Ecn 100 - Intermediate Microeconomic Theory
ECN 100 A: Midterm 2 Version B
SECTION I: MULTIPLE CHOICE (40 points)
1. If a production technology exhibits diminishing marginal product of labor for all levels of labor, then which of the following must be true in the short-run?
(a) MC is above AC.
(b) MC is increasing.
(c) AC is increasing.
(d) All of the above.
2. Suppose that each worker must use one shovel to dig a hole, and that shovels are useless by themselves. Workers are paid $10 each. There are five free shovels, but every shovel after the 5th costs $5 each. In the long run,
(a) Producing holes at times exhibits constant return to scale.
(b) Producing holes at times exhibits diseconomies of scale.
(c) Producing holes at times exhibits decreasing return to scale.
(d) Both (a) and (b)
3. Each of the above figures depicts a market demand curve with a solid line and the residual demand curve for firm one with a dashed line. Which residual demand curve would re丑ect that firm one competes with a large number of perfectly competitive firm?
(a) Market A.
(b) Market B.
(c) Market C.
(d) Market D.
4. If capital is fixed in the short run and labor is variable, increasing the price of capital will . (Assume that before and after the price change the firm finds it optimal to produce a positive quantity of output.):
(a) Lead the firm to use more labor in the short run.
(b) Lead the firm to use less labor in the short run.
(c) Lead the firm to produce less output in the short run.
(d) None of the above.
5. If we use only wood and glue to make bookcases and we always have to use them in fixed proportions, then:
(a) The isoquants will be L-shaped.
(b) The isoquants will be straight lines.
(c) The isoquants will be upward sloping.
(d) The isoquants will be concave.
6. Schilling robotics recently bought land on 2nd Street from Sudwurks for an expansion of its factory for $100,000. After they completed their purchase, they discovered that the land is soaked with so much beer as to make the ground unsuitable for its factory. Target is willing to pay them $10,000 to turn the land into a parking lot. The opportunity cost of the land is
(a) $100,000.
(b) $10,000.
(c) $90,000.
(d) None of the above.
7. A Nashville recording studio, the Hit Factory!TM follows a well worn formula for producing Hits! using artists and instruments. In the short run, instruments are fixed but the number of artists is variable. Which of the following prices would afect the optimal number of artists in the short run? (Assuming no shutdown.)
(a) The price of artists.
(b) The price of Hits!.
(c) The marginal product of artists.
(d) all of the above.
Consider a market for high-speed broadband services illustrated in the above figure. The Long-run Average Cost and Marginal Cost for a single firm are represented by solid lines.
8. In the long-run, at what price will be willing to invest in this market?
(a) 40.
(b) 10.
(c) 45.
(d) None of the above.
SECTION II: SHORT ANSWER (48 points)
1. (24 points) You own a business making solid gold nose rings. The market for nose rings in
Davis is perfectly competitive. The Total Cost functions of an individual firm is given by:
C(q) = 250 + 10q2
(a) How many nose rings would you produce if the market price is $140/ring. Show your work.
(b) If the market remains perfectly competitive what will be the price of nose-rings in the long-run? Show your work.
(c) If the Davis city council has limited the number of nose ring sellers to be no more than 20. Assume that this regulation is binding so that there are exactly 20 firms. What is the Davis market supply curve for nose-rings? Show your work.
(d) Suppose that the market demand function is D(p) = 240 - p. What will be the equi- librium price given that 20 firms supply nose-rings in this market? Show your work. (hint: use supply curve from the previous answer)
2. (24 points) Tesla motors manufacturing utilizes a new robotic suit called the ElonBot. When workers wear the ElonBot, they become smarter and stronger. Each ElonBot makes a human worker twice as productive. In fact in an auto factory, one worker-hour with one ElonBot can produce one car. Normally it takes Two worker-hours with no ElonBots to produce one car. However, the Bots only work in combination with a worker, they add no production on their own. General Motors is leasing the ElonBots. Assume that they can hire fractions of workers and rent fractions of ElonBots.
(a) Draw a graph with ElonBots on the vertical axis (think Capital) and Labor on the hor- izontal axis illustrating three Isoquants for producing one, two, and three cars. Assume that you can rent fractions of an hour worth of ElonBots.
(b) Elon Musk is renting his bots for $20 an hour and the factory workers are paid $40 an hour. Assuming that GM always uses a cost-minimizing set of inputs and has no other assembly costs (other than bots and labor), what are its average cost of assembly per-car? Explain.
(c) Assume GM is producing 2 cars an hour but has booming sales and needs to increase its output. It does not have time to rent any more ElonBots. What is its (short-run) marginal cost of producing (greater than 2 cars)? Explain.