ECON310 Solutions

Econ 310 Practice Questions: Chaps. 4, 7-8 Figure 4.1 Other goods A H c a U2 U1 b 0 x Z H’ Z’ 1. Figure 4.1 shows the effect of a decrease in the price of good x. The substitution effect is indicated by A) c to a. B) b to c. C) a to c. D) a to b. Figure 4.2 Other goods A c H U2 a U1 b 0 x Z 2. A) B) C) D) H’ Z’ Figure 4.2 shows the effect of a decrease in the price of good x. In this case, x is an inferior good. a bad. a Giffen good. a normal good. 3. When a consumer is purchasing 4 units of good x, her MRS between a composite good and good x, i.e., the slope of the indifference curve, is equal to -$9, with x measured on the horizontal axis. The vertical height of the consumer’s demand curve for x at x = 4 units is A) $1/9 = $0.11. B) $9. C) ($1/9) x 4 = $0.44. D) $36. 4. Which of the following statements is false? (Take it as given that there can be such a thing as a Giffen good.) A) An inferior good must be a Giffen good. B) A normal good can never be a Giffen good. C) A Giffen good must be an inferior good. D) The income effect is stronger than the substitution effect in the case of a Giffen good. 5. Consumer surplus is A) the area below the demand curve and above the price. B) the entire area below the demand curve up to the equilibrium quantity. C) the rectangular area defined by multiplying equilibrium price by equilibrium quantity. D) the area above the supply curve and below the price. 6. Moving along one of the consumer’s indifference curves, she is willing to give up $5 of other goods for the first unit of pizza, $4 for the second, $3 for the third, $2 for the fourth and $1 for the fifth. Assuming that she purchases 5 units of pizza at $0.75 each, her consumer surplus is A) $11.25. B) $14.25. C) $3.75. D) $15. 7. Good x is measured along the horizontal axis of an indifference curve-budget line diagram, with a composite good measured on the vertical axis. If the price-consumption curve is upward sloping from left to right, then demand for x is A) infinitely elastic. B) inelastic. C) elastic. D) unit elastic. 8. Diminishing marginal returns to the variable factor, labor, applies only over the range of employment of labor where A) the marginal product of labor is less than the average product of labor. B) the marginal product of labor is decreasing. C) the marginal product of labor is negative. D) the average product of labor is decreasing. Figure 7.1 output TP 0 L1 L2 L3 labor 9. In Figure 7.1, the average product of labor reaches a maximum when the amount of labor employed is A) L3. B) L2. C) L1. D) between L1 and L2. 10. If a good is produced with two inputs, land and labor, with labor measured on the horizontal axis and land on the vertical axis, then the slope of the isoquant for this good is given by A) - MPland/MPlabor. B) - MClabor/MCland. C) - MPlabor/MPland. D) - MCland/MClabor. Figure 7.2 capital A B C IQ1 0 labor 11. A) B) C) D) In Figure 7.2, AB = 4 units of capital and BC = 1 unit of labor. It follows that labor’s marginal product is four times capital’s marginal product. the marginal rate of technical substitution is -1/4. capital’s marginal product is four times labor’s marginal product. Both (B) and (C) of the above. 12. A) B) C) D) One possible reason for decreasing returns to scale is complex and expensive equipment may be feasible only when output is sufficiently high. specialization and division of labor within the firm. diminishing marginal returns. the inefficiency of managing large operations. Figure 7.3 capital IQ40 IQ30 0 13. A) B) C) D) IQ20 IQ10 The isoquant map in Figure 7.3 displays increasing marginal returns. decreasing returns to scale. constant returns to scale. increasing returns to scale. labor Figure 8.1 $ TVC 0 q1 q2 q3 output 14. A) B) C) D) In Figure 8.1, average variable cost reaches a minimum when output is q1. between q1 and q2. q3. q2. 15. A) B) C) D) Average variable cost is necessarily upward sloping over the entire range of output where marginal cost is greater than average fixed cost. marginal cost is greater than average variable cost. average fixed cost is downward sloping. marginal cost is less than average total cost. 16. A) B) C) D) Which of the following statements is true? AVC = w.(ΔL)/Δq. AVC = w.q/L. AVC = w.(Δq)/ΔL. AVC = w.L/q. 17. If labor is measured on the horizontal axis and capital on the vertical axis and w = $8 and r = $6 then, when the firm is using a cost-minimizing combination of labor and capital, the MRTS between labor and capital is A) indeterminate because there is an infinite number of cost-minimizing combinations of labor and capital depending on the firm’s total cost. B) -3/4. C) -1. D) - 4/3. 18. Assuming that labor is measured along the horizontal axis and capital along the vertical axis, if (MPL/MPK) > (w/r), then A) a cost-minimizing firm will hire more labor and less capital. B) a cost-minimizing firm will hire only capital and zero labor. C) a cost-minimizing firm will hire more capital and less labor. D) the isoquant is flatter than the isocost line, i.e., the absolute value of the slope of the isoquant is less than that of the isocost line. E) Both (C) and (D) of the above. Figure 8.2 capital M1 M b c a IQ2 IQ1 0 labor N’ N1 N 19. Figure 8.2 shows the effect of an increase in w with no change in r. The input substitution effect is A) b to c. B) c to a. C) a to b. D) c to b. 20. If a firm doubles the amount of labor employed and triples the amount of capital employed, and as a result output increases by 50 percent, then the firm’s operation is necessarily characterized by A) economies of scale. B) decreasing returns to scale. C) increasing returns to scale. D) diseconomies of scale. Answer key: 1. D 2. C 3. B 4. A 5. A 6. A 7. B 8. B 9. B 10. C 11. A 12. D 13. B 14. C 15. B 16. D 17. D 18. A 19. C 20. D