NAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Midterm II April 30, 2008

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1 NAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Section I: Multiple Choice (4 points each) Identify the choice that best completes the statement or answers the question. 1. For a linear demand curve a. the price elasticity of demand is constant for all values of P and Q. b. the price elasticity of demand decreases (becomes more negative) as Q increases and P decreases. c. the price elasticity of demand increases (becomes less negative) as Q increases and P decreases. 2. If goods X and Y are substitutes, then the cross price elasticity of demand between them will be a. positive. c. zero. b. negative. d. infinity. 3. A firm s marginal rate of technical substitution (MRTS) is represented graphically by a. the slope of the line connecting the origin with the relevant point on the isoquant. b. the negative of the slope of the line connecting the origin with the relevant point on the isoquant. c. the slope of the isoquant at the relevant point. d. the negative of the slope of the isoquant at the relevant point. 4. The production function q = a. exhibits constant returns to scale and constant marginal productivities for K and L. b. exhibits diminishing returns to scale and diminishing marginal productivities for K and L. c. exhibits constant returns to scale and diminishing marginal productivities for K and L. d. exhibits diminishing returns to scale and constant marginal productivities for K and L. 5. On an isoquant-isocost two-input model you can tell that a nonoptimal short-run production decision is being made because a. all decisions in the short run are nonoptimal b. the rate of technical substitution is equal to the ratio of the input prices c. the rate of technical substitution is not equal to the ratio of the input prices 6. Suppose pigs (G) can be fed corn-based feed (C) or soybean-based feed (S) such that the production function is G = 2C + S. If the price of corn feed is $4 and the price of soybean feed is $5, what is the cost minimizing combination of producing G = 200? a. C = 100 c. C = 50, S = 100 b. S = 200 d. C = 75, S = 50

2 7. The opportunity cost of producing a bicycle refers to a. the out-of-pocket payments made to produce the bicycle. b. the value of the goods that were given up to produce the bicycle. c. the bicycle s retail price. d. the marginal cost of the last bicycle produced. 8. The firm s expansion path records a. profit-maximizing output choices for every possible price. b. cost-minimizing input choices for all possible output levels for when input rental rates expand along with production. c. cost-minimizing input choices for all possible output levels for a fixed set of input prices. d. cost-minimizing input choices for profit-maximizing output levels. 9. Suppose that a futon manufacturer is currently producing 5,000 futons. At this level of output, the MP L = 100 and MP K = 250. The rental rate on capital is $25, and the wage rate is $5. The manufacturer a. is currently minimizing the cost of producing 5,000 futons per month. b. can reduce the cost of producing 5,000 futons by using more labor and less capital. c. can reduce the cost of producing 5,000 futons by using less labor and more capital. 10. In the long run a. all inputs are fixed. c. some inputs are fixed. b. all inputs are variable. d. production levels never change. 11. For a constant returns to scale production function a. marginal costs are constant but the average cost curve has a U-shape. b. both average and marginal costs are constant. c. marginal cost has a U-shape; average costs are constant. d. both average and marginal cost curves are U-shaped. 12. Technical progress will a. shift a firm s production function and its related cost curves. b. not affect the production function, but may shift cost curves. c. shift a firm s production function and alter its marginal revenue curve. d. shift a firm s production function and cause more capital (and less labor) to be hired. 13. A firm s marginal revenue is defined as a. the ratio of total revenue to total quantity produced. b. the additional output produced by lowering price. c. the additional revenue received due to technical innovation. d. the additional revenue received when selling one more unit of output. Page 2 of 6

3 14. In order to maximize profits, a firm should produce at the output level for which a. average cost is minimized. b. marginal revenue equals marginal cost. c. marginal cost is minimized. d. price minus average cost is as large as possible. 15. If a 1.0 percent increase in price leads to a 0.7 percent increase in quantity supplied, the short-run supply curve is a. elastic. c. unit elastic. b. inelastic. d. perfectly inelastic. Page 3 of 6

4 Section II: Essay Problems Give clear, well-written answers to the questions below. Use graphs if appropriate. Please make sure your graphs are legible and label all parts of the graph (e.g., axes, lines, etc.). You will not receive full credit if the graphs are illegible. 1. (15 points) Assume that a price-taking firm in the corn industry has typical U-shaped average total cost and average variable cost curves in the short-run. Assume that the minimum of the average total cost curve is $35 at 50 bushels of corn, and assume that the minimum of the average variable cost curve is $20 at 30 bushels of corn. a. Draw a diagram including the short-run marginal cost, average total cost, and average variable cost curve for this firm. b. Assume that the market price is $28. Will the firm produce positive output? If so, will the short-run profits of this firm be positive, negative, or zero? Explain your answer. c. Graph the short-run supply curve for your firm. Page 4 of 6

5 2. (25 points) Assume that a firm has the following production function: q = f(k,l). Suppose that the marginal cost of producing output, q, in the short-run for this competitive firm is MC(q) = 0.4q + 2. The market price of the firm s product is $10. a. What level of output will the firm produce? b. Assume that the firm s fixed costs are $30, and the firm s average variable cost is given by AVC(q) = 0.2q + 2. What is the short-run total cost equation for this firm? c. Below what price will the firm shut down in the short run? d. What are the short-run profits for the firm? e. Show the level of profits in a graph, including the relevant revenue and cost curves. Page 5 of 6

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