Chapter 5 THEORY ON PRODUCER’S BEHAVIOR

Chapter 5 THEORY ON PRODUCER’S BEHAVIOR Input elasticity of output is equal to the ratio of marginal product divided by average product. Microeconomics Seventh Edition 7th N.Greogory Mankiw Business Administration (Faculty of Business Administration) Exercises for practice.

PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) CHAPTER 5: THEORY ON PRODUCER’S BEHAVIOR PART 1: TRUE OR FALSE, EXPLAIN? Input elasticity of output is equal to the ratio of marginal product devided by average product Cobb-Doughlas production function Q = K0,3L0,7 indicates that capital elasticity of output is greater than labour elasticity of output When a production function becomes steeper, the marginal product is decreasing When the total output is increasing, the marginal product of variable input can still decrease but must be greater than zero When quantity increases, average product never increases Marginal product equals to average product curve at the highest value of marginal product When marginal product is below average product, average product must be increasing Total cost curve is upward sloping, starts from the origin The vertical distance between TV and VC curve is diminish as quantity output increases 10 When marginal cost is greater than average total costs, average total costs must be falling 11 Average variable cost will increase when marginal cost increases 12 When marginal cost increases, average total cost also increases 13 If marginal cost is decreasing, total cost will go down as well 14 If the production function for a firm exhibits the law of diminishing marginal product, the total cost curve for the firm will become flatter as the quantity of output expands 15 If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal cost curve will be U-shaped 16 Average total cost curve crosses marginal cost curve at the minimum point of marginal cost curve 17 Average variable cost curve intersects marginal cost curve at the minimum point of marginal cost curve 18 The vertical distance between average total cost curve and average variable cost curve remains unchanged when quantity output changes 19 All average cost curves in short run production are U-shaped 20 Marginal cost curve crosses all average cost curves at their minimum points 21 If marginal cost exceeds marginal revenue, firm should increase output and reduce the price in order to increase profit 22 When firms want to maximize total revenue, they will sell higher quantity of products and charge higher prices than when they want to maximize profit viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) 23 Firm can maximize its profit by minimizing its cost 24 Explicit cost is smaller than economic cost and accounting cost 25 Economic profit is greater than accounting profit PART 2: EXERCISES Exercise 1: A firm is facing with the demand curve Q = 24 – P and cost function: ATC = 2Q + 10/Q ($) a) Calculate P, Q, TR, π and PS in case firm wants to maximize profit b) Calculate P, Q, TR, π and PS in case firm wants to maximize total revenue Exercise 2: A firm is facing with the demand curve P = 54 – 6Q and cost function: MC = 15 + Q, FC = ($) a) Calculate P, Q, TR, π and PS in case firm wants to maximize profit b) Calculate P, Q, TR, π and PS in case firm wants to maximize total revenue Exercise 3: A firm is facing with the demand curve P = 100 – Q and cost function: VC = Q2 + 4Q, FC = 10 ($) a) Calculate P, Q, TR, π and PS in case firm wants to maximize profit b) Calculate P, Q, TR, π and PS in case firm wants to maximize total revenue c) Government impose a tax of 10$/unit on firm, Calculate optimal P, Q, TR and π in this case Exercise 4: A firm is facing with the demand curve P = 52 – 2Q and cost function: TC = 0,5Q2 + 2Q + 47,5 ($) a) Calculate P, Q, TR, π and PS in case firm wants to maximize profit b) Calculate P, Q, TR, π and PS in case firm wants to maximize total revenue c) Government impose a tax of 2,5$/unit on firm, calculate optimal P, Q, TR and π in this case Exercise 5: A firm is facing with the demand curve P = 100 – 0,01Q and cost function: TC = 50Q + 30000 ($) a) Calculate P, Q, TR, π and PS in case firm wants to maximize profit b) Calculate P, Q, TR, π and PS in case firm wants to maximize total revenue c) Government impose a tax of 10$/unit on firm, calculate optimal P, Q, TR and π in this case Exercise 6: A firm has cost function: TC = 3Q3 – 2Q2 + 5Q + 225 ($) a) Derive VC, FC, AVC, AFC, ATC and MC function of this firm b) Calculate the minimum value of ATC, AVC and MC c) Given wage = 200$, calculate the maximum value of APL and MPL viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) PART 3: MULTIPLE CHOICE QUESTIONS A production function is a relationship between A inputs and quantity of output B inputs and revenue C inputs and costs D inputs and profit The short run is a time period in which A all resources are fixed B the level of output is fixed C the size of the production plant is variable D some resources are fixed and others are variable Which of these assumptions is often realistic for a firm in the short run? A The firm can vary both the size of its factory and the number of workers it employs B The firm can vary the size of its factory, but not the number of workers it employs C The firm can vary the number of workers it employs, but not the size of its factory D The firm can vary