19. The following relationship must hold between the average total cost (ATC) curve and the
marginal cost curve (MC):
a.
If MC is rising, ATC must be rising.
b.
If MC is rising, ATC must be greater than MC.
c.
If MC is rising, ATC must be less than MC.
d.
If ATC is rising, MC must be greater than ATC.
e.
If ATC is rising, MC must be less than ATC.

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20. The production function of a competitive firm is described by the equation
?
= 4
?
1/2
?
1/2
The
factor prices are
?
?
= $1 and
?
?
= $36 and the firm can hire as much of either factor it wants at
these prices. The firm’s marginal cost is

21. A competitive firm uses two variable factors to produce its output, with a production function
?
=
???
{
?
,
?
}.Thepriceoffactor
x
is$8andthepriceoffactor
y
is$5.Duetoalackofwarehouse space, the
company cannot use more than 10 units of
x
. In addition to the cost of inputs, the firm must pay a
fixed cost of $80 if it produces any positive amount but doesn’t have to pay this cost if it
produces no output. What is the smallest integer price that would make a firm willing to produce
a positive amount?

22. Imagine first a drug dealer working in a competitive market with a constant marginal cost for
producing marijuana of $6/oz. Suppose now that government authorities decided to seize the
marijuana production whenever they find it. The production of marijuana is seized with a
probability of 50%. If the production is seized, there is no other punishment besides loss of the
marijuana. What happens to the new equilibrium prices with the new government’s policy?
(Hint: assume that the drug dealer is happy making zero economic profit.)

23. A monopolist receives a subsidy from the government for every unit of output that is
consumed. He has constant marginal costs and the subsidy that he gets per unit of output is
greater than his marginal cost of production. But to get the subsidy on a unit of output, somebody
has to consume it.
a.
He will pay consumers to consume his product.
b.
If he sells at a positive price, demand must be inelastic at that price.
c.
He will sell at a price where demand is elastic.
d.
He will give the good away.
e.
None of the above.

24. An airline has exclusive landing rights at the local airport. The airline flies one flight per day
to New York with a plane that has a seating capacity of 100. The cost of flying the plane per day
is $4,000 + 10
?
, where
q
is the number of passengers. The number of tickets to New York
demanded is
?
= 165 − 0.5
?
. If the airline maximizes its monopoly profits, the difference
between the marginal cost of flying an extra passenger and the amount the marginal passenger is
willing to pay to fly to New York is