Final Exam Answer - Name _ Practice Final Exam ECON 3550 /...

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1 Name _________________________________________________ Practice Final Exam ECON 3550 / 5030 Please show all your work and explain your answers. Without an explanation for your answer, you will not receive credit. Clearly label all graphs for full credit and please write legibly. 1. Jason’s monthly income is $100, and he consumes 32 pieces of pizza and 12 cans of beer per month. The price of a piece of pizza is $2 and the price of a can of beer is $3. a. Draw Jason’s budget constraint (put pizza on the horizontal axis). Clearly label the intercepts and the slope. Indicate his current bundle. beer 33 slope of BC = 2/3 12 BC 32 50 pizza b. At Jason’s current bundle, his MRS is 1. In a new graph below, draw his indifference curve with his budget constraint. Indicate his current bundle. beer 33 12 U 1 32 50 pizza c. Is Jason consuming optimally? Explain how you know. If he’s not consuming optimally, what should he do? No, he is not consuming optimally because the slope of his indifference curve (MRS) at his current consumption is not equal to the slope of his budget constraint. Because M R S > P P /P B , he should consume more pizza and less beer.
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2 2. Suppose that the daily production of doughnuts at Dippin’ Doughnuts depends on the number of fryers (capital) and workers (L) hired each day, according to the following production function: Q = 6 × L 0.5 × K 0.5 . They currently have a fixed amount of capital, K = 25. The price of labor per day is $90 and the price of capital per day is $100. (NOTE: L 0.5 = L ) a. What is the firm’s short run total cost function (in terms of Q)? Q = 6 × L 0.5 × 25 0.5 = 6 × L 0.5 × 5 = 30L 0.5 Solve for L: L = Q 2 /900 TC = P L L + P K K = (90)(Q 2 /900) + (100)(25) = Q 2 /10 + 2500 ( = TVC + TFC ) b. What are the following functions for the firm: average total cost (ATC), average variable cost (AVC),
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Final Exam Answer - Name _ Practice Final Exam ECON 3550 /...

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