neither the size of its factory nor the number of workers it employs When a firm’s only variable input is labor, then the slope of the production function measures the A quantity of labor B quantity of output C total cost D marginal product of labor The marginal product of an input in the production process is the increase in A total revenue obtained from an additional unit of that input B profit obtained from an additional unit of that input C total revenue obtained from an additional unit of that input D quantity of output obtained from an additional unit of that input When adding another unit of labor leads to an increase in output that is smaller than increases in output that resulted from adding previous units of labor, we have the property of A diminishing labor B diminishing output C diminishing marginal product D negative marginal product viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) Diminishing marginal product suggests that the marginal A cost of an extra worker is unchanged B cost of an extra worker is less than the previous worker’s marginal cost C product of an extra worker is less than the previous worker’s marginal product D product of an extra worker is greater than the previous worker’s marginal product The law of diminishing marginal product of labor occurs when A every additional worker hired reduces the quantity produced by the firm B every additional worker hired reduces the total costs of the firm C every additional worker hired contributes a smaller increase in production than previously hired workers D every additional worker hired contributes a smaller increase in total costs than previously hired workers The marginal product of labor is equal to the A incremental cost associated with a one unit increase in labor B incremental profit associated with a one unit increase in labor C increase in labor necessary to generate a one unit increase in output D increase in output obtained from a one unit increase in labor 10 The marginal product of labor can be defined as A change in profit/change in labor B change in output/change in labor C change in labor/change in output D change in labor/change in total cost 11 Suppose a certain firm is able to produce 160 units of output per day when 15 workers are hired The firm is able to produce 176 units of output per day when 16 workers are hired (holding other inputs fixed) Then the marginal product of the 16th worker is A 10 units of output B 11 units of output C 16 units of output D 176 units of output 12 Let L represent the number of workers hired by a firm and let Q represent that firm’s quantity of output Assume two points on the firm’s production function are (L = 12, Q = 122) and (L = 13, Q = 130) Then the marginal product of the 13th worker is A units of output B 10 units of output viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) C 122 units of output D 130 units of output 13 On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires workers He is able to produce 4,400 bushels of wheat when he hires workers Which of the following possibilities is consistent with the property of diminishing marginal product? A The farmer is able to produce 5,600 bushels of wheat when he hires workers B The farmer is able to produce 5,800 bushels of wheat when he hires workers C The farmer is able to produce 6,000 bushels of wheat when he hires workers D All of the above are correct 14 When the total product curve is falling, the A marginal product of labor is zero B marginal product of labor is negative C average product of labor is increasing D average product of labor must be negative 15 When marginal product reaches its maximum, what can be said of total product? A total product must be at its maximum B total product starts to decline even if marginal product is positive C total product is increasing if marginal product is still positive D total product levels off The figure below depicts a production function for a firm that produces cookies Use the figure to answer questions 16 and 17 16 As the number of workers increases, A total output increases, but at a decreasing rate B marginal product increases, but at a decreasing rate C marginal product increases at an increasing rate D total output decreases viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) 17 With regard to cookie production, the figure implies A diminishing marginal product of workers B diminishing marginal cost of cookie production C decreasing cost of cookie production D increasing marginal product of workers 18 Which of the following statements about a production function is correct for a firm that uses labor to produce output? A The production function depicts the relationship between the quantity of labor and the quantity of output B The slope of the production function measures marginal cost C The quantity of output is measured along the horizontal axis D All of the above are correct 19 If a production function exhibits diminishing marginal product, its slope A is linear (a straight line) B becomes steeper as the quantity of the input increases C becomes flatter as the quantity of the input increases D could be any of these answers 20 One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run, A output is not variable B the number of workers used to produce the firm's product is fixed C the size of the factory is fixed D there are no fixed costs 21 Fixed