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Sheet1 Page 1 BUSINESS 802 FINAL EXAM KEY SPRING 1990 MANAGERIAL ECONOMICS SHORT ANSWER (5 pts each) 1. A. True. When îQ < 1, the percentage change in output is less than a given percentage change in all inputs. Thus, decreasing returns to scale and increasing average costs are indicated. B. True. Returns to the capital input factor are decreasing when the marginal product of capital falls as capital usage grows. C. False. L-shaped production isoquants reflect a perfect complementary relation among inputs. D. False. Marginal revenue product is the revenue generated by expanding input usage, and represents the maximum that could be paid to expand usage. Since MRP is calculated before input costs (wages in the case of labor, for example), it does not measure the increase in profit earned through expansion. E. False. The marginal rate of technical substitution is measured by the relative marginal productivity of input factors. This relation is unaffected by a commensurate increase in the marginal productivity of all inputs. 2. A. True. The point of minimum average cost identifies the minimum efficient scale of plant. By definition, average and marginal costs are equal at this point. B. False. The breakeven activity level is where Q = TFC/(P - AVC). As average variable cost (AVC) increases, this ratio and the breakeven activity level will also increase. C. True. When îC > 1, the percentage change in cost exceeds a given percentage change in output. This describes a situation of increasing average costs and diminishing returns to scale. D. True. When long-run average costs are declining, it can pay to operate larger plants with some excess capacity rather than smaller plants at their peak efficiency. E. False. The degree of operating leverage is defined DOL = Q(P - AVC)/(Q(P - AVC) - TFC). Therefore, when total fixed costs are zero, DOL is a constant and an increase in average variable cost will have no effect on DOL. 3. A. False. In long-run equilibrium, every firm in a perfectly competitive industry earns zero excess profit. Following a decrease in industry prices, high cost producers will be forced to exit. However, remaining firms will continue to operate and earn a normal rate of return on investment. B. True. Pure competition exists in a market when individual firms have no influence over price. Such firms take industry prices as a given. C. False. A natural monopoly occurs in a market when the market clearing price, or price where Demand (Price) = Supply (Marginal Cost), occurs at an output level where long-run average costs are declining. D. True. Downward sloping demand curves follow from the law of diminishing marginal
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Sheet1 Page 2 utility and characterize both perfectly competitive and monopoly market structures. E. True.
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