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Unformatted text preview: Economics 420K University of Texas Professor Matt Clements Fall 2006 Practice exam #2 (I) 1. (10 points) A firm wants to minimize the total cost of producing 100 tons of dynamite. The firm uses two factors of production, chemicals and labor. Assume that cost minimization does not result in a corner solution. Bill says that, if the firm is minimizing cost, it must be that the production of an additional unit of dynamite costs the same regardless of whether chemicals or labor are used. Ted says that, if the firm is minimizing cost, it must be that the additional amount of labor the firm would need if they use one less unit of chemicals, keeping output constant, is equal to the additional amount of labor the firm could afford if they use one less unit of chemicals, keeping cost constant. Who is correct? Explain. 2. (10 points) Consider the effects of a price ceiling in the widget market. Assuming the price ceiling is binding (i.e. that the free market price is above the price ceiling), there is a price ceiling is binding (i....
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- Spring '07