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# Producer Theory Practice Questions.doc

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Department
Economics
Course
ECON 1900
Professor
Nancy Carson
Semester
Winter

Description
Producer Theory Practice Questions: 1. The law of diminishing returns implies that, when one input is variable while others are fixed: a) The Marginal Product of the variable input will eventually decline. b) As input use increases, total output eventually falls. c) The Short Run Marginal Cost must fall initially. d) None of the above. 2. Which of the following cost relationships hold in the short run? a) For positive Fixed Cost, Average Variable Cost approaches Average Total Cost as output increases. b) If Average Total Cost exceeds Average Variable Cost, Average Variable Cost is falling. c) If Short Run Marginal Cost is rising, both Average Variable Cost and Average Fixed Cost are rising. d) If Average Variable Cost is constant, then Average Total Cost is also constant, but at a higher level 3. In the Long Run, if the cost per unit increases as output increases then the production of this good is exhibiting a) Constant Returns to Scale b) Economies of Scale c) Diseconomies of Scale d) Positive Returns to Scale. 4. For the following table, fill in the missing information. Output Fixed Variable Total Marginal Cost Cost cost cost 0 10 ---------- 27 ---------- 1 ---------- 2 52 3 90 ---------- 36 ---------- 4 Given the information in the table above and assuming this firm operates under perfect competition, if the price of the output is \$32 what is the profit maximizing quantity of output? 5. A firm in a perfectly competitive industry is producing where short run marginal cost is equal to price. Total revenue is \$1000; total short run cost is \$1600 and total variable cost is \$500. The firm’s best strategy in the short run is to; a) Increase its price. b) Increase its output. c) Decrease its output. d) Maintain output at its present level. e) Shut down. 6. A firm in a perfectly competitive industry is producing where short run marginal cost is greater than price. Total revenue is \$1700; total short run cost is \$1600 and total fixed cost is \$500. The firm’s best strategy in the short run is to; a) Increase its price. b) Increase its output. c) Decrease its output. d) Maintain output at its present level. e) Shut down. 7. A firm in a perfectly competitive industry is producing where short run marginal cost is equal to price. Total revenue is \$6000; total short run cost is \$8000 and total fixed cost is \$2500. What is the firm’s best strategy in th
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