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Economics
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Economics 2150A/B
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Besanko & Braeutigam – Microeconomics, 4 editionTest Bank Chapter 4: Costs and Cost Minimization Multiple Choice 1. Suppose you are a star basketball player at a major university in your sophomore year. You are sought after by several NBA teams. Which of the following choices best characterizes your opportunity cost if you choose to drop out of college and enter the NBA? a) The value of your college scholarship that you have given up. b) The skills that two more years of playing at your college would have given you along with their additional value over the rest of your life, in addition to the educational value of the college degree. c) The total of explicit costs that have been incurred in the past. d) The total of implicit costs that have been incurred in the past. Ans: B 2. You have invested about $100,000 in a new (hopefully) trendy restaurant in an urban location. These costs have gone to purchase the restaurant, prepay insurance for the following year and purchase supplies for the restaurant. It will cost you an additional $10,000 per year to hire each waiter and waitress. (They earn tips which they get to keep.) Which of the following statements is most accurate? e) The $100,000 sum represents sunk costs, whereas the costs for waiters and waitresses is not sunk, but all of these costs would be considered accounting costs, but do not include all of the possible economic costs of operating the business. f) The $100,000 sum represents sunk costs, whereas the costs for waiters and waitresses is not sunk, but all of these costs would be considered accounting costs, and also include all of the possible economic costs of operating the business g) The $100,000 sum represents sunk costs and the costs for waiters and waitresses are sunk as well. h) The $100,000 sum represents sunk costs and all of the possible accounting costs as well. Ans: A 3. Sunk costs do not i) matter. j) affect business shutdown decisions. k) affect business start-up decisions. l) cost as much as marginal costs. Copyright © 2011 John Wiley & Sons, Inc. 7-1 Besanko & Braeutigam – Microeconomics, 4 editionTest Bank Ans: B 4. You decide to purchase a car for $12,000. Upon driving the car off of the lot, the resale value of the car falls to $9,000. After purchasing the car, the $12,000 purchase price represents a(n) m) average cost. n) implicit cost. o) sunk cost. p) non-sunk cost. Ans: C 5. Opportunity cost for a firm is q) Costs that involve a direct monetary outlay r) The sum of the firm’s implicit costs s) The total of explicit costs that have been incurred in the past t) The value of the next best alternative that is forgone when another alternative is chosen 6. A small business owner is planning to purchase a new office computer for $1,000. The opportunity cost of purchasing this computer is u) $900 v) $1,000 w) $1,100 x) Unknown, since we don’t know the owner’s next best alternative. 7. You decide to purchase a new car for $12,000. Upon driving the car off of the lot, the resale value of the car falls to $9,000. The opportunity cost of purchasing the car is __________ and the opportunity cost of using the car is __________ y) $12,000 and $9,000. z) $12,000 and $3,000. aa) Unknown and $9,000. bb) Unknown and $3,000. Ans: A 8. Economic costs are synonymous with cc) Accounting costs dd) Sunk costs ee) Opportunity costs ff) Implicit costs Copyright © 2011 John Wiley & Sons, Inc. 7-2 Besanko & Braeutigam – Microeconomics, 4 editionTest Bank 9. The short-run is gg) a time period in which all input levels are fixed. hh) a time period in which at least one input level is fixed. ii) three months. jj) a time period in which no input levels are fixed. 10. The cost-minimization problem of the firm is to kk) minimize total costs. ll) minimize average costs. mm) minimize total cost of producing a particular amount of output. nn) maximize output subject to a cost constraint. 11. Isocost lines represent oo) the same value for every firm in the industry. pp) are the same as implicit costs. qq) the same total expenditure on the inputs to the production process. rr) the sum of all past explicit costs 12. When isocost lines shift outward from the origin, it represents ss) increasing levels of expenditure on the inputs to the production process. tt) increasing sunk costs uu) increasing opportunity costs vv) decreasing levels of expenditure on the inputs to the production process. 13. An isocost line represents ww) all combinations of inputs in which the firm produces the same level of output. xx) all combinations of inputs in which the firm has the same level of total cost. yy) for a given level of output, the various points that will produce that same level of output at the same cost. zz) all combinations of output that yield the same total cost level. 14. The cost-minimization problem of the firm is to aaa) maximize output subject to a given cost constraint. bbb) minimize total cost. ccc) minimize average cost. ddd) minimize total cost of producing a particular level of output. 