ECON520QUIZ_3Fall2010AnswerKey

ECON520QUIZ_3Fall2010AnswerKey - University of Illinois At...

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University of Illinois At Chicago Microeconomics for Business Decisions (ECON520) Quiz #3 (Fall 2010) Answer Key 1. (5 pts.) Which of the following factor inputs are variable in the long run? A. Labor B. Plant size C. Capital and equipment D. All of the above By definition, long run is a period of time when all factor inputs can be changed – all factor inputs are variable. 2. (5 pts.) When the average product is decreasing, marginal product: A. is less than average product. B. is increasing. C. exceeds average product. D. is decreasing. This is as much a mathematical concept as an economics concept. Any time that an incremental (marginal) value is added and that value is higher than the existing average, the average will increase. Similarly, any time an incremental value is added and that value is less than the existing average, the average will decrease. So if the average is falling, the marginal value must be pulling it down – the marginal value is decreasing and less than the average. A numerical example that fits is your quiz scores. If your average quiz score falls after Quiz #3 (hopefully not), that means the score you earned on Quiz #3 must have been less than your average score from Quiz #1 and Quiz #2. Graphically, this is demonstrated with average product and marginal product on page 200 of your text. 3. (5 pts.) The law of diminishing returns assumes that: A. there is at least one fixed input. B. all inputs are changed by the same percentage. C. additional inputs are added in smaller and smaller increments. D. all inputs are held constant. Like Question #1, this is for the most part definitional. Diminishing returns eventually result from an operational constraint – adding variable inputs to one or more fixed inputs.
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ECON520 Quiz #3 Answer Key (Fall 2010) – Page 2 4. (5 pts.) The law of diminishing returns applies to: A. the short run only. B. the long run only. C. both the short and long run. D. neither the short nor the long run. The most likely circumstance in which the law of diminishing returns applies is as previously mentioned – in cases where one or more input factors are fixed; the short run. Pindyck and Rubinfeld, however, argue there may be a time when this concept is applicable in the long-run. Their thinking, as I interpret it, is that decision makers can artificially create a constraint by holding constant one input factor of production in an environment when circumstances would allow them to not have this constraint. The reason would be to perhaps “test drive” some other input options against the constraint to see if they exhibit different patterns of diminishing returns. Both A and C, therefore, are acceptable answers. 5. (5 pts.) Which is least
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ECON520QUIZ_3Fall2010AnswerKey - University of Illinois At...

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