Practice Exam 2-Solution

# Practice Exam 2-Solution - University of Illinois at...

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University of Illinois at Urbana-Champaign ECON302 Intermediate Microeconomics Exam 2 November 5, 2008 Form A Solution PART I: Multiple Choice Questions (40 points) 1.Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making? I. "Even though I hate my MBA classes, I can't quit because I've spent so much money on tuition." II. "To break into the market for soap our firm needs to spend \$10M on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account." a. I only. b. II only. c. Both I and II. d. Neither I nor II. Scenario 1: The average total cost to produce 100 cookies is \$0.25 per cookie. The marginal cost is constant at \$0.10 for all cookies produced. 2. Refer to Scenario 1. The total cost to produce 50 cookies is a. \$20 b. \$25 c. \$50 d. \$60 e. indeterminate 3.In a short-run production process, the marginal cost is rising and the average total cost is falling as output is increased. Thus, marginal cost is a. below average total cost. b. above average total cost. c. between the average variable and average total cost curves. d. below average fixed cost.

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Figure 1 4. Refer to Figure 1. At output level Q 1 a. marginal cost is falling. b. average total cost is falling. c. average variable cost is less than average fixed cost. d. marginal cost is less than average total cost. e. all of the above. 5. Consider the following statements when answering this question; I. A firm's marginal cost curve does not depend on the level of fixed costs. II. As output increases the difference between a firm's average total cost and average variable cost curves cannot rise. a. I is true, and II is false. b. I is false, and II is true. c. I and II are both true. d. I and II are both false.
6. A firm employs 100 workers at a wage rate of \$10 per hour, and 50 units of capital at a rate of \$21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm a. is producing its current output level at the minimum cost. b. could reduce the cost of producing its current output level by employing more capital and less labor. c. could reduce the cost of producing its current output level by employing more labor and less capital. d. could increase its output at no extra cost by employing more capital and less labor. e. both (b) and (d) are true. 7. When there are economies of scale, a. MC > AC, so cost-output elasticity is greater than AC. b. MC < AC, so cost-output elasticity is less than AC. c. MC < AC, so cost-output elasticity is greater than 1. d. MC < AC, so cost-output elasticity is less than 1. e. long-run marginal cost is declining. 8. When the average product is decreasing, marginal product

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## This note was uploaded on 04/06/2009 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.

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Practice Exam 2-Solution - University of Illinois at...

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