Econ 5515 -Managerial Economics - Module 4 Additional Study Problems

Econ 5515 -Managerial Economics - Module 4 Additional Study Problems

Marginal product equals average product

a.      when marginal product equals zero.

b.      when average product equals zero.

c.      at the inflection point of the total product curve.

d.      at the maximum value of marginal product.

e.      at the maximum value of average product.

e      MP = AP at AP’s maximum point. Note that answer c is wrong because the inflection point on TP is where MP (not AP) reaches its maximum.

The economically efficient input combination for producing a given level of output

a.      minimizes the average cost of producing the given level of output.

b.      occurs at the maximum value of the total product curve.

c.      can produce that level of output at the lowest possible total cost.

d.      is determined entirely by the production function.

c      The efficient input combination is the one that minimizes total, not average, cost.

If average product is rising, then marginal product

a.      cannot be falling.

b.      can be either rising or falling, but it must lie above average product.

c.      must lie below average product.

d.      must be rising.

b     MP both rises and falls over the range of labor usage for which AP is rising.

Labor	Quantity
0	0
1	3
2	10
3	21
4	24
5	25
6	24
7	14

The average product of labor when 3 units of labor are employed is

a.      3.

b.      5.

c.      7.

d.      11.

e.      –1.

c      AP₃ = 21/3 = 7

Labor	Quantity
0	0
1	3
2	10
3	21
4	24
5	25
6	24
7	14

The marginal product of the 6^th laborer is

a.      3.

b.      5.

c.      7.

d.      11.

e.      –1.

e      TP₅ = 25 and TP₆ = 24  TP falls by one unit.  MP for the sixth unit of labor is –1.

Labor	Quantity
0	0
1	3
2	10
3	21
4	24
5	25
6	24
7	14

Diminishing marginal returns begin with the

a.   2^nd unit of labor.

b.   4^th unit of labor.

c.   5^th unit of labor.

d.   6^th unit of labor.

b     MP is smaller for the fourth unit of labor than it is for the third unit of labor.

Labor	Quantity
0	0
1	3
2	10
3	21
4	24
5	25
6	24
7	14

Marginal product is negative when more than

a.   3 units of labor are employed.

b.   4 units of labor are employed.

c.   5 units of labor are employed.

d.   6 units of labor are employed.

c      MP < 0 after 5 units of labor are employed.

Fixed costs

a.   must be considered in any decision-making process.

b.   do not exist in the long run.

c.   decrease as output rises.

d.   a and b.

e.   b and c.

b     Fixed costs are the payment to the fixed inputs. Since all inputs are variable in the long run, there are no fixed costs in the long run.

				Average
Q	Total Cost	Fixed Cost	Variable Cost	Fixed Cost	Variable Cost	Total Cost	Marginal Cost
0..........	20	_____	_____	xx	xx	xx	xx
1..........	_____	_____	_____	_____	_____	_____	20
2..........	_____	_____	_____	_____	15	_____	_____
3..........	_____	_____	_____	_____	_____	19	_____
4..........	_____	_____	48	_____	_____	_____	_____

What is total fixed cost?

a.      10

b.      15

c.      20

d.      cannot be determined

e.      none of the above

c      You can see that fixed cost is $20 by noting that when Q = 0, TC = $20.

				Average
Q	Total Cost	Fixed Cost	Variable Cost	Fixed Cost	Variable Cost	Total Cost	Marginal Cost
0..........	20	_____	_____	xx	xx	xx	xx
1..........	_____	_____	_____	_____	_____	_____	20
2..........	_____	_____	_____	_____	15	_____	_____
3..........	_____	_____	_____	_____	_____	19	_____
4..........	_____	_____	48	_____	_____	_____	_____

What is total cost when Q = 1?

a.      30

b.      35

c.      40

d.      20

e.      none of the above

c      Since SMC for unit 1 is $20, TC for the first unit must be $20 greater than TC when Q = 0. Therefore, TC = 20 + 20 = 40.