15. The long-run is eee) a time period in which all input levels are fixed. fff) a time period in which at least one input level is fixed. ggg) one year. hhh) a time period in which no input levels are fixed. Copyright © 2011 John Wiley & Sons, Inc. 7-3 Besanko & Braeutigam – Microeconomics, 4 editionTest Bank 16. A difference between the short run and the long run is that a firm in the short run iii) faces an unconstrained cost minimization problem, whereas the firm is constrained in the long run. jjj) faces a constrained cost minimization problem, whereas the firm is unconstrained in the long run. kkk) faces a constrained cost minimization problem in both the short run and the long run. lll) faces an unconstrained cost minimization problem in both the short run and the long run. 17. When the level of capital is plotted on the vertical axis and the level of labor is plotted on w the horizontal axis, the slope of the isocost line is (assuming is the price of labor and r is the price of capital and production uses only these two inputs) mmm) −w r −r nnn) w ooo) MPK MPL MPL ppp) MPK 18. To derive the equation for an isocost line when the level of capital is plotted on the vertical axis and the level of labor is plotted on the horizontal axis, you should qqq) solve the production function for K . rrr) solve the production function for L . sss) solve the total cost equation for K . ttt) solve the total cost equation for L . 19. Let a firm use labor (L) and capital (K) as its only inputs to produce an output, Q. The cost of labor is w = $5 per labor hour and the cost of capital is r = $15 per machine hour. When capital is measured on the vertical axis and labor on the horizontal axis, what is the slope of an isocost line for this firm? uuu) -3. vvv) -5. www) -15. xxx) -1/3. 20. A firm uses labor and capital, (L,K) , to produce an output. The hourly cost of labor is $10, and the hourly cost of capital is $50. Which of the following combinations of labor and capital hours of use represent points on the firm’s $100,000 isocost line? yyy) (10000, 2000) zzz) (2000, 10000) aaaa) (1000, 1800) bbbb) (1000, 1000) Copyright © 2011 John Wiley & Sons, Inc. 7-4 Besanko & Braeutigam – Microeconomics, 4 editionTest Bank 21. In order to solve graphically for an interior cost minimum of the firm, subject to the constraint of producing a particular target level of output, we cccc) shift in the isocost line as much as possible. dddd) shift out the isoquant as much as possible. eeee) shift the isocost line left as much as possible subject to the constraint that it touches the target isoquant at least once. ffff) shift the isoquant left as much as possible subject to the constraint that it touches the target isocost at least once. 22. Which of the following statements correctly characterizes the solution to a cost minimization problem with an interior solution? gggg) The isoquant is tangent to the isocost line. hhhh) The isoquant lies to the interior of the isocost line. iiii) The isocost line lies to the interior of the isoquant. jjjj) The distance between the isoquant and the isocost line is maximized. 23. When a firm uses inputs in a fixed proportion, the cost minimizing combination of capital and labor kkkk) occurs when the firm uses either all workers or all machines. llll) occurs when the firm uses equal amounts of workers and machines. mmmm) occurs where the ratio of the marginal productivities equals the ratio of the input prices. nnnn) occurs at the corner point on the isoquant. 24. Suppose that a firm uses only two inputs in its production process. The ratio of the marginal products of these inputs always exceeds the ratio of the prices of the inputs. What can you say about the cost-minimizing point of the firm? oooo) It is an interior solution. pppp) A cost-minimizing point must not exist. qqqq) If a cost-minimizing point exists, it must be at a corner. rrrr) Costs must be negative at the cost-minimizing point. 25. Suppose for a particular production function that  K   L  MP =L36  L  MP K 36  K  If the price of capital is $5 per unit and the price of labor is $125 per unit, at the cost- minimizing combination of capital and labor the firm should employ ssss) five times as much labor as capital. tttt) five times as much capital as labor. uuuu) 125/36 units of capital and 5/36 units of labor. vvvv) 36/125 units of capital and 36/5 units of labor. Ans: B Copyright © 2011 John Wiley & Sons, Inc. 7-5 Besanko & Braeutigam – Microeconomics, 4 editionTest Bank 26. Suppose in a particular production process that capital and labor are perfect substitutes so that three units of labor are equivalent to one unit of capital. If the price of capital is $4 per unit and the price of labor is $1 per unit, the firm should wwww) employ capital only. xxxx) employ labor only. yyyy) use three times as much capital as labor. zzzz) use three times as much labor as capital. Ans: B 27. A firm’s production function is given by Q = KL. The wage rate of labor is w = $10 and the rental rate of capital is r = $20. The firm wants to produce 1,800 units of output. What is the most efficient combination of labor and capital (L,K) ? aaaaa) (10, 20) bbbbb)(20, 90) ccccc) (60, 30) ddddd)(90, 20) 28. A firm’s production function is given by Q = KL. The wage rate of labor is w = $10 and the rental rate of capital is r = $20. The firm wants to produce 1,800 units of output in the most efficient way possible. How much does the firm spend? eeeee) $2,000 fffff) $1,300 ggggg)$1,200 hhhhh)$1,100 29. A firm’s production function is given by Q = KL. The wage rate of labor is w = $10 and the rental rate of capital is r = $20. What is the most efficient combination of labor and capital (L,K) that also yields a cost of exactly $1000? iiiii) (10, 45) jjjjj) (25, 50) kkkkk)(50, 25) lllll) (20, 40) Ans: C 30. A firm’s production function is given by Q = KL. The wage rate of labor is w = $10 and the rental rate of capital is r = $20. The firm spends exactly $1000 in the most efficient way possible. How much output can the firm produce? mmmmm) 450 nnnnn)800 ooooo)1000 ppppp)1250 Copyright © 2011 John Wiley & Sons, Inc. 7-6 Besanko & Braeutigam – Microeconomics, 4 editionTest Bank Ans: D 2 31. A firm’s production function is given by Q = K L . Further, the wage rate isw = $10 and the rental rate of capital is= $20 . What is the most efficient combination of labor and capital (L,K) that also results in a total cost level of exactly $1,200? qqqqq)(20, 50) rrrrr) (25, 47.5) sssss) (30, 45) ttttt) (40, 40)
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