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Exam 2_Solutions

# Exam 2_Solutions - College of Human Ecology Cornell...

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College of Human Ecology Cornell University Ithaca, New York Department of Policy Analysis and Management PAM 200 Intermediate Micro A. Sinan ¨ Un¨ur – Fall 2007 Prelim 2 – Answers November 8, 2007 Multiple Choice MC 1) Profit-maximizing competitive firms want to maximize the difference between: ( a ) total revenue and total cost. ( b ) price and marginal cost. ( c ) price and average cost. ( d ) average revenue and average variable cost. Answer : 1a . Profit is defined as the difference between total revenue and total cost. So long as price the firm can obtain for its product covers marginal cost, the firm can add to its profits by selling more, so firms seek to produce an output level Q * such that P = MC ( Q * ) on the increasing portion of MC . Once such a point is determined, the maximized level of profit is given by π ( Q * ) = Q * ( P - ATC ( Q * ) . MC 2) In a competitive market, the quantity supplied by producers at each price does not depend on: Answer : 2c . Consumers’ incomes influence the location of the demand curve, and as a result affect the equilibrium output level. However, the location of the supply curve is determined by costs of production which in turn are determined by factor prices and technology.

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MC 3) Suppose you are running a fast food restaurant. In the short run, which one of the following is a variable cost? Answer : 3c . This is the only expense that is related to how many burgers you sell in the shortest time period during which at least one factor is constant. MC 4) Suppose you are operating a small fast food restaurant. With two workers, you can produce a total of 50 burgers in an hour. If you hire a third worker, you can produce a total of 70 burgers in an hour. What is the marginal product of the third worker? Answer : 4b . Adding a third hour of labor increased total output by 20 burgers. Therefore, Δ Q / Δ L = 20 / 1 = 20 units. MC 5) Assuming the fast food restaurant you are operating is in a competitive market, you would be spending time making decisions on: ( a ) how many workers to hire. ( b ) what price to charge. ( c ) how much to spend on advertising. ( d ) the logo to use on the wrappers. Answer : 5a . Competitive firms take price as given, and choose how much output to pro- duce. In choosing the output level, they must also decide how much of each input to employ in the production. 2

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Exam 2_Solutions - College of Human Ecology Cornell...

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