cost

C opportunity cost

D variable cost

24 Variable costs are

A sunk costs

B multiplied by fixed costs

C costs that change with the level of production

D defined as the change in total cost resulting from the production of an additional unit of

output

25 Variable cost curve is

A Upward sloping, starts from the origin

B Upward sloping, starts from fixed cost

C U-shaped

D Horizontal

26 Total cost curve is

A Upward sloping, starts from the origin

B Upward sloping, starts from fixed cost

C U-shaped

D Horizontal

27 The average fixed cost curve

A always declines with increased levels of output

B always rises with increased levels of output

C declines as long as it is above marginal cost

D declines as long as it is below marginal cost

28 Average total cost is very high when a small amount of output is produced because

A average variable cost is high

B average fixed cost is high

C marginal cost is high

D All of the above are correct

29 The changing slope of the total cost curve reflects

A decreasing average variable cost

B decreasing average total cost

C decreasing marginal product

D increasing fixed cost

30 If a production function exhibits diminishing marginal product, the slope of the

corresponding total-cost curve

A is linear (a straight line)

B becomes steeper as the quantity of output increases

C becomes flatter as the quantity of output increases

D could be any of these answers

31 Average total cost equals

A change in total costs divided by quantity produced

B change in total costs divided by change in quantity produced

C (fixed costs + variable costs) divided by quantity produced

D (fixed costs + variable costs) divided by change in quantity produced

32 The vertical distance between ATC and AVC curves is

A Constant as quantity output increases

B Increasing gradually as quantity output increases

C Decreasing gradually as quantity output increases

D Decreasing gradually as quantity output decreases

33 Marginal cost tells us

A the marginal increment to profitability when price is constant

B the value of all resources used in a production process

C the amount total cost rises when output rises by one unit

D the amount fixed cost rises when output rises by one unit

34 Marginal cost equals

(i) change in total cost divided by change in quantity produced

(ii) change in variable cost divided by change in quantity produced

(iii) the average fixed cost of the current unit

A (i) and (ii)

B (ii) and (iii)

C (ii) only

D All of the above are correct

35 The firm's short-run marginal-cost curve is increasing when

A marginal product is increasing

B total fixed cost is increasing

C marginal product is decreasing

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D average fixed cost is decreasing

36 If marginal cost is rising,

A average variable cost must be falling

B average fixed cost must be rising

C marginal product must be falling

D marginal product must be rising

37 Marginal cost is equal to average total cost when

A average variable cost is falling

B average fixed cost is rising

C marginal cost is at its minimum

D average total cost is at its minimum

38 When marginal cost exceeds average variable cost,

A average fixed cost must be rising

B average variable cost must be rising

C average variable cost must be falling

D marginal cost must be falling

39 When marginal cost is less than average total cost,

A marginal cost must be falling

B average variable cost must be falling

C average total cost is falling

D average total cost is rising

40 Whenever marginal cost is greater than average total cost,

A marginal cost is rising

B marginal cost is falling

C average total cost is rising

D average total cost is falling

41 When marginal cost is rising, average variable cost

A must be rising

B must be falling

C must be constant

D could be rising or falling

42 At all levels of production beyond the point where the marginal cost curve crosses the

average variable cost curve, average variable cost

A rises

B remains unaffected

C falls

D All of the above are possible, it depends on the shape of the marginal cost curve

43 The efficient scale of the firm is the quantity of output that

A maximizes marginal product

B maximizes profit

C minimizes average total cost

D minimizes average variable cost

44 The marginal cost curve crosses the average total cost curve at

A the efficient scale

B the minimum point on the average total cost curve

C a point where the marginal cost curve is rising

D All of the above are correct

45 If the short-run average variable costs of production for a firm are rising, then this

indicates that

A average total costs are at a maximum

B average fixed costs are constant

C marginal costs are above average variable costs

D average variable costs are below average fixed costs

46 Which of the following statements about costs is correct?

A When marginal cost is less than average total cost, average total cost is rising

B The total cost curve is U-shaped

C As the quantity of output increases, marginal cost eventually rises

D All of the above are correct

47 All of the average cost curves are U-shaped, except for

A ATC curve

B AVC curve

C AFC curve

D MC curve

48 The reason the marginal cost curve eventually increases as output increases for the

typical firm is because

A of diseconomies of scale

B of minimum efficient scale

C of the law of diminishing returns