ECON 120 Lecture Notes - Lecture 7: Fixed Cost, Production Function, Telomerase Reverse Transcriptase

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2 Nov 2016
School
Department
Course
University of Illinois
At Chicago
Principles of Microeconomics (ECON120)
Test 2 Answer Key (Fall 2013)
1. (12 pts.) At 30 units of output, a firm’s marginal cost and average variable cost each
equal $10. Therefore, assuming normally shaped cost curves, at 29 units of output, the
firm’s marginal cost:
A. is greater than $10 and its average variable cost is less than $10
B. is greater than $10 and its average variable cost is also greater than $10
C. is less than $10 and its average variable cost is more than $10
D. is less than $10 and its and its average variable cost is also less than $10
E. The answer cannot be determined with the information given.
2. (12 pts.) If a perfectly competitive seller can increase its profits or reduce its losses by
increasing output, then it must be the case that the seller’s:
A. marginal cost exceeds its marginal revenue
B. the market price is less than its average variable cost
C. marginal revenue exceeds its marginal cost
D. price exceeds its marginal revenue
E. Statements A, B, C, and D are all incorrect
3. (12 pts.) Assume that a perfectly competitive seller is operating in the short-run, and is
producing its profit maximizing level of output. If the seller is earning a positive
economic profit, then all of the following are true except:
A. price is equal to marginal cost
B. price is equal to marginal revenue
C. marginal cost is greater than average total cost
D. average total cost is greater than average variable cost
E. There are no exceptions: answer choices A→D are all true
4. (12 pts.) Assume normally shaped cost curves. When marginal cost is rising:
A. average variable cost must be rising
B. average total cost must be rising
C. both average variable cost and average total cost may be rising or
falling
D. average variable cost and average total cost must be falling
E. None of the answer choices A→D are correct
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ECON120 Test 2 Answer Key (Fall 2013) Page 2
5. (12 pts.) A decrease in fixed costs, with no change in variable costs, would cause a
downward shift in the marginal cost curve, but the average variable cost curve would
remain unchanged. Indicate whether you believe the statement is true or false, and then
briefly explain your answer.
4 pts. FALSE
8 pts. A change in fixed costs does not affect marginal cost as fixed costs are
constant at all output levels the difference between fixed costs between any
two levels of output is zero. If there is no change in marginal cost resulting
from an increase in fixed cost, the marginal cost curve would remain
unchanged. The only cost curves affected would be average fixed cost and
average total cost they would both shift upward.
6. (12 pts.) Assume labor, measured in hours, is a variable input. Also assume all labor is
paid the same hourly rate. Due to the law of diminishing returns to a variable input, we
know that after a certain point, the addition of more labor hours will reduce the marginal
product of labor AND increase marginal cost. Indicate whether you believe the last
statement is true or false, and then briefly explain your answer.
4 pts. TRUE
8 pts. The law of diminishing returns speaks to the expectation that adding more
variable inputs to a fixed input will eventually lead to marginal product
decreasing below the marginal product of the previous input. Since all labor
is paid the same hourly rate, the change in total cost is the same, but because
marginal product is decreasing, the change in output is less. This translates
into an increase in marginal cost per unit produced, not a decrease.
7. (12 pts.) With respect to measuring time from an economics perspective, any time
frame less than one year is considered short-run, a time period of one year through five
years can be short-run or long-run, and any time period is excess of five years is
considered as long-run. Indicate whether you believe the statement is true or false, and
then briefly explain your answer.
4 pts. FALSE
8 pts. The distinction between short-run and long-run is not driven by calendar
time. Rather, it depends on whether input factors of production can be
changed. If one or more input factors of production cannot be changed (i.e.
fixed), then the time period is defined as short-run.
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Document Summary

Test 2 answer key (fall 2013) marginal cost exceeds its marginal revenue the market price is less than its average variable cost price exceeds its marginal revenue. The answer cannot be determined with the information given: (12 pts. ) At 30 units of output, a firm"s marginal cost and average variable cost each equal . Therefore, assuming normally shaped cost curves, at 29 units of output, the firm"s marginal cost: (12 pts. ) If a perfectly competitive seller can increase its profits or reduce its losses by increasing output, then it must be the case that the seller"s: marginal revenue exceeds its marginal cost, (12 pts. ) Assume that a perfectly competitive seller is operating in the short-run, and is producing its profit maximizing level of output. If the seller is earning a positive economic profit, then all of the following are true except: (12 pts. )

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