Question

56. Mr. Max is about to purchase 4 units of good A and 6 units of good B. The price of both A and B is $2. Mr. Max has only $20 to spend. If the marginal utility of the fourth unit of A is 12 and the marginal utility of the sixth unit of B is 12, then:

a. he should not buy anything.

b. he should buy more of A and less of B.

c. he should buy less of A and more of B.

d. he should buy A and B in the quantities indicated.

e. he should buy more of A and little more than that of B.

57. If an oligopolist cuts the prices of its products,

a. customers will switch to a rival firm.

b. customers will remain unchanged in number.

c. customers will switch from rival firms to buy from them.

d. rival firms will not react.

58. Cy recently went into the business of producing and selling cardboard boxes. For this business, which of the following is most likely to be a fixed cost?

a. fire insurance

b. labor costs

c. paper costs

d. adhesive costs e. b, c, and d are equally likely to be fixed costs

59. At 100 units of output, total cost is $22,000 and total variable cost is $14,000. At 100 units of output, what is the value of average total cost, average variable cost, and average fixed cost, respectively?

a. $22; $14; $8

b. $220; $140; $80

c. $740; $340; $400

d. $340; $740; $60

e. $400; $340: There is not enough information provided to determine the average fixed cost

Answer 1

56.Ans: d)  he should buy A and B in the quantities indicated.

Explanation:

Utility maximization conditions are;

• Entire given money income must be spend on both the goods.
• MU of good X / Price of good X = MU of good Y / Price of good Y

Budget constraint;

Y = Price of good X * Quantity of good X + Price of good Y * Quantity of good Y

In the above case ,

MU per dollar for both the goods = 12 / 2 = 6

$20 = $2  * 4 + $2 * 6

57.Ans: c) customers will switch from rival firms to buy from them.

58.Ans: a) fire insurance

Explanation:

Fixed cost are available even at zero level of output and remain constant throughout the subsequent level of production.

Variable costs vary with the level of production.

59.Ans: b) $220; $140; $80

Explanation:

Total units of output = 100

Total cost =  $22,000

Total variable cost =  $14,000

Total Fixed cost = Total cost - Total variable cost =  $22,000 -  $14,000 =  $8,000

At 100 units of output;

Average total cost = Total cost / Quantity = $22,000 / 100 = $220

Average variable cost = Total variable cost / Quantity = $14,000 / 100 = $140

Average fixed cost = Total fixed cost / Quantity =  $8,000 / 100 = $80