costs can be defined as costs that A vary inversely with production B vary in proportion with production C are incurred only when production is large enough D are incurred even if nothing is produced 22 Which is not a fixed cost? A monthly rent of $1,000 contractually specified in a one-year lease B an insurance premium of $50 per year, paid last month C an attorney's retainer of $50,000 per year D a worker's wage of $15 per hour 23 If a firm produces nothing, which of the following costs will be zero? viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) A total cost B fixed cost C opportunity cost D variable cost 24 Variable costs are A sunk costs B multiplied by fixed costs C costs that change with the level of production D defined as the change in total cost resulting from the production of an additional unit of output 25 Variable cost curve is A Upward sloping, starts from the origin B Upward sloping, starts from fixed cost C U-shaped D Horizontal 26 Total cost curve is A Upward sloping, starts from the origin B Upward sloping, starts from fixed cost C U-shaped D Horizontal 27 The average fixed cost curve A always declines with increased levels of output B always rises with increased levels of output C declines as long as it is above marginal cost D declines as long as it is below marginal cost 28 Average total cost is very high when a small amount of output is produced because A average variable cost is high B average fixed cost is high C marginal cost is high D All of the above are correct 29 The changing slope of the total cost curve reflects A decreasing average variable cost B decreasing average total cost C decreasing marginal product viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) D increasing fixed cost 30 If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve A is linear (a straight line) B becomes steeper as the quantity of output increases C becomes flatter as the quantity of output increases D could be any of these answers 31 Average total cost equals A change in total costs divided by quantity produced B change in total costs divided by change in quantity produced C (fixed costs + variable costs) divided by quantity produced D (fixed costs + variable costs) divided by change in quantity produced 32 The vertical distance between ATC and AVC curves is A Constant as quantity output increases B Increasing gradually as quantity output increases C Decreasing gradually as quantity output increases D Decreasing gradually as quantity output decreases 33 Marginal cost tells us A the marginal increment to profitability when price is constant B the value of all resources used in a production process C the amount total cost rises when output rises by one unit D the amount fixed cost rises when output rises by one unit 34 Marginal cost equals (i) change in total cost divided by change in quantity produced (ii) change in variable cost divided by change in quantity produced (iii) the average fixed cost of the current unit A (i) and (ii) B (ii) and (iii) C (ii) only D All of the above are correct 35 The firm's short-run marginal-cost curve is increasing when A marginal product is increasing B total fixed cost is increasing C marginal product is decreasing viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) D average fixed cost is decreasing 36 If marginal cost is rising, A average variable cost must be falling B average fixed cost must be rising C marginal product must be falling D marginal product must be rising 37 Marginal cost is equal to average total cost when A average variable cost is falling B average fixed cost is rising C marginal cost is at its minimum D average total cost is at its minimum 38 When marginal cost exceeds average variable cost, A average fixed cost must be rising B average variable cost must be rising C average variable cost must be falling D marginal cost must be falling 39 When marginal cost is less than average total cost, A marginal cost must be falling B average variable cost must be falling C average total cost is falling D average total cost is rising 40 Whenever marginal cost is greater than average total cost, A marginal cost is rising B marginal cost is falling C average total cost is rising D average total cost is falling 41 When marginal cost is rising, average variable cost A must be rising B must be falling C must be constant D could be rising or falling 42 At all levels of production beyond the point where the marginal cost curve crosses the average variable cost curve, average variable cost A rises viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) B remains unaffected C falls D All of the above are possible, it depends on the shape of the marginal cost curve 43 The efficient scale of the firm is the quantity of output that A maximizes marginal product B maximizes profit C minimizes average total cost D minimizes average variable cost 44 The marginal cost curve crosses the average total cost curve at A the efficient scale B the minimum point on the average total cost curve C a point where the marginal cost curve is rising D All of the above are correct 45 If the short-run average variable costs of production for a firm are rising, then this indicates that A average total costs are at a maximum B average fixed costs are constant C marginal costs are above average variable costs D average variable costs are below average fixed costs 46 