Economics 172 Name:

Spring 2006 Quiz 6

1. If the marginal cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE?

a. AFC is rising. AFC can never be rising

b. AVC is rising. If MC is rising, AVC can be rising or falling. If MC is above AVC, then AVC is rising, but MC can be rising without AVC increasing. Think about what the AVC and MC curves look like.

c. MC > AVC. Same answer as b

d. MPL is falling. Yes. This is the relationship between MPL and MC.

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. A firm is producing a certain level of output. Its average total cost of production is $100; total fixed cost is $120; average variable cost is $70. How much output is the firm producing? Show how you arrived at your answer. Hint: write out what you know with mathematical definitions.

ATC = 100 and AVC = 70

AFC + AVC = ATC

AFC + 70 = 100 so AFC = 30

TFC = 120 and we know that AFC = TFC/Q

120/Q = 30 so Q =4.