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ECN100 MT2 W09 Key Parman

ECN100 MT2 W09 Key Parman - Ecn 100 Intermediate...

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Ecn 100 - Intermediate Microeconomic Theory University of California - Davis February 27, 2009 Instructor: John Parman Midterm 2 - Solutions You have until 3pm to complete the exam, be certain to use your time wisely. For multiple choice questions, mark your answer on your scantron sheet. Choose only one answer for each multiple choice question; if more than one letter is filled in for a question it will be marked wrong. For the short answer questions, write your answers directly on the exam. Show your work clearly, place a box around final answers and be certain to label any graphs you draw. Final answers may be left as fractions. Non-graphing calculators may be used but they should not be necessary. Good luck! Name: ID Number: Section: SECTION I: MULTIPLE CHOICE (60 points) 1. Suppose that a firm’s production function exhibits increasing returns to scale. If it costs the firm $100 to produce 20 units of output, then it will cost the firm: (a) Less than $100 to produce 40 units of output. (b) Exactly $200 to produce 40 units of output. (c) More than $200 to produce 40 units of output. (d) Less than $200 to produce 40 units of output. (d) To double output from 20 to 40 units, inputs will increase, increasing costs, but they will less than double. So the costs of producing 40 units will be greater than the costs of producing 20 units but less than double the costs of producing 20 units. 2. Suppose that apples are a Giffen good. If the price of apples increases, then: (a) The income and substitution effects for apples will both be positive. (b) The income and substitution effects for apples will both be negative. (c) The income effect will be positive and the substitution effect will be negative for apples. (d) The income effect will be negative and the substitution effect will be positive for apples. (c) The substitution effect will be negative when the price of a good increases, even if it is a Giffen good. Since apples are a Giffen good, we know that the overall change in apples will be positive when the price increases. Given that the substitution effect is negative, this means that the income effect must be positive. 3. A firm that uses capital and labor is operating at its profit-maximizing input levels given the current prices of inputs and output. Which of the following price changes would not lead to an increase in labor hired in the short run? (Assume capital is fixed in the short run.)
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2 Midterm 2 - Solutions (c) The price of the fixed good (capital) will not effect short run demand for labor.
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