Question

Multiple Choice:

1. Suppose the firm's production process is given by Q = 2K^(1/2)*​L. If K=16 and L=8 what is the marginal productivity of capital?

a) 1

b) 2

c) 5

d) 6

e) 8

2. Which of the following is not an assumption we make about perfectly competitive markets?

a) Firms are price-takers

b) Firms sell identical products

c) Firms earn positive profit in the short-run but zero profit in the long-run

d) Firms can freely enter or exit the market in the long-run

e) All of the above are valid assumptions

True/False - If you label a statement as false briefly explain why it is false (if you answer true you do not need to explain).

1. We are studying the competitive market for beer, a firm faces the cost curve C(y) = 3y^2 + y + 27. If the market price is 5 the firm will enter the market.

2. A firm will produce in the short-run as long as they can cover their average costs; in the short-run a firm's supply curve is equal to their marginal cost curve.

Answer 1

2. In a perfectly competitive market, firms can earn either positive pr negative profit in the short ru but in the long run they earn zero economic profit. Hence the answer will be:

c) Firms earn positive profit in the short-run but zero profit in the long-run

2. Firm will produce in the short run as long as it can cover variable cost of production and firm's supply curve is that portion of the marginal cost curve which lies above the minimum of average variable cost curve. Hence the statement is false.