F03Q2

McPeak = &nb= sp; = &nb= sp; Name:____________________________

PPA 723- F03 &= nbsp; &nbs= p; &= nbsp; November 5, 2003

Quiz 2

1) Compl= ete the following table. (2 points)

a) Quantity of Output	Fixed Cost	Total Cost	Average Cost	Marginal Cost	Variable Cost	Average Variable Cost
0	5	5	------------	---------	-----------
1			23
2			20
3				16
4					66
5		75
6				17
7					104
8		129

b. If the market price for= the output produced is 17 and the market structure is competitive, what level of output is the profit maximizing level of output? Why?

2= ) Isoquants. (2 points)

= a. = Define an isoquant.

= b. Is the slope of an isoquant positive or negative. Why?

= c. = Draw an isoquant illustrating a production setting in which the inputs are easily substituted.

3= ) Consumer Surplus. (2 points)

= a. = Show on a supply and demand graph the area corresponding to consumer surplus in a perfectly competitive market.

= b. Explain using economic concepts why we use this area to provide a measure of consum= er welfare.

= c. = Illustrate how a policy that restricts the quantity that can be sold in this market to= a level below the level sold in the perfectly competitive market impacts cons= umer surplus using a graph.

4= ) You know that the inverse demand curve is defined by the following function: P=3D100-5*Q and costs are defined = by 10*Q (so you know MC is 10 for all possible levels of Q). (2 points)

= a. = Use the bisection rule to define the marginal revenue curve

= b. What level of output equates marginal revenue with marginal cost for the monopol= ist?

= c. = What is the implied price?

= d. What is the implied profit?

= e. = Is the firm better off producing zero units of output or the level of output identified in (b)? Why?

5= ) You know that the inverse demand curve is defined by the following function: P=3D100-5*Q and costs are defined = by 10*Q (so you know MC is 10 for all possible levels of Q). THIS IS THE SAME BASIC INFORMATION= AS IN PROBLEM FOUR!!!!! (2 points)<= /p>

= a. = If the market is perfectly competitive, what is the equilibrium price – quantity pair that results from equating supply with demand?

= b. What is the implied profit at this equilibrium price quantity pair?

= c. = Draw a graph comparing the equilibrium price quantity pair derived in problem fo= ur with the answer to 5 (b).

= d. What is the size of the deadweight loss of the monopoly market structure?

6= ) Cost issues. (2 points)

= a. = If there are fixed costs in production, is marginal cost equal to the change in total cost divided by the change in quantity or not? Why or why not?

= b. If there are fixed costs in production, is the average fixed cost curve above = or below the average cost curve? Why?

= c. = If marginal cost is below average cost, is average cost rising or falling? Why?

7= ) It is common practice for professors at universities to solicit job offers from other universities in order to argue to their current university that they deserve a salary increase (that is we enter the job market not to look for a new job but in order to justify a hefty salary increase at our current institution). Explain this pr= actice using the concept of opportunity cost.&nbs= p; (1 point)

8= ) Returns to scale. (1 point)

My current level of produc= tion is 7 units. If I double my input bundle and my output level becomes 15 units, do I have increasing, constant= , or decreasing returns to scale in production?= Why?

9) More = fun with isoquants. (2 points)

a. Derive = the expansion path graphically, using isoquant and = isocost curves.

= ;

= b. Describe in words how to interpret the expansion path.

= c. = Illustrate how a total cost curve can be derived from your graph in (a).

1= 0) Circl= e the concept identified by the condition (if more than one are possible, pick the concept that is the condition is defined to identify). (2 points)

Condition	Identifies
Quantity of output that satisfies MR(q) =3D MC(q) &g= t; AC(q) in a competitive market	Technical Efficiency Economic Efficiency Profit Maximization Who leaked to Novak Valerie Pla= me’s name
A point on a curve defined by the marginal rate of technical substitution	Technical Efficiency Economic Efficiency Profit Maximization Who leaked to Novak Valerie Pla= me’s name
Input bundle where an isocost is tangent to an isoquant.	Technical Efficiency Economic Efficiency Profit Maximization Who leaked to Novak Valerie Pla= me’s name
The quantity of output resulting from applying to the production funct= ion a given level of input	Technical Efficiency Economic Efficiency Profit Maximization Who leaked to Novak Valerie Pla= me’s name

WARNING: THE ANSWER IS NOT “WHO LEAKE= D TO NOVAK VALERIE PLAME’S NAME!!!!!!!!!

11) Cost concepts. (2 points)

= a. = What are the seven short-run cost concepts, and how are they defined?

= b. Are there fewer short-run cost concepts than long-run cost concepts? Why or why not?