McPeak Name:____________________________
PPA 723- F03
Quiz 2
1) Complete 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 consumer 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 consumer surplus using a graph.
4) You know that the inverse demand curve is defined by the following function: P=100-5*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 monopolist?
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=100-5*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)
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 four 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 practice using the concept of opportunity cost. (1 point)
8) Returns to scale. (1 point)
My current level of production 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).
10) Circle 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) = MC(q) > AC(q) in a competitive market |
Technical Efficiency Economic Efficiency Profit Maximization Who leaked to Novak Valerie Plame’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 Plame’s name |
|
Input bundle where an isocost is tangent to an isoquant. |
Technical Efficiency Economic Efficiency Profit Maximization Who leaked to Novak Valerie Plame’s name |
|
The quantity of output resulting from applying to the production function a given level of input |
Technical Efficiency Economic Efficiency Profit Maximization Who leaked to Novak Valerie Plame’s name |
WARNING: THE ANSWER IS NOT “WHO LEAKED 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?