PS8-ans question 2 - Name Davidson College Department of...

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Name Davidson College Mark C. Foley Department of Economics Aug - Dec 2004 Intermediate Microeconomic Theory Review #2 Suggested Solutions Directions: This review is a closed-book, closed-notes exam to be taken in one sitting, no time limit. You may use a calculator. There are 100 points on the exam. Each true-false question is worth 3 points. Each question in Section II is worth 5 points. The problems in Sections III are worth 20 points each. The problem in Section IV is worth 20 points. You must show all your work to receive full credit. Any assumptions you make and intermediate steps should be clearly indicated. Do not simply write down a final answer to the problems without an explanation. Read the questions carefully, answering what is asked. Think clearly and work efficiently. Carpe diem.
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Section I: Short Answer. In the space provided , answer the following questions. 1. Draw a properly-labeled graph with two consumption bundles that violate the weak axiom of revealed preference (WARP). Explain precisely why they violate WARP. 2. Define increasing returns to scale and explain what factors give rise to increasing returns as well as decreasing returns to scale. Increasing returns to scale occurs when output more than doubles after all inputs are doubled. That is, output increases more than proportionately with the increase in all inputs. First, in larger operations, workers can specialize in certain tasks and therefore do them more efficiently than if they were responsible for many jobs. Second, arithmetical relationships can facilitate increasing returns. For example, doubling the area of a warehouse (output) does not require double the wall space (input) to be constructed. Third, some techniques are best-suited to a larger scale of operations. Such large-scale technologies might be assembly lines, irrigation systems, MRI machines, hub & spoke systems (airlines, FedEx), etc. Working against these factors is the inefficiency of managing large operations. As a firm increases its output level, coordination and communication become more difficult, leading to rising average total cost. 2
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3. Using a properly-labeled graph, explain why some industries support both large and small firms and other industries are composed of primarily large firms. Minimum efficient scale is the production scale at which ATC is a minimum. Some industries have both small and large firms because the ATC curve (due in part to the technology of the production process in the industry) is more L- shaped than U-shaped. Thus, both small and large firms operate at similar average costs. In industries in which the ATC curve is more U-shaped, large firms will operate at lower average cost than smaller firms, thus smaller firms will not be able to compete and we see only larger firms in such industries. 4.
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This note was uploaded on 06/29/2011 for the course ECON 206 taught by Professor Ioanadan during the Fall '10 term at University of Toronto.

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PS8-ans question 2 - Name Davidson College Department of...

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