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EXAM

The following group of questions all refer to the Figures 1A, 1B, and 1C below. These figures show the production and cost functions of a single firm which produces output (Q) using one input, labor (L). There is no capital and thus no fixed cost. Total cost is therefore just the cost of hiring labor.

1. If production is efficient, how much labor is needed to produce 80 units

of output?

a. 30 c. 100

b. 60 d. NOTA (“None of the Above”)

2. The marginal product of labor (MPL) is at a maximum at which point on

the production function Figure 1A?

a. A c. C

b. B d. NOTA

3. The point B in Figure 1A is equivalent to which point in Figure 1C?

a. I c. M

b. J d. NOTA

4. The average cost (AC) of producing 80 units of output is how large (i.e.

what is its numerical value)?

a. 10 c. 12.5

b. 25 d. NOTA

5. Marginal cost equals average cost at what level of labor input?

a. 30 c. 100

b. 60 d. NOTA

6. When the price of output is \$25.00 per unit, how much output would be

produced by a profit maximizing firm?

a. 24 c. 80

b. 60 d. NOTA

9. When the price of output is \$25.00 per unit, how much profit would a

profit maximizing firm earn by operating at the optimal level of output?

a. \$0 c. \$2000

b. \$900 d. NOTA (1000)

10. The firm’s supply curve of output is determined by which of the

following curve segments?

a. the marginal cost curve above the point J

b. the marginal cost curve above the point I

c. the average cost curve above the point J

d. NOTA

11. If the price were to fall from \$25.00 to \$10.00 per unit, how much

profit would the profit maximizing firm earn?

a. \$0 c. \$600

b. \$150 d. NOTA

12. If a technological innovation were to shift the production function in

Figure 1A upward, the cost functions in Figure 1C would shift

a. upward c. become flat

b. downward d. NOTA

Figure 1A Figure 1B

Figure 1C

Question Group II

The following set of questions refer to the figure and table below. A firm makes VCRs using the technology represented by the isoquant map in the figure. This figure indicates the amounts of capital and labor needed produced various amounts of VCR. The return to capital, r, is \$20 per unit of capital and the wage, w, is \$10 per unit of labor. The firm selects the point a in the figure, and the data relevant for this point are shown in the first line of Table 1.

TABLE

_______________________________________________________________________

r w K L Q TC AC P

_______________________________________________________________________

Point a 20 10 10 36 200 560 2.8 2.8

Point b 20 20 20 20 200 800 4.0 4.0

Point c 20 20 10 10 100 ? ? ?

_______________________________________________________________________

1. You can tell by looking at table or figure above that production takes

place under

a. decreasing returns to scale

b. constant returns to scale

c. increasing returns to scale

d. average cost is U-shaped

2. Points a and b in the figure are points at which

a. profit is equal

b. cost is equal

c. output is equal

d. NOTA

3. Long-run marginal cost at point a is

a. greater than average cost

b. equal to average cost

c. less than average cost

d. indeterminate

Suppose, now, that the firm’s work force becomes unionized, and that the wage rate rises to \$20. The wage increase causes the firm’s costs to rise and the price of VCRs rises to \$4. At the new price and wage, the firm selects the point c in Figure 3.

4. After the wage increase, the firm’s average cost is

a. \$2.00 c. \$4.00

b. \$2.80 d. NOTA

5. After the wage increase, the firm uses how much labor?

a. 10 c. 36

b. 20 d. NOTA

Question Group III

The figure below shows the cost functions of U.S. wine producing firms (Panel A) and German wine producers (Panel B). The U.S. firms are initially excluded from the German wine market.

1. With U.S. firms excluded from the German market, competition among

German producers in the wine industry will cause the long-run price of wines in Germany to be

a. 10 c. 20

b. 14 d. NOTA

2. With U.S. firms excluded from the German market, competition among

German producers in the wine industry will cause the long-run profit earned by each individual German firm to be

a. 0 c. 144

b. 36 d. NOTA

3. With U.S. firms excluded from the German market, competition among

German producers in the wine industry will lead to a long-run supply curve of the wine in Germany that is

a. upward sloping

b. flat

c. U-shaped

d. NOTA

Suppose, now, that Germany signs a limited free-trade agreement with the U.S. allows just one U.S. wine producer to enter the German wine market. The tariff on U.S. wines is abolished for this one U.S. producer. The cost structure of this U.S. firm is shown in Panel A of Figure 4.

4. Suppose that the U.S. firm sets a price for its wine is equal to 14.

Each German wine producer will respond to this price in the short run by

producing how many units of wine?

a. 0 c. 24

b. 20 d. NOTA

5. Suppose that the U.S. firm sets a price for its wine is equal to 14.

Each German wine producer will respond to this price in the long run by

producing how many units of wine?

a. 0 c. 24

b. 20 d. NOTA

6. If German firms restructure themselves and lower their costs to meet the

price (14) set by the U.S. firm. By how much must the German average

cost be reduced in order to make the German wine producers competitive

with the U.S. firm?

a. 7 per unit c. 14 per unit

b. 8 per unit d. NOTA (6)

7. If German firms restructure themselves and lower their costs to meet the

price (14) set by the U.S. firm. How much total profit will the U.S.

producer earn in the long run at this price?

a. 0 c. 800

b. 300 d. NOTA

8. If German firms restructure themselves and lower their costs to meet the price (14) set by the U.S. firm. How much total profit will each German producer earn in the long run at this price?

a. 0 c. 800

b. 300 d. NOTA

Question Group IV

The following two figures shown the Edgeworth Box and Contract Curve (Panel A) and the Utility Possibility Frontier and Social Welfare Function (Panel B) of the following situation: Adam has an endowment of 5 apples and no honey, and Eve an endowment of has 9 units of honey and no apples. The two have to decide how much (if any) of their endowments to trade with each other. Society has to decide of the trades are satisfy social values about poverty.

Panel A Panel B

1. At which point in Panel A and B are Adam and Eve initially located,

a. e c. d

b. b d. NOTA

2. Both Adam and Eve are better off at points

a. a c. c

b. b d. d

3. If Adam were able to drive his best bargain, she would propose which

point to Tony?

a. a c. c

b. b d. d

4. Which point in Panel B corresponds to the point d in Panel A?

a. a c. c

b. b d. NOTA (e)

5. Which point in Panels A and B corresponds are a competitive equilibrium?

a. a c. c

b. b d. NOTA

6. Which points in Panels A and B are a social optimum?

a. a c. c

b. b d. NOTA

7. The point b in Panel A is

a. Pareto Optimal and socially optimal

b. Pareto Optimal but not socially optimal

c. Not Pareto Optimal and not socially optimal

d. NOTA

Question Group V

The figure below depicts the situation of an industry that becomes monopolized by a single producer.

1. A competitive industry would operate at which point in the figure?

a. A c. C

b. B d. NOTA

2. The monopolist produces at which quantity of output in the figure?

a. 4 c. 16

b. 8 d. NOTA

3. The monopolist charges what price?

a. 8 c. 16

b. 12 d. NOTA

4. The monopolist product makes how much profit?

a. 0 c. 16

b. 8 d. NOTA

5. What is consumer surplus at the monopoly price and quantity of output?

a. 0 c. 32

b. 16 d. NOTA (8)

6. What is the dead weight loss at the monopoly price and quantity of

output?

a. 4 c. 16

b. 8 d. NOTA

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