Correct Answer: False
TRUE OR FALSE (You do not need to justify your answer but think of a
justification)
1.
A firm in a competitive industry takes account of the fact
that the demand curve it confronts has a significant negative slope.
FALSE, the firm is so small that from it’s point of view they face a
flat demand curve.
2.
Mr. O. Carr has the cost function
c
(
y
) =
y
2
+ 100 if his
output,
y
, is positive and
c
(0) = 0. If the price of output is 25, Mr.
Carr’s profitmaximizing output is zero.
FALSE, he produces at P=MC so
25=2y and y*=12.5. Many ways of checking this, here is one: profit=P*y
c(y)=25*12.5 – (12.5*12.5) – 100 = 56.25 (not zero).
3.
Two firms have the same technology and must pay the same
wages for labor. They have identical factories, but firm 1 paid a
higher price for its factory than firm 2 did. If they are both profit
maximizers and have upwardsloping marginal cost curves, then we would
expect firm 1 to have a higher output than firm 2.
FALSE, since both
will set P=MC and the marginal cost is not affected by the fixed cost
they paid for the factory. That is, since the factories are identical
they have the same cost structure so P=MC will give you the same level
of output.
4.
Average fixed costs never increase with output.
TRUE,
remember the fixed cost is just a number F, so AFC=F/y which will
always decrease as y gets larger. Formally if we take the derivative of
AFC with respect to y we get F/y
2
, which assuming the fixed cost is
positive will always be negative (so increasing y by a little will
always decrease AFC).
5.
It is possible to have an industry in which all firms make
zero economic profits in longrun equilibrium.
TRUE, actually that is
pretty much what we expect will happen since zero economic profits is a
condition for no entry of new firms. If there were positive economic
profits we would expect new firms to enter the market until they drive
them to zero.
6.
If some firm in an industry has the production function
F
(
x
,
y
) =
x
3/4
y
3/4
, where
x
and
y
are the only two inputs in producing the
good, then that industry cannot be competitive in the long run.
TRUE
because this technology shows increasing returns to scale so I can
always double my production, less than double my costs and increase my
profits so I have an incentive to grow and grow.
7.
Since a monopoly charges a price higher than marginal cost,
it will produce an inefficient amount of output.
TRUE, since we now
from the welfare theorems that any efficient outcome can be represented
as the solution to a competitive market and competitive markets set
P=MC. Another way of stating this is that if P>MC then there are people
willing to pay (given by price) more that what it costs to make the
marginal unit so it is efficient to produce it and yet it is not.
8.
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 Fall '08
 Hansen
 Microeconomics, AFC, Marge Costa, Mr. O. Carr

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