Which of the following statements about costs is correct? A When marginal cost is less than average total cost, average total cost is rising B The total cost curve is U-shaped C As the quantity of output increases, marginal cost eventually rises D All of the above are correct 47 All of the average cost curves are U-shaped, except for A ATC curve B AVC curve C AFC curve D MC curve 48 The reason the marginal cost curve eventually increases as output increases for the typical firm is because A of diseconomies of scale B of minimum efficient scale C of the law of diminishing returns viethoa.k52@ftu.edu.vn 10 PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) D normal profit exceeds economic profit The curves below reflect information about the cost structure of a firm Use the figure to answer the questions from 49 to 51 49 Which of the curves is most likely to represent average variable cost? A Curve A B Curve B C Curve C D Curve D 50 This particular firm is necessarily experiencing increasing marginal product when curve A A is falling B B is falling C C is falling D D is falling 51 Curve A is U-shaped because of A diminishing marginal product B increasing marginal product C the fact that increasing marginal product follows decreasing marginal product D the fact that decreasing marginal product follows increasing marginal product 52 Which of the following statements is true? A All costs are fixed in the short run B All costs are variable in the long run C All costs are variable in the short run D All costs are fixed in the long run 53 If you know that with units of output, average fixed cost is $12.50 and average variable cost is $81.25, then total cost at this output level is viethoa.k52@ftu.edu.vn 11 PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) A $93.75 C $750 B $97.78 D $880 54 With fixed costs of $400, a firm has average total costs of $3 and average variable costs of $2.50 Its output is A 200 units C 800 units B 400 units D 1.600 units 55 Those things that must be forgone to acquire a good are called A substitutes B opportunity costs C explicit costs D competitors 56 The amount of money that a firm receives from the sale of its output is called A total gross profit B total net profit C total revenue D net revenue 57 Total revenue equals A total output multiplied by price per unit of output B total output divided by profit C (total output multiplied by sales price) – inventory surplus D (total output multiplied by sales price) – inventory shortage 58 Profit is defined as A net revenue minus depreciation B total revenue minus total cost C average revenue minus average total cost D marginal revenue minus marginal cost 59 Economists normally assume that the goal of a firm is to (i) sell as much of their product as possible (ii) set the price of their product as high as possible (iii) maximize profit A (i) and (ii) B (ii) and (iii) C (iii) only D All of the above are correct viethoa.k52@ftu.edu.vn 12 PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) 60 XYZ corporation produced 300 units of output but sold only 275 of the units it produced The average cost of production for each unit of output produced was $100 Each of the 275 units sold was sold for a price of $95 Total revenue for the XYZ corporation would be A –$3.875 C $28.500 B $26.125 D $30.000 61 Explicit costs A require an outlay of money by the firm B include all of the firm’s opportunity costs C include income that is forgone by the firm’s owners D All of the above are correct 62 An example of an explicit cost of production would be A the cost of forgone labor earnings for an entrepreneur B the lost opportunity to invest in other capital markets when the money is invested in one’s business C the cost of flour for a baker D None of the above are correct 63 An example of an implicit cost of production would be A the income an entrepreneur could have earned working for someone else B the cost of raw materials for producing bread in a bakery C the cost of a delivery truck in a business that rarely makes deliveries D All of the above are correct 64 Which of the following would be categorized as an implicit cost? (i) wages of workers (ii) raw material costs (iii) forgone investment opportunities A (i) and (iii) B (iii) only C (ii) and (iii) D All of the above are correct 65 Which of the following is an implicit cost? (i) the owner of a firm forgoing an opportunity to work for another firm (ii) interest paid on the firm’s debt (ii) rent paid by the firm to lease office space viethoa.k52@ftu.edu.vn 13 PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) A (ii) and (iii) B (i) and (iii) C (i) only D All of the above are correct 66 Economic profit is equal to A total revenue minus the opportunity cost of producing goods and services B total revenue minus the accounting cost of producing goods and services C total revenue minus the explicit cost and implicit cost of producing goods and services D average revenue minus the average cost of producing the last unit of a good or service 67 Accounting profit is equal to A marginal revenue minus marginal cost B total revenue minus the explicit cost of producing goods and services C total revenue minus the opportunity cost of producing goods and services D average revenue minus the average cost of producing the last unit of a good or service 68 Accounting profit is equal to total revenue minus A