Economics 172 Name:____________________________

Fall 2007 Quiz 4

1. A firm uses only labor and capital to produce its output. If the marginal cost of producing a good is increasing as a firm produces more of the good, then which of the following must always be TRUE?

a. AFC is rising. No, marginal cost has nothing to do with average fixed costs.

b. AVC is rising. No. the AVC can be rising as marginal cost rise. Check out the handout and the text. Note that if AVC is rising, MC must be rising, but the converse does not have to be true.

c. MC > AVC. See answer to b.

d. MPL is falling. If the marginal product of labor is falling, marginal cost must be rising. See page 193 of the text or the handout. This is a fundamental point and it deals with the relationship between production and cost.

2. The Nifty Gum Co. has purchased a large parcel of land for $1 million. The company recently discovered that the land is contaminated and is worthless to all possible buyers. The opportunity cost of the land is

a. $0. If the land is worthless, its second best use is 0, so it has no opportunity cost. If I buy the Mona Lisa for $100 million and then someone tells me it is a fake reproduction, what’s the opportunity cost of my Mona Lisa? It has zero opportunity cost.

b. $1 million. Sorry. That’s what you paid for it, not what its opportunity cost is.

c. some amount greater than $0 but less than $1 million. No.

d. equal to the cost of the factory that was planned to be built there. No.

3. At the XYZ Co., a unit of capital costs 3 times as much as a unit of labor. If the isoquants are convex, and the firm does not change its input mix in the long run, we can conclude that

We know that MRTS = MPL/MPK which = w/r , then

Since w/r = 1/3 MPL/MPK must also equal 1/3 so MPK is 3 times MPL , so a.

a. MPK = 3 * MPL.

b. the firm will not hire any capital.

c. the firm will hire 3 times as much labor as capital.

d. the firm will hire 3 times as much capital as labor.

4. Which of the following will cause the average fixed cost curve of making cigarettes to shift?

a. A $5 million penalty charged to each cigarette maker. This is a fixed cost. The firm pays $5 million no matter how many cigarettes it produces. If FC goes up, so too does AFC.

b. A $1 per pack tax on cigarettes. This increases the AVC and MC.

c. A $3 per hour wage increase. This also increases the AVC and MC.

d. An increase in the demand for cigarettes. Demand has nothing to do with fixed costs.

5. The marginal product of a variable input is

a. zero at the point where diminishing marginal returns sets in No, it is still positive.

b. the change in the average product that occurs when the variable input is increased one unit. No.

c. the change in the total product that occurs in response to a unit change in the variable input. This is the correct definition.

d. the additional output obtained with a proportional increase in all inputs. No, this deals with economies of scale.