				Average
Q	Total Cost	Fixed Cost	Variable Cost	Fixed Cost	Variable Cost	Total Cost	Marginal Cost
0..........	20	_____	_____	xx	xx	xx	xx
1..........	_____	_____	_____	_____	_____	_____	20
2..........	_____	_____	_____	_____	15	_____	_____
3..........	_____	_____	_____	_____	_____	19	_____
4..........	_____	_____	48	_____	_____	_____	_____

What is average total cost when Q = 2?

a.      10

b.      20

c.      30

d.      40

e.      none of the above

e      Since AVC = $15, TVC = $30 (= 2 × 15). TC = TVC + TFC = 30 + 20 = 50.  Therefore, ATC = TC/Q = 50/2 = $25.

				Average
Q	Total Cost	Fixed Cost	Variable Cost	Fixed Cost	Variable Cost	Total Cost	Marginal Cost
0..........	20	_____	_____	xx	xx	xx	xx
1..........	_____	_____	_____	_____	_____	_____	20
2..........	_____	_____	_____	_____	15	_____	_____
3..........	_____	_____	_____	_____	_____	19	_____
4..........	_____	_____	48	_____	_____	_____	_____

What is marginal cost when Q = 3?

a.      7

b.      8

c.      9

d.      10

a     ATC = $19 and TC = $57 (= 3 × 19). Since TC is $50 for 2 units, and TC is $57 for 3 units, the marginal cost of the 3^rd unit must be $7.

				Average
Q	Total Cost	Fixed Cost	Variable Cost	Fixed Cost	Variable Cost	Total Cost	Marginal Cost
0..........	20	_____	_____	xx	xx	xx	xx
1..........	_____	_____	_____	_____	_____	_____	20
2..........	_____	_____	_____	_____	15	_____	_____
3..........	_____	_____	_____	_____	_____	19	_____
4..........	_____	_____	48	_____	_____	_____	_____

What is marginal cost when Q = 4?

a.      5

b.      10

c.      11

d.      15

e.      20

c      TC_Q=4 = TVC + TFC = 48 + 20 = 68. Since TC_Q=3 = $57, the marginal cost of the 4^th unit must be $11.

When the average product of the variable input is equal to the marginal product,

a.      marginal cost reaches its minimum value.

b.      average variable cost reaches its minimum value.

c.      marginal cost is rising.

d.      both a and c.

e.      both b and c.

e      When AP = MP, AP is at its maximum value. MP is falling when AP = MP, and thus SMC (= w/MP) is rising.

If a firm is producing 5 units of output and the marginal cost for the fifth unit is $7 and the average variable cost for the fifth unit is $3, then the average variable cost for the fourth unit is _______.

a.      1

b.      2

c.      4

d.      8

e.      none of the above

b     Since AVC₅ = $3, TVC₅ = $15. Given marginal cost of the 5^th unit is $7, the total variable cost of 4 units must be $8.  Thus AVC₄ = $8/4 = $2.

If short-run marginal cost is -shaped, then

a.      total cost increases at an increasing rate, then increases at a decreasing rate.

b.      total variable cost increases at a decreasing rate then increases at an increasing rate.

c.      total variable cost must be S-shaped.

d.      all of the above.

e.      both b and c.

e      If SMC is U-shaped, then the slope of TVC first falls, then rises. The only way this can occur is if TVC is S-shaped (i.e., TVC first increases at a decreasing rate, then increases at an increasing rate).

Average total cost

a.   increases as output increases.

b.   decreases as output increases.

c.   increases if marginal cost is increasing.

d.   increases if marginal cost is greater than average total cost.

e.   both c and d.

d     If marginal exceeds average, then average rises.

Average fixed cost

a.   increases as output increases.

b.   decreases as output increases.

c.   increases if marginal cost is increasing.

d.   increases if marginal cost is greater than average fixed cost.

b     While TFC is constant, AFC declines as Q gets larger.

A fixed cost is

a.   the cost of any input with a fixed price per unit.

b.   a cost which increases in a fixed proportion as output increases.

c.   a cost the firm must pay even if output is zero.

d.   a cost that does not vary with the amount of good or service produced.

e.   both c and d

e      Both c and d are correct.