PS_CH07 - ECON2296-PracticeQuestionsChapter7 1. A firm's...

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ECON 2296  -  Practice Questions Chapter 7 1. A firm's total cost is C = Q 3 /2 - 10Q 2 + 100Q + 288. a) What is the firm's fixed cost (FC)? b) What is the firm's variable cost (VC)? c) What is the firm's average fixed cost (AFC)? d) What is the firm's average variable cost (AVC)? e) What is the firm's average cost (AC)? f) What is the firm's marginal cost (MC)? g) At what level of output do diminishing returns begin? 2. A firm's production function is Q = L 1/2 K 1/2 . The price of labour (w) is $10 per unit and the price of capital (r) is $100 per unit. Capital is fixed at 16 units. a) What are the marginal product of labour (MP L ) and the average product of labour (AP L )?. b) What are the firm's fixed cost (FC), variable cost (VC), total cost (TC), average fixed cost (AFC), average variable cost (AVC), average cost (AC), and marginal cost (MC). Hint: each of these (except for FC) is a function of Q. c) What is the relationship between MP L and MC? d) What is the relationship between AP L and AVC? 3. The price of labour is $25 per unit and the price of capital is $100 per unit. a) Draw the isocosts for cost = $400, cost = $600, and cost = $800. b) Suppose the price of labour increases to $50 per unit. Draw the new isocosts for cost = $400, cost = $600, and cost = $800. 4. A firm's production function is Q = L 1/2 K 1/2 . The price of labour is $10 per unit and the price of capital is $100 per unit. In the short run, capital is fixed at 4 units. a) Draw the isoquant for Q = 10. Identify three specific input bundles that lie on this isoquant. Measure labour on the X-axis and capital on the Y-axis. b) Draw the isocost for cost = $1000 in the same diagram as a). What is the absolute slope of the isocost? c) The isoquant from a) and the isocost from b) should intersect at two points. Is either of these input bundles the lowest cost method of producing Q = 10?Explain. d) Suppose the firm is operating in the short run . What input bundle would minimize the cost of producing 10 units of output? Hint: what does the short run mean? What is the cost of this input bundle? e) Suppose the firm is operating in the long run . What input bundle would minimize the cost of producing 10 units of output? What is the cost of this bundle? f) Could the cost of producing 10 units of output in the short run ever be less than the cost of producing 10 units of output in the long run? Explain. g) What function would represent the firm's expansion path? Show work. h) Suppose the price of labour increases to $20 per unit and the firm is operating in
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the long run . What input bundle minimizes the cost of producing Q = 10? How is this bundle different from the bundle in e)? 5. A firm's production is described by the following production function: Q = 3L
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This note was uploaded on 09/25/2010 for the course ECON Econ 2296 taught by Professor W.graygiovannetti during the Fall '10 term at Langara.

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PS_CH07 - ECON2296-PracticeQuestionsChapter7 1. A firm's...

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