Multiple Choice questions 1. Suppose a firm is producing 100 units of output, incurring a total cost of $10 000 and total variable cost of $6000. It can be concluded that average fixed cost is

A) $40. B) $60. C) $100. D) $160. E) $40

2. Assume Brazilian soccer player Neymar is averaging three goals per game going into the last game of the season in which he collects four goals, thereby changing his seasons average. To use an analogy in economics, it could be said that

A) Soccer has nothing to do with economics.

B) Average product increases when marginal product increases.

C) Average product increases when average product exceeds marginal product.

D) Average product increases when total product increases.

E) Average product increases when marginal product exceeds average product.3. The point of diminishing marginal productivity is the point where

A) The total product begins to fall.

B) The marginal product begins to fall at an increasing rate.

C) Marginal product has reached a maximum.

D) The marginal product curve lies below the average product curve.

E) Average product has reached a maximum.4. The opportunity cost of using an asset is zero if

A) The asset was given to the firm for free.

B) No money was spent to acquire the asset.

C) The asset is already owned by the firm.

D) The asset has zero sunk costs associated with it.

E) The asset has no alternative uses.

5. Which of the following is most likely a long-run decision?

A) The hours a store should stay open.

B) How many warehouses to build.

C) The price at which to sell the product.

D) The number of workers to hire.

E) The amount of inventory to stock.

6. When marginal cost is rising, we know that

A) Average fixed cost must be rising.

B) Marginal product must be falling.

C) Average variable cost must be rising.

D) Average total cost must be rising.

E) Marginal product must be zero.

7. Average, marginal, and total product curves

A) Express relationships between physical inputs and physical outputs.

B) Demonstrate that in the short run, all inputs are variable.

C) Demonstrate that each of these measures of output increase as more inputs are applied.

D) Relate the prices of inputs (factors of production) to the prices of products.

E) Relate the price of output to the quantity supplied.

8. Which of the following is the best definition of marginal revenue product? a. The extra revenue that results from a unit increase in the input. b. The extra revenue that results from an increase in output. c. The extra revenue that results from a unit decrease in excess inputs. d. The extra product that results from a unit increase in the input. e. The extra product that results from an increase in technical efficiency.

9. Suppose Jodi's widget business is using two inputs, labour and capital. What would happen if the price of labour rises?

A) The firm's average total cost curve will shift upward.

B) Jodi will "wind-up" her business.

C) The firm's marginal cost curve will remain unchanged.

D) The firm's average fixed cost curve will shift upward.

E) Jodi would hire more labour.

10. Suppose that a firm has limited amounts of some input to ration among several facilities that produce the same product. What decision rule should it follow in allocating the input? a. Allocate so that marginal products of all facilities are zero. b. Allocate so that marginal products of all facilities are rising. c. Allocate so that marginal products of all facilities are equal. d. Allocate so that average products of all facilities are equal. e. Allocate so that total products of all facilities are equal.

Computational/Discussion questions

Question one: Fill in the blanks in the following table.Units of OutputFixed CostVariable CostTotal CostMarginal CostAverage Fixed CostAverage Variable CostAverage Total Cost

01000100

125

2100145

357

4177

5202

6236

7170

8226

9298

10100390

b. Draw a graph that shows marginal cost, average variable cost, and average total cost, with cost on the vertical axis and quantity on the horizontal axis.

c. A firm has a fixed production cost of $5,000 and a constant marginal cost of production of $500 per unit produced. What is the firms total cost function? Average cost?Question 2

Consider two non-specific industries that are moderately concentrated with relatively high barriers to entry. Suppose that the two industries are quite similar except that in the first industry, firms can adjust their capacity very quickly in response to new orders while in the second industry, firms must plan in advance for any increase in capacity. (An example might be local delivery services where the first industrys main inputs of production can be rented on short notice, e.g. small trucks, and workers can be hired on a temporary basis, while the second industrys main inputs must be specially equipped and special ordered in advance.)

(a) All else equal, which industry would be more attractive (i.e. which industry would be likely to have higher profit margins)? Explain why.

(b) Consider the effect of a short-term increase in demand (i.e. at any price level consumers are willing to buy more). In which industry would short-term profit margins increase the most? Explain why.

Question 4

Determine the net present value for a project that costs $104,000 and would yield after-tax cash flows of $16,000 the first year, $18,000 the second year, $21,000 the third year, $23,000 the fourth year, $27,000 the fifth year, and $33,000 the sixth year. Your firm's cost of capital is 12.00%.