Exam 2 Review Problems Chapters 6 7 and 8 Which of the following would cause the AFC curve for cigarettes to shift up I An Increase in annual property tax II An increase in the cigarette tax charged per pack III An increase in the cost of electricity IV An increase in advertising expenditures A B C D I II III IV I II III I I IV Find which of these are FC in respect to output does it vary with output Which of the following would shift the MC curve for cigarettes A B C D An increase in the interest rate A 10 million penalty charged to each cigarette maker An increase in the demand for cigarettes A 4 wage increase Looking for variable cost wage is the price of the labor which is a VC When we talk about cost we are talking about the supply side If the market price is 4 to maximize profit the firm should produce thousand units and will earn a profit of approximately thousand A B C D 350 350 350 1400 300 1200 None of the above are correct Price MC 4 00 Q 350 Profit R C R ATC At a market price of the firm will earn an economic profit of zero In this case the firm should produce A B C D 3 50 0 3 00 0 2 00 0 3 00 300 P Min ATC If the market price is 2 50 to maximize profit the firm should produce thousand units and will earn a profit of approximately thousand Assume fixed cost is 250 thousand A B C D 0 0 0 250 250 125 250 125 At a price of 2 50 Q 250 ATC 3 at Q 250 0 50 250 125 In the short run if you shut down you are stuck with your fixed costs If the market price is 1 50 to maximize profit the firm should produce thousand units and will earn a profit of approximately thousand Assume fixed cost is 250 thousand A B C D 0 0 0 250 150 250 150 300 It is more profitable to such down to incur a fixed cost of 250k then producing units at a profit of 300k Two farmers raise barley The farms are identical in every respect except farmer Anne bought her tractor for 500 000 and farmer Betty rents her tractor for 50 000 Farmer Anne could rent her tractor out for 50 000 if she chose not to farm with it If Anne sold the tractor and purchased bonds she would earn 25 000 a year from interest Which farmer has lower costs A Farmer Anne B Farmer Betty C Neither the costs are identical See notes Long run equilibrium price of wheat is 5 a bushel Compared to every other wheat farmer Sally has an extra 2 of accounting profit for every bushel of wheat due to high quality land The extra 2 per bushel is A economic rent B long run economic profit C sunk cost D B C Definition of economic rent The total cost of making 100 donuts is 100 The marginal cost of the 100th donut is 1 10 The average total cost of the 100th donut is A Constant B Rising C Decreasing D Less than average fixed cost MC TC Q MC ATC ATC is increasing A firm employs 500 workers at a wage rate of 20 and 50 units of capital at 40 per hour The marginal product of labor is 200 and the marginal product of capital is 800 The firm is producing its target level of output To minimize costs the firm should A continue employing the existing amounts of both capital and labor B hire more capital and more labor C hire more capital and less labor D hire less capital and more labor See notes A firm s MC equals 20 while its long run average cost is 200 This firm A is experiencing economies of scale B is experiencing diseconomies of scale C is experiencing learning economies D is producing an output greater than its minimum efficient scale A movement from A to C in the figure represents A economies of scale B diseconomies of scale C learning D economies of scope In the perfectly competitive constant cost parsnip market the market demand is Q 10 000 100p and the short run market supply is Q 2 000 200P For each parsnip producer marginal cost equals long run average cost at 20 In this market we would expect there to be until the market price A entry equals 20 B exit equals 20 C exit equals 40 D entry equals 40 Cal s Flour Mill competes in a highly competitive market where the market price is 10 per 50 pound bag His total and marginal cost curves are TC 200 01q2 and MC 02q What is the profit maximizing output Bread Production K L 10 10 10 10 10 10 q 0 1 2 3 4 5 MP AP 0 15 20 20 10 What is the average product when 3 workers are employed 15 Bread Production K L 10 10 10 10 10 10 q 0 1 2 3 4 5 MP 0 15 40 60 70 75 AP 15 25 20 10 5 What is the average product when 3 workers are employed 15 20 20 17 5 15