ARE100A INTERMEDIATE MICROECONOMICS:
THEORY OF PRODUCTION AND CONSUMPTION
FALL QUARTER 2008
Midterm Exam 2
Thursday November 20
1. Materials (M) is the only input for a firm producing fabric with the production function Q =
10M
0.5
.
M is measured in tons and the price of M is $100 per ton.
Q is measured in square km
of fabric.
a. Write the marginal cost function as an equation.
Show how you know.
M = (1/100)Q
2
Cost = $100 (1/100) Q
2
MC = $2Q
b. Write the average cost function as an equation.
Show how you know.
AC = Cost/Q = Q
2
/Q = $1(Q)
c. Using the notation P for the price of output Q per square km, write the short run supply
function for Q as an equation. Show how you know.
MC = P,
2Q = P
Q = 0.5P
so long a profit is positive
d. How much does the firm produce at P = $1000/square km?
Show how you know.
Q = 0.5P
Q = 500
e. What is the firms profit?
Show how you know.
PQ = $500,000
C = Q
2
= $250,000
Profit = $250,000
2. LoserInc produces plastic toys with the following cost function C = $800 + 10Q + 2.5Q
2
,
where Q is measured in tons of toys per month.
The 800 is for keeping the lights on in the
factory when it operates.
The plastic toy industry has many firms all with somewhat different
cost functions.
The price in January 2008 was $110/ton.
a. How much did LoserInc produce? Show how you know.
Explain
MC = (10 + 5Q) = P = 110;
Q = 100/5 = 20 ;
Q = 0.2(P 10)
b. What was the profit of LoserInc?
Show how you know.
Explain.
PQ = 20Q = $2200; C = 800 +10(20) + 2.5(20)
2
= 800 + 200 + 1000 = $2000.
Profit = $200
c. By November 2008 the price had fallen to $60/ton.
How much did LoserInc produce? Show
how you know.
Explain.
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 Fall '09
 DANIELSUMNER
 Economics, Adam

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