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4 Pages

### 2.1

Course: ECN 212, Fall 2007
School: ASU
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Word Count: 876

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Set Problem 2.1 Use Figure 1 for questions 1-3. Select the correct answer and explain it in some detail. 1. The cost conditions in Figure 1 imply that the point of maximum average productivity of the variable input coincides with: a. point R on curve II d. point S on curve III b. point N on curve III e. none of the above d. BMNE e. RS c. point L on curve II 2. At an output level of q1 in Figure 1, total fixed...

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Set Problem 2.1 Use Figure 1 for questions 1-3. Select the correct answer and explain it in some detail. 1. The cost conditions in Figure 1 imply that the point of maximum average productivity of the variable input coincides with: a. point R on curve II d. point S on curve III b. point N on curve III e. none of the above d. BMNE e. RS c. point L on curve II 2. At an output level of q1 in Figure 1, total fixed cost is a. LK b. 0ALq1 c. MN 3. Curves I, II, and III in Figure 1 represent, respectively: a. AP, MP, and TP b. MP, TP, and AP d. MC, AVC, and ATC e. MC, ATC, and AFC c. MC, ATC, and AVC 4. In the long run, increase in output is exactly proportional to the increase in resources. This result is described as: a. constant returns to scale. b. diseconomies of scale. c. diminishing returns. d. increasing returns. e. economies of scale. Use Figure 2 for questions 5-7. 5. In Figure 2, the law of diminishing returns pertains to: a. movement along any of the SAC curves d. movement along LAC beyond point C. b. movement along SAC1 and SAC2 only e. movement along LAC up to point C. c. movement from SAC1 to SAC2, but not from SAC2 to SAC3. 6. In Figure 2, the SAC curves correspond to _______ and economies of scale relate to movement from ______. a. alternative plant sizes; A toward C c. alternative plant sizes; A toward B b. changes in technology; A toward C d. changes in technology; A toward B e. either alternative plant sizes or changes in technology; A toward C 7. Point D does not lie on the LAC curve because: a. the same output could be produced at a lower cost in a larger plant b. the same output could be produced at a lower cost in a smaller plant c. economies of scale have been exhausted d. division of labor is limited by the extent of the market e. markets do not always ensure efficient outcomes in the short run Figure 3 describes Firm A's cost conditions. Use it to answer questions 8-11. 8. In the short-run, Firm A will continue to operate as long as the market price stays above: a. 30 b. 20 c. 15 d. 14 e. 0 9. If the market price is p2, the firm will earn an economic profit of a. 100 b. 200 c. 210 d. 75 e. 10 10. Figure 4 describes the market conditions under which Firm A operates. The supply curve in Figure 4 is consistent with approximately ____ firms that are exactly like A. a. 14 b. 18 c. 20 d. 23 e. 25 11. The long-run supply curve for this industry is a. the same as the short-run supply curve (S) b. steeper than the short-run supply curve c. flatter than the short-run supply curve, but still d. rising horizontal at p = 30 e. horizontal at p = 60 See "Profit Maximization B", slides 4-5. Use the function C = 100 + 5q + q2 to generate the cost curves of the representative firm. Assume that 60 firms are currently operating in the market. Use it to answer questions 12-15. 12. The ATC curve is minimized at an output of q = _____. a. 10 b. 15 c. 20 d. 25 e. 30 13. If the market price is 35, the firm will maximize profit by producing q = _____. a. 10 b. 15 c. 20 d. 25 e. 45 14. If the market price is 45, the firm will earn an economic profit of a. 100 b. 200 c. 300 d. 20 e. 10 15. If the market price is 45, the industry will supply Q = _____. a. 300 b. 600 c. 1200 d. 1500 e. 4500 16. With regard to the number of passengers on specific flights, it is reasonable to infer that: a. b. c. d. e. fixed costs are high and marginal costs are significant, but not prohibitive fixed costs are negligible and marginal costs are increasing fixed costs are high and marginal costs are negligible operating costs a directly proportional to the number of passengers none of the above 17. Analysis developed in class suggests that a major risk facing pharmaceutical companies is: a. devastating side effects d. regulation by the FDA b. socialized medicine c. reform of the patent laws e. rapid demand fluctuation 18. The following is a major source of pharmaceutical companies' fixed costs: a. the probability of a law suit d. patent applications b. research and development e. none of the above c. terrorist threats 19. When the demand curve (D) for any good or service is downward sloping, the MR curve: a. is also downward sloping but lies above D b. will slope upward and intersect D c. is also downward sloping and lies below D d. determines equilibrium along D e. is not related to D within this context. 20. If economic profits are being realized in a perfectly competitive market, a. firms will start merging. b. new firms will enter the market c. firms will differentiate their products in hope of capturing the entire economic profit. d. costs or production will have to increase e. demand will adjust downward Exercise (Refer to Table 1) a. Fill in the blanks b. Construct a large carefully labeled graph containing the AVC, ATC, and MC curves. Plot marginals at half-intervals (e.g., MC = 8 should correspond to q = rather than q = 1). Use approved graph paper. Adjust the scales so these curves resemble the ones in Figure 1. c. Explain the law of diminishing returns and use it to discuss the shapes of these curves.
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