# Test #2 (with answers) - SHOMU BANERJEE ISC 202B SUMMER...

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SHOMU BANERJEE ISC 202B SUMMER 2011 TEST 2 ANSWERS Labor APL TP (q) MPL 1 1 1 1 2 3 6 5 3 5 15 9 4 4.5 18 3 5 4 20 2 Table 1 1. An economic consultant derives the production relationship between labor and AVERAGE PRODUCT OF LABOR given in Table 1 above. The marginal product of the 4 th unit of labor is a. 5 b. 18 c. 9 d. 4.5 e. 3 2. In Table 1, diminishing returns sets in as the firm goes from employing a. 1 to 2 workers b. 0 to 1 workers c. 3 to 4 workers d. 4 to 5 workers e. 2 to 3 workers 3. In Table 1, the price of labor, w, is \$420 per unit. The marginal cost of producing the 6th unit of output is a. \$84 = 420/5 b. \$105 c. \$140 d. \$70 e. none of the other alternatives 4. In Table 1, the price of labor, w, is \$420 per unit. The shutdown price is – look for the highest APL which corresponds to the lowest AVC a. \$105 b. \$93.33 c. \$40 d. \$84 = 420/5 e. none of the other alternatives 5. In Table 1, the shutdown quantity is a. 6 b. 18 c. 12 d. 20 e. 15—this is the quantity corresponding to the shutdown price Formulas MU x /P x = MU y /P y = MU z /P z APL = Q/L MPL = Q/ L TC = TFC + TVC (+ NPM) AC = TC/q AFC = TFC/q AVC = TVC/q AC = AFC + AVC MC = TC/ q = TVC/ q AVC = w/APL MC = w/MPL π = TR – TC MR = TR/ q

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6. The perfectly competitive firm shown in Figure 1 faces a market price of \$20 per unit. Its maximum profit in the short run is a. \$600—TR = 2000, TVC = \$8x100= 800, and TFC = AFC @ 150 x qty. = \$4x150 = \$600 b. \$2,000 c. -\$600 d. \$1,200 e. \$800 7. In Figure 1, the AC of producing 100 units is a. \$20 b. \$12 c. \$15 d. \$14—AVC = 8; AFC @ q=100 = TFC/100 = 600/100 = \$6; AC = AVC + AFC e. \$16 8. In Figure 1, suppose the competitive firm has now to pay a 60% corporate tax, i.e., a tax on supernormal profits. In the short run, the firm should a. shut down immediately b. increase its production to offset its increased costs c. produce the same quantity as before the profit tax d. reduce the production by an indeterminate amount (since the firm's new MC is not shown) Figure 2 9. For the competitive firm in Figure 2, if the market price for its product is P4 in the short run, then in the long run after entry or exit, the market price will settle at a. P3 b. P1 c. P2 d. cannot say without additional information e. P4—this is the long run price
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## Test #2 (with answers) - SHOMU BANERJEE ISC 202B SUMMER...

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