Econ2Z03 Sample Exam Questions_Ch5,6,7
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) What describes the graphical relationship between average product and marginal product?
A) Average product cuts marginal product from below, at the maximum point of marginal product.
B) Marginal product cuts average product from below, at the maximum point of average product.
C) Average and marginal product do not intersect.
D) Average product cuts marginal product from above, at the maximum point of marginal product.
E) Marginal product cuts average product from above, at the maximum point of average product.
2) Consider the following statements when answering this question;
I. Suppose a semiconductor chip factory uses a technology where the average product of labor is constant for all employment levels. This technology obeys the law of diminishing returns.
II. Suppose a semiconductor chip factory uses a technology where the marginal product of labor rises, then is constant and finally falls as employment increases. This technology obeys the law of diminishing returns.
A) Both I and II are true. B) I is true, and II is false.
C) Both I and II are false. D) I is false, and II is true.
3) A manufacturing firm uses only capital (K) and labour (L) to produce its product, using a production function of Q = 10KL. It pays its workers w = $15 per hour and has a rental cost of capital of r = $5 per hour. If the firm wants to produce 480 units of output, the optimal bundle of inputs is:
A) (4, 12). B) (3, 16). C) (12, 4) D) (6, 8).
4) The law of diminishing returns assumes that
A) there is at least one fixed input.
B) all inputs are held constant.
C) additional inputs are added in smaller and smaller increments.
D) all inputs are changed by the same percentage.
5) Use the following two statements to answer this question:
I. The marginal product of labor is the slope of the line from the origin to the total product curve at that level of labor usage.
II The average product of labor is the slope of the line that is tangent to the total product curve at that level of labor usage.
A) I is true, and II is false. B) I is false, and II is true.
C) Both I and II are true. D) Both Iand II are false.
Figure 6.1
6) Refer to Figure 6.1. Which of the following statements is false?
A) At point E the marginal product of labor is less than the average product of labor.
B) At point E the average product of labor is negative.
C) At point E the marginal product of labor is negative.
D) At point E the average product of labor is decreasing.
E) At point E the marginal product of labor is decreasing.
7) If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the
A) marginal product of capital.
B) average rate at which the firm can replace capital with labor without changing the output rate.
C) marginal product of labor.
D) rate at which the firm can replace capital with labor without changing the output rate.
8) An examination of the production isoquants in the diagram below reveals that:
A) capital and labor must be used in fixed proportions.
B) capital and labor are perfectly substitutable.
C) the MRTS is constant along the isoquant.
D) Both B and C are correct.
E) none of the above
9) The diagram below shows an isoquant for the production of wheat.
Which point has the highest marginal productivity of labor?
A) Point A B) Point B C) Point C D) Point D
10) Which of the following examples represents a fixed-proportion production system with capital and labor inputs?
A) Airplanes and pilots B) Horse-drawn carriages and carriage drivers
C) Clerical staff and computers D) all of the above
Figure 6.2
11) Refer to Figure 6.2. The situation pictured is one of
A) increasing returns to scale, because doubling inputs results in more than double the amount of output.
B) constant returns to scale, because the line through the origin is linear.
C) increasing returns to scale, because the isoquants are convex.
D) decreasing returns to scale, because the isoquants are convex.
E) decreasing returns to scale, because doubling inputs results in less than double the amount of output.
12) A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function C = L0.5M0.75. This production function exhibits
A) constant returns to scale for all output levels B) increasing returns to scale for all output levels
C) no clear pattern of returns to scale D) decreasing returns to scale for all output levels
13) A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function Q = L0.5 + M0.75. This production function exhibits
A) decreasing returns to scale for all output levels. B) constant returns to scale for all output levels.
C) increasing returns to scale for all output levels. D) no clear pattern of returns to scale.
14) In 1985,Alice paid $20,000 for an option to purchase ten acres of land. By paying the $20,000, she bought the right to buy the land for $100,000 in 1992. When she acquired the option in 1985, the land was worth $120,000. In 1992, it is worth $110,000. Should Alice exercise the option and pay $100,000 for the land?
A) It depends on what the rate of inflation was between 1985 and 1992.
B) Yes.
C) No.
D) It depends on what the rate of interest was.
15) The difference between the economic and accounting costs of a firm are
A) the corporate taxes on profits .
B) the sunk costs incurred by the firm.
C) the accountant's fees.
D) the explicit costs of the firm.
E) the opportunity costs of the factors of production that the firm owns.
16) Jim left his previous job as a sales manager and started his own sales consulting business. He previously earned $70,000 per year, but he now pays himself $25,000 per year while he is building the new business. What is the economic cost of the time he contributes to the new business?
A) $25,000 per year B) zero C) $45,000 per year D) $70,000 per year
17) In a short-run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus,
A) marginal cost is below average fixed cost. B) average fixed cost is constant.
C) marginal cost is above average variable cost. D) marginal cost is below average variable cost.
