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Prelim 2

# Prelim 2 - College of Human Ecology Cornell University...

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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 – Spring 2008 Prelim 2 – Answers April 3, 2008 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. Com- petitive firms take the market price as given. 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 compet- itive 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. MC 3) Profit-maximizing monopolists want to maximize the difference between:

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MC 4) Suppose a firm has the production function Q = F ( L , K ) = L + K The wage rate and the rental rate on capital are both \$3/hr. Suppose the firm is operating in the short run with fixed capital ¯ K = 100. How much labor will the firm use to produce Q = 30? Answer : 4a . Substitute ¯ K in the production function for Q = 30 and solve for L : 30 = L + 100 L = 400 .
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Prelim 2 - College of Human Ecology Cornell University...

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