implicit costs B variable costs C the sum of implicit and explicit costs D explicit costs 69 Economic profit is equal to accounting profit minus A variable costs B implicit costs C explicit costs D marginal costs 70 Which of the following expressions is correct? A accounting profit = economic profit + implicit costs B accounting profit = total revenue – implicit costs C economic profit = accounting profit + explicit costs D economic profit = total revenue – implicit costs 71 Suppose that a firm produces 200,000 units a year and sells them all for $10 each The explicit costs of production are $1,500,000 and the implicit costs of production are $300,000 The firm has an accounting profit of A $500,000 and an economic profit of $200,000 B $400,000 and an economic profit of $200,000 viethoa.k52@ftu.edu.vn 14 PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) C $300,000 and an economic profit of $400,000 D $200,000 and an economic profit of $500,000 72 If there are implicit costs of production, A accounting profit will exceed economic profit B economic profit will always be zero C economic profit will exceed accounting profit D accounting profit will always be zero E economic profit and accounting profit will be equal 73 If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve A is linear (a straight line) B becomes steeper as the quantity of output increases C becomes flatter as the quantity of output increases D could be any of these answers 74 Which of the following is a variable cost in the short run? A rent on the factory B wages paid to factory labour C interest payments on borrowed financial capital D payment on the lease for factory equipment E salaries paid to upper management The figure 13-1 below is used for questions number 75 and 76 Numbers of workers Output 0 23 40 50 75 Refer to Figure 13-1 The marginal product of labour as production moves from employing one worker to employing two workers is A 10 B 17 C 23 D 40 76 The production process described above exhibits A constant marginal product of labour viethoa.k52@ftu.edu.vn 15 PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) B diminishing marginal product of labour C increasing returns to scale D increasing marginal product of labour E decreasing returns to scale The figure 13-2 below is used for questions number 77 to 79 77 The average fixed cost of producing four units is A €2.50 B €5 C €26 D €10 78 The average total cost of producing three units is A €28 B €3.33 C €18 D €9.33 79 The marginal cost of changing production from three units to four units is A €6 B €7 C €8 D €9 81 When marginal costs are below average total costs, A average fixed costs are rising B average total costs are falling C average total costs are rising D average total costs are minimized 82 If marginal costs equal average total costs, A average total costs are falling viethoa.k52@ftu.edu.vn 16 PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) B average total costs are rising C average total costs are maximized D average total costs are minimized 83 If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginalcost curve will A be flat (horizontal) B slope upward C slope downward D be U-shaped 84 Which of the following statements is true? A All costs are fixed in the short run B All costs are variable in the long run C All costs are variable in the short run D All costs are fixed in the long run 85 Of all the costs shown below incurred by Superior Airways, which is an example of an implicit cost? A The salaries paid to the pilots B The jet fuel bills C The purchases of parts needed for maintenance of the aircraft D The rent that could be earned on an aircraft that is owned and used by Superior 86 Everything that needs to be given up whenever a choice is made is called A an implicit cost B an explicit cost C an opportunity cost D a sunk cost 87 Accounting profit is generally than economic profit, because accountants implicit costs in their calculations A greater, consider B greater, not consider C smaller, consider D smaller, not consider 88 The cost of raw materials will fall under the category of A fixed costs viethoa.k52@ftu.edu.vn 17 PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) B variable costs C implicit costs D average fixed costs 89 The factory rent payments made by a firm fall under the category of A fixed costs B variable costs C short-run costs D average variable costs The table below is used for questions number 90 to 92 90 Based on the table above, what is the marginal cost of the tenth unit? A $250 B $200 C $50 D $300 91 Based on the table above, if the fixed cost is $500, what is the average total cost of the fifth unit? A $250 B $140 C $240 D $100 92 Based on the table above, what is the average variable cost of the fourth unit? A $250 B $125 C $240 D $100 viethoa.k52@ftu.edu.vn 18 ... APL and MPL viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) PART 3: MULTIPLE CHOICE QUESTIONS A production function is a relationship between A inputs... with production B vary in proportion with production C are incurred only when production is large enough D are incurred even if nothing is produced 22 Which is not a fixed cost? A monthly rent... rent of $1,000 contractually specified in a one-year lease B an insurance premium of $50 per year, paid last month C an attorney's retainer of $50 ,000 per year D a worker's wage of $ 15 per hour 23