McPeak

PPA 723- F03

Practice Quiz 2

1) For each of the following names corresponding to a slope, provide the technical name of the curve or line from which this slope is derived.

a) Slope name	Curve or line name
Marginal rate of technical substitution
Negative of the ratio of input prices

b) Which one of these is based on the concept of technically efficient production?

c) How do we use these slopes to identify points of economic efficiency in producer theory? Explain using words and a graph.

2) The demand curve is defined by the relationship: p = 10-2*q. Marginal cost is defined by MC=2.

a) What is the price quantity pair chosen by the monopolist.

b) What is the price quantity pair that will result from perfect competition in this market if the marginal cost structure and the demand curve remain as given?

c) Identify the magnitude of consumer surplus, producer surplus, and deadweight loss in this example.

	Consumer Surplus	Producer Surplus	Deadweight Loss
Perfect Competition
Monopoly

3) Complete the following table.

a) Quantity of Output	Fixed Cost	Total Cost	Average Cost	Marginal Cost	Variable Cost
0	15	15	------------	---------	-----------
1		27
2			18
3		48
4				14
5		75
6				15
7		107
8					120

b. If the market price for the output produced is 12 and the market structure is competitive, what level of output is the profit maximizing level of output?

4) Describe both in writing and by using graphs how the concept of diminishing marginal returns in production is connected to the concept of increasing marginal costs.

5) Isoquants.

a) Describe two of the three properties of isoquants provided in class, and identify the economic reasoning that underlies each of the properties you identify.

b) Discuss and illustrate how the degree of substitutability of inputs in production influences the shape of the isoquant.

6) Returns to scale.

a. My current level of production is 13 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?

b. Compare moving from points a to b, b to c, and c to d in terms of returns to scale. (circle the correct response)

	Labor	Capital	Output
A	2	2	10
B	4	4	25
C	8	8	50
D	16	16	75

From A to B I have (increasing, constant, decreasing) returns to scale.

From B to C I have (increasing, constant, decreasing) returns to scale.

From C to D I have (increasing, constant, decreasing) returns to scale.

7) Economic efficiency.

a. Define and draw the curves used to trace out the expansion path.

b. Are there any points used in deriving the expansion path that are economically efficient but not technically efficient? Why or why not?

c. Derive the cost curve from the expansion path you drew in (a).

8) Welfare in the competitive market.

a. Illustrate using a supply and demand curve the following areas: consumer surplus, producer surplus, and variable cost.

b. Illustrate using a graph the “deadweight loss” of a policy that restricts the quantity sold to be less than the quantity would be in the absence of the policy (if the market were allowed to reach a perfect competition equilibrium).

c. Explain using words how the deadweight loss area is to be interpreted, using the concepts of marginal willingness to pay, marginal cost of production, and the selling price.

9) Regulating monopolies.

a. Illustrate using a graph how to use a price ceiling in a monopolistic market to arrive at the price quantity pair that would characterize a perfectly competitive market.

b. Will this policy work if the monopoly in question is a natural monopoly? Why or why not?

10) Cost issues.

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

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

c. If the market price falls between these two curves described in (b) in a perfectly competitive market, what are the implications for both the output level and the profit level of the firm?