18) A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm
A) could reduce the cost of producing its current output level by employing more capital and less labor.
B) is producing its current output level at the minimum cost.
C) could reduce the cost of producing its current output level by employing more labor and less capital.
D) could increase its output at no extra cost by employing more capital and less labor.
E) Both B and D are true.
19) If two different fuel sources (e.g., coal and natural gas) are perfect substitutes in the long-run production of energy. How will a profit maximizing firm choose between these two inputs?
A) The firm will only use the input with higher cost
B) The firm cannot achieve a profit maximizing level of output under these circumstances
C) The firm will use equal amounts of the two inputs, even if one of the inputs has a lower cost
D) The firm will only use the input with lower cost
20) At the current level of output, long-run marginal cost is $50 and long-run average cost is $75. This implies that:
A) there are neither economies nor diseconomies of scale.
B) there are diseconomies of scale.
C) the cost-output elasticity is greater than one.
D) there are economies of scale.
21) The equation below gives the degree of economies of scope (SC):
SC = (C(Q1) + C(Q2) - C(Q1,Q2)) / C(Q1,Q2)
where C(Q1) is the cost of producing output Q1, C(Q2) is the cost of producing output Q2, and C(Q1,Q2) is the joint cost of producing both outputs. If SC is negative:
A) there are neither economies nor diseconomies of scope.
B) there are economies of scope.
C) there are diseconomies of scope.
D) there are both economies and diseconomies of scope.
Figure 5.1.1
22) Refer to Figure 5.1.1 above. Which of the two jobs is more risky?
A) Job 1 B) Job 2
C) Both are equally risky. D) Neither job is risky.
The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.
Table 5.3
|
|
Outcome 1
|
Outcome 2
|
|
Job Choice
|
Prob.
|
Income
|
Prob.
|
Income
|
|
Work for HMO
|
0.95
|
$100,000
|
0.05
|
$60,000
|
|
Own practice
|
0.2
|
$250,000
|
0.8
|
$30,000
|
|
Research
|
0.1
|
$500,000
|
0.9
|
$50,000
|
23) Refer to Table 5.3. The expected returns are highest for the physician who:
A) opens her own practice.
B) does research.
C) either opens her own practice or does research.
D) either works for an HMO or does research.
E) works for an HMO.
24) The expected value is a measure of:
A) uncertainty. B) central tendency. C) variability. D) risk.
25) Blanca would prefer a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000. Based on this information:
A) we can infer that Blanca neutral. B) we can infer that Blanca is risk loving.
C) we can infer that Blanca is risk averse. D) we cannot infer Blanca's risk preferences.
Figure 5.2.2
26) When facing a 50% chance of receiving $50 and a 50% chance of receiving $100, the individual pictured in Figure 5.2.2:
A) would want to be paid a risk premium of 10 utils to give up the opportunity of facing the two outcomes.
B) would pay a risk premium of 10 utils to avoid facing the two outcomes.
C) would want to be paid a risk premium of $7.50 to avoid facing the two outcomes.
D) would pay a risk premium of $7.50 to avoid facing the two outcomes.
E) has a risk premium of 10 utils.
Scenario 5.8:
Risk-neutral Icarus Airlines must commit now to leasing 1, 2, or 3 new airplanes. It knows with certainty that on the basis of business travel alone, it will need at least 1 airplane. The marketing division says that there is a 50% chance that tourism will be big enough for a second plane only. Otherwise, tourism will be big enough for a third plane. This, plus revenue information, yields the following table:
|
Planes
|
Tourism Revenue
|
Expected
|
|
Leased 2
3
|
Light Heavy
$90 million $30 million
$10 million $140 million
|
Profit $60 million $75 million
|
27) Refer to Scenario 5.8. Given that the two outcomes are equally likely, Icarus Airlines' expected profit under complete information would be:
A) $120 million.
B) $40 million.
C) $90 million.
D) $125 million.
E) $115 million.
28) We may not be able to fully remove risk by diversification if:
A) buying stock on margin is not allowed by financial regulators.
B) a completely risk-free asset does not exist.
C) the asset returns in our portfolio are positively correlated.
D) none of the above
29) Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). The expansion path for this business will:
A) not be defined.
B) be a vertical line.
C) follow the 45-degree line from the origin.
D) increase at a decreasing rate because we will substitute capital for labor as the business grow.
30) Davy Metal Company produces brass fittings.
Q = 500L0.6K0.8,
where Q = annual output measured in pounds, L = labor measured in person hours, K = capital measured in machine hours. The marginal products of labor and capital are:
MPL = 300L-0.4K0.8 MP K = 400L0.6K-0.2
Davy's employees are relatively highly skilled and earn $15 per hour. The firm estimates a rental charge of $50 per hour on capital. Determine the firm's optimal capital-labor ratio, given the information above.
A) 2.5 B) 0.3 C) 3.3 D) 0.4