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Homework Chapter7

1) Alice paid $20,000 for an option to buy land worth $120,000 for $100,000 in 1992. In 1992, the land is worth $110,000. She should not exercise the option since the land is now worth less than the option price. 2) A medallion required to operate a taxi in New York City is an example of a sunk cost since it was already purchased and cannot be recovered. 3) The variable cost of producing computer disks given total cost (TC) = 200 + 5Q is 5Q.

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53 views5 pages

Homework Chapter7

1) Alice paid $20,000 for an option to buy land worth $120,000 for $100,000 in 1992. In 1992, the land is worth $110,000. She should not exercise the option since the land is now worth less than the option price. 2) A medallion required to operate a taxi in New York City is an example of a sunk cost since it was already purchased and cannot be recovered. 3) The variable cost of producing computer disks given total cost (TC) = 200 + 5Q is 5Q.

Uploaded by

Roshan Bhatta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Homework 7

1) In 1985, Alice paid $20,000 for an option to purchase ten acres of land. By paying
the $20,000, she bought the right to buy the land for $100,000 in 1992. When she
acquired the option in 1985, the land was worth $120,000. In 1992, it is worth
$110,000. Should Alice exercise the option and pay $100,000 for the land?
A) Yes.
B) No.
C) It depends on what the rate of inflation was between 1985 and 1992.
D) It depends on what the rate of interest was.

2) In order for a taxicab to be operated in New York City, it must have a medallion on
its hood. Medallions are expensive, but can be resold, and are therefore an example of
A) a fixed cost.
B) a variable cost.
C) an implicit cost.
D) an opportunity cost.
E) a sunk cost.

3) The total cost (TC) of producing computer software diskettes (Q) is given as: TC =
200 + 5Q. What is the variable cost?
A) 200
B) 5Q
C) 5
D) 5 + (200/Q)
E) none of the above

4) The total cost (TC) of producing computer software diskettes (Q) is given as: TC =
200 + 5Q. What is the average total cost?
A) 500
B) 5Q
C) 5
D) 5 + (200/Q)
E) none of the above

Scenario 7.1:
The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost
is constant at $0.10 for all cookies produced.

5) Refer to Scenario 7.1. The total cost to produce 100 cookies is


A) $0.10
B) $0.25
C) $25.00
D) $100.00
E) indeterminate

6) Refer to Scenario 7.1. The total cost to produce 50 cookies is


A) $20
B) $25
C) $50
D) $60
E) indeterminate

7) Refer to Scenario 7.1. For 100 cookies, the average total cost is
A) falling.
B) rising.
C) neither rising nor falling.
D) less than average fixed cost.

8) Refer to Scenario 7.1. Which piece of information would NOT be helpful in


calculating the marginal cost of the 75th unit of output?
A) The total cost of 75 units
B) The total cost of 74 units
C) The variable cost of 75 units
D) The variable cost of 74 units
E) The firm's fixed cost

9) Complete the following table:

Total Variable Fixed Marginal


Output Cost Cost Cost Cost
0 50
1 60
2 75
3 100
4 150
5 225
6 400
6 400 350 50 175

10) In a short-run production process, the marginal cost is rising and the average
variable cost is falling as output is increased. Thus,
A) average fixed cost is constant.
B) marginal cost is above average variable cost.
C) marginal cost is below average fixed cost.
D) marginal cost is below average variable cost.
Figure 7.1

11) Refer to Figure 7.1. The diagram above contains ________ cost curves.
A) short run
B) intermediate run
C) long run
D) both short run and long run.

12) Refer to Figure 7.1. At output level Q1

A) marginal cost is falling.


B) average total cost is falling.
C) average variable cost is less than average fixed cost.
D) marginal cost is less than average total cost.
E) all of the above

13) Refer to Figure 7.1. At output level Q2

A) average fixed cost is increasing.


B) average variable cost equals average fixed cost.
C) marginal cost is negative.
D) average total cost is negative.
E) none of the above
14) Refer to Figure 7.1. At output level Q3

A) average fixed cost reaches its minimum.


B) average total cost reaches its minimum.
C) average variable cost reaches its minimum.
D) marginal cost reaches its minimum.
E) all of the above

15) Refer to Figure 7.1. At what level of output does average total cost equal marginal
cost?
A) Q2

B) Q3

C) Q4

D) Q5

E) none of the above

16) Refer to Figure 7.1. At what level of output are average total cost, average cost,
average fixed cost and marginal cost increasing?
A) Q2

B) Q3

C) Q4

D) Q5

E) none of the above

17) An isocost line reveals the


A) costs of inputs needed to produce along an isoquant.
B) costs of inputs needed to produce along an expansion path.
C) input combinations that can be purchased with a given outlay of funds.
D) output combinations that can be produced with a given outlay of funds.

18) Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal
axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the
rental cost of capital is $25 per hour, the slope of the isocost curve will be
A) 500.
B) 25/500.
C) -4/5.
D) 25/20 or 1.25.

19) A firm's expansion path is


A) the firm's production function.
B) a curve that makes the marginal product of the last unit of each input equal for each
output.
C) a curve that shows the least-cost combination of inputs needed to produce each level
of output for given input prices.
D) none of the above

20) Suppose that the price of labor (PL) is $10 and the price of capital (PK) is $20.

What is the equation of the isocost line corresponding to a total cost of $100?
A) PL + 20PK

B) 100 = 10L + 20K


C) 100 = 30(L+K)
D) 100 + 30 (PL + PK)

E) none of the above

21) Use the following statements to answer this question:


I. The long-run average cost (LAC) curve is the envelope of the short-run average
cost (SAC) curves.
II. The long-run marginal cost (LMC) curve is the envelope of the short-run marginal
cost (SMC) curves.
A) I and II are true.
B) I is true and II is false.
C) II is true and I is false.
D) I and II are false.

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