Quiz 3 Ec21 S2013 Solutions.pdf

Quiz 3 Ec21 S2013 Solutions.pdf - Economics 21 Spring 2013...

Info icon This preview shows pages 1–2. Sign up to view the full content.

Page 1 of 4 Economics 21 Spring 2013 Quiz 3 SOLUTIONS 1. Short Answer Questions (20 points) a. (3 points) Define “opportunity cost” and explain how it is related to “economic cost”. The opportunity cost of a resource is the value of that resource in its best alternative use. Opportunity cost is the same as economic cost. b. (3 points) Define “isoquant”. An isoquant consists of all combinations of factor inputs (typically: K and L) that yield the same level of output. c. (3 points) What are the arguments of a Social Welfare Function, and what is a Social Welfare function used for? The arguments of a social welfare function are the levels of utility of the individuals in society, so SWF=V(u 1 , u 2 , u 3 ,…) where u 1 is the utility of individual 1, u 2 is the utility of individual 2, etc. A SWF is used to rank alternative allocations and thus reflects “society’s” preferences. d. (4 points) What are the five conditions for “perfect competition”? (1) Free entry and exit (2) Identical products (i.e., homogeneous products) (3) Negligible transaction costs (4) Large number of firms and buyers (5) Perfect information Note that price taking follows from conditions (4) and (2). Note also that perfect competition does not require firms to have identical technologies (i.e. identical cost or production functions). e. (3 points) Suppose a producer of iPad covers has a contract to deliver 1,000,000 such covers per month to Apple. Currently, the company employs 150 workers and rents 50 machines to produce these covers. With the current number of workers and machines, the marginal product of a worker is 2000 covers/month and the marginal product of a machine is 6000 covers/month. The wage rate for a worker is 1000 Yuan per month and the rental rate for a machine is 4000 Yuan per month. Is the firm using the optimal combination of workers and machines? If so, explain why. If not, explain how the firm should adjust the number of workers and the number of machines. At the optimum the relative factor prices, w/r = 1000/4000 = 1/4, should be equal to the ratio of marginal products, MP L / MP K =2000/6000 = 1/3. This is not the case (and the firm is not a corner solution because it uses non-zero quantities of each input), so the firm is not using the optimal input mix.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern