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CSUN ECON 310 - Exam #2

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Econ 310 29031d Exam #2 Multiple Choice: (circle the correct letter) (5 points each) 1) The short run marginal cost curve a. must pass through the minimum of the short run average cost curve. b. must pass through the minimum of the average variable cost curve. c. must always lie above the average fixed cost curve. d. must always increase as output increases. e. Both (a) and (b) are correct. f. None of the above answers are correct. 2) Market demand a. specifies the total quantity that all consumers are willing and able to purchase at varying prices. b. is graphically a “horizontal summation” of all individual demand functions. c. can be positively sloped for a commodity which is an ordinary good for every consumer in the market. d. is always a linear function of price. e. More than one, but not all of the above answers are correct. 3) The Cobb-Douglas production function βαKALKLF =),( a. must always exhibit decreasing returns to scale. b. must always exhibit constant returns to scale. c. must always exhibit increasing returns to scale. d. exhibits decreasing returns to scale if and only if 1>+βα. e. Exhibits constant returns to scale if and only if 1=+βα. 4) Consider a consumer with demand for commodity one given by 1*153pIx = . For such a consumer: a. commodity one is an ordinary good. b. commodity one is a Giffen good. c. commodity one is a normal good. d. commodity one is an inferior good. e. Both (a) and (d) are correct. f. Both (a) and (c) are correct.5) Consider the production function bKaLKLF+=),(, for which aMPL= and bMPK= . This production process: a. exhibits decreasing returns to scale. b. exhibits constant returns to scale. c. is such that baMRTSKL=,. d. each isoquant is a downward sloping straight line. e. More than one, but not all of the above are correct. True or False: (circle TRUE or FALSE) (4 points each) 1) TRUE or FALSE: By definition, a good is a Giffen good if an increase in price leads to an increase in the level of consumption. 2) TRUE or FALSE: Suppose the production function ),(KLF exhibits increasing returns to scale. As a result, )4,3(2)8,6(FF=. 3) TRUE or FALSE: If total product is increasing, marginal product must also be increasing. 4) TRUE or FALSE: Fixed Costs must decrease as the level of output increases. Problems and/or short answer questions: 1) Consider a firm with the production function LKKLF210),( = . Suppose the firm is operating in the short run with capital fixed at KK=. The firm wishes to minimize the costs of producing a target level of output Q . a. Determine the amount of labor that the firm will hire to solve its short run cost minimization problem. (6 points)b. How will this optimal amount of labor change as w changes? How will it change as r changes? (8 points) c. Determine the short run costs of producing Q . (8 points) d. Decompose this expression for short run costs into variable costs and fixed costs of production. (6 points)2) Consider a market with 10 consumers, 5 of which have individual demand given by 520)(ppX−= for 1000≤≤p and 5 of which have individual demand given by ppX −= 100)( for 1000≤≤p . a. Determine a general expression for market demand as a function of price for any price 500 ≤≤p . (10 points) b. Determine the quantity demanded by all consumers in the market at a price of 50ˆ=p . (5 points) c. Determine the total consumer surplus in the market when 50ˆ=p . (8 points) d. Suppose price were to decrease to 25=p . Would you expect total consumer surplus to increase or decrease? Explain. (8

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