Module 7 Homework

1. The di erence between the short-run & the long-run is:

A. Three months, or one business quarter

B. The time it takes for rms to change all inputs in the production process
C. The time it takes for rms to change only their variable inputs
D. More information is required to answer this question

2. In a call center, which of the following situations can be considered as a variable

input in the short run?

A. The level of computer software being utilized

• This is generally considered a xed input in the short run, as the software itself is not
easily changed or adjusted based on immediate demand.

B. The number of call center representatives on duty at the center

• This is a variable input. The number of representatives can be adjusted based on call
volume and demand, making it a exible resource in the short run.

C. The number of call center managers or supervisors

• While this can be adjusted to some extent, it is typically more xed in the short run
compared to the number of representatives, as management levels are often set
based on organizational structure.

D. The size (e.g., square footage) of the call center

• This is a xed input in the short run, as the physical space cannot be easily changed
or adjusted based on immediate operational needs.

3. If a rm nds itself operating in Stage I, it implies that:

A. Variable inputs are extremely expensive

B. It underinvested in xed capacity

C. It overinvested in xed capacity

• In Stage I of production, the rm is typically experiencing increasing marginal returns,
meaning each additional unit of variable input (such as labor) results in more output.
This often happens when the rm has more xed inputs (such as machinery or capital)
than it needs relative to its current level of variable inputs, leading to underutilization
of xed capacity.
• Thus, the rm has overinvested in xed capacity because it could produce more
output with the same xed inputs by employing more variable inputs. This is why
Stage I is sometimes referred to as a stage of increasing returns due to underutilized
xed resources.

D. Fixed inputs are extremely expensive

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 4. Assume a rm employs 10 workers & pays each $15 per hour.
• The MP of the 10th worker is 5 units of output
• The price of the output is $4
• According to economic theory, in the short run:

A. The rm should hire additional workers

B. The rm should reduce the number of workers employed
C. The rm should continue to employ 10 workers
D. More information is required to answer this question

• The Marginal Revenue Product (MRP) is an important concept in economics, particularly in

the context of a rm deciding how much labor or another input to employ
• It measures the additional revenue generated from employing one more unit of a particular
input, such as labor or capital

5. The following Cobb-Douglas production function, Q = 1.8L0.74K0.36, exhibits:

A. Increasing returns
B. Constant returns
C. Decreasing returns
D. Both A & B

6. Which of the following is most likely a xed cost?

A. Expenditures for raw materials

• These are variable costs because they uctuate with the level of production. The more
a company produces, the more raw materials it needs.

B. Wages for unskilled labor

• This can be a variable cost, especially if the number of workers changes with
production levels. However, if the wages are for permanent sta regardless of output,
it could be considered xed.

C. Fuel cost
• This is typically a variable cost, as it depends on the level of production and usage of
machinery or vehicles.

D. Property taxes
• Property taxes are a xed cost because they do not change with the level of
production. They are incurred regardless of how much output the company produces.
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 7. When a rm increased its output by one unit, its AC rose from $45 to $50. This implies
that its MC is:

A. $5

B. Between $45 & $50

C. Greater than $50

D. Cannot be determined from the above information

8. Which of the following statements best represents a di erence between short-run &
long-run cost?

A. Less than one year is considered the short run; more than one year the long run

B. There are no xed costs in the long run

C. In the short-run labor must always be considered the variable input & capital the
xed input

D. All of the above are true

9. When a rm experiences increasing returns to scale:

A. Its AFC will decrease

B. Its AFC will increase
C. Its AC will increase
D. Its AC will decrease

10. Which level indicates the point of maximum economic e ciency?

A. Lowest point on AC curve

• The lowest point on the AC curve indicates the most e cient level of production in
terms of cost per unit.

B. Lowest point on AVC curve

• While the lowest point on the Average Variable Cost (AVC) curve indicates the
minimum variable cost per unit, it does not account for xed costs. Therefore, it does
not represent maximum economic e ciency in the overall cost structure.

C. Lowest point on MC curve

• The Marginal Cost (MC) curve does not indicate maximum economic e ciency
directly. Instead, it intersects the AC curve at the lowest point of the AC curve. The
lowest point on the MC curve indicates the minimum cost of producing one additional
unit, but it does not represent the overall e ciency of production.

D. None of the above

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 11. Given the Production Function of a perfectly
competitive rm: Q = 60L + 12L2 – L3
• Q = Output
• L = Labor Input

• At what value of L will Diminishing Returns

take e ect?

A. 4.0

B. 6.0

C. 10.0

D. 9.4

12. Given the Production Function of a perfectly competitive rm: Q = 60L + 12L2 – L3
• Q = Output
• L = Labor Input

• At what value of labor will Stage I end & Stage II begin?

A. 4.0

B. 6.0

C. 10.0

D. 9.4

13. Given the Production Function of a perfectly competitive rm: Q = 60L + 12L2 – L3
• Q = Output
• L = Labor Input

• At what value of labor will Stage II end & Stage III begin?

A. 4.0

B. 6.0

C. 10.0

D. 9.4
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14. Given the Production Function of a perfectly competitive rm: Q = 60L + 12L2 – L3
• Q = Output
• L = Labor Input

• Suppose that the wage rate is $40 & the price of output is $2 per unit,
• How many workers should the rm hire?

A. 4.0

B. 6.0

C. 10.0

D. 9.4

15. Given the Production Function of a perfectly competitive rm: Q = 60L + 12L2 – L3
• Q = Output
• L = Labor Input

• At what value of L will Q be at its maximum?

A. 4.0

B. 6.0

C. 10.0

D. 9.4

16. Given the Production Function of a perfectly competitive rm: Q = 60L + 12L2 – L3
• Q = Output
• L = Labor Input

• What is the maximum amount of Q?

A. 368

B. 576

C. 800

D. 794
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17. Suppose that you estimate the following cost function for your company, which is a

monopolistically competitive rm , and the following

demand curve for your product: .

• The average cost curve is _____.

A. 150 - 5Q + Q

B. 150 - 10Q + 3Q2

C. -5Q + Q2

D. -10Q + 3Q2

18. Suppose that you estimate the following cost function for your company, which is a

monopolistically competitive rm , and the following

demand curve for your product: .

• The marginal cost curve is _____.

A. 150 - 5Q + Q2
B. 150 - 10Q + 3Q2
C. -5Q + Q2
D. -10Q + 3Q2

19. Suppose that you estimate the following cost function for your company, which is a

monopolistically competitive rm , and the following

demand curve for your product:

• At what value of Q does minimum cost e ciency occur?

A. 2.5
B. 2.0
C. 3.0
D. 1.5
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 20. Suppose that you estimate the following cost function for your company, which is a

monopolistically competitive rm , and the following

demand curve for your product:

• How many units of output will you produce? (Hint: A monopolistically competitive
rm produces where MR=MC. First nd the level of output by setting MR=MC, then
substitute the value of Q into the price equation above to nd the value of P.)

A. 2.5
B. 2.0
C. 3.0
D. 1.5

21. Suppose that you estimate the following cost function for your company, which is a

monopolistically competitive rm , and the following

demand curve for your product:

• What price will you charge for each unit? (Hint: A monopolistically competitive rm
produces where MR=MC. First nd the level of output by setting MR=MC, then
substitute the value of Q into the price equation above to nd the value of P.)

A. 149.50
B. 152.00
C. 137.80
D. 144.00

22. Suppose that you estimate the following cost function for your company, which is a

monopolistically competitive rm , and the following

demand curve for your product:

• What is the maximum amount of total pro t that this rm can earn?

A. 23.50
B. 16.00
C. 11.00
D. 13.75
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