Question

13 A firm has a production function for steel (x) and aluminum (z) that is q = 2x + z. If the price of steel is $50 and the price of aluminum is $20, then:

A. the firm is indifferent between using aluminum and steel.

B. the firm should only use aluminum.

C. the firm should only use steel.

D. the firm should use 2 steel for every aluminum.

15 In the short run, a firm 's output level is 10 units. Its total cost is $4000 and its average fixed cost is $100. What is this firm's average variable cost (AVC) of producing 10 units?

A. AVC = $275

B. AVC = $300

C. AVC = $400

D. AVC = $250

17 Economies of scale in autos exists because of

A. increased use of automation as a firm increases size.

B. reduced input costs from volume purchases as a firm increases size.

C. greater demand for autos as costs fall.

D. both A and B.

18 A small business owner earns $120,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $75,000 annually. The owner's accounting profit is ________ and the economic profit is ________.

A. $80,000; $5,000

B. $20,000; -$5,000

C. $25,000; -$5,000

D. $45,000; -$5,000

Answer 1

13. B. the firm should only use aluminum.
(MRTS = MPx/MPz = 2/1 = 2 and Px/Pz = 50/20 = 2.5
So, MRTS < price ratio. Thus, only z should be used.)

15. B. AVC = $300
(ATC = TC/Q = 4000/10 = 400
So, AVC = ATC - AFC = 400 - 100 = 300)

17. D. both A and B.
(Increased cost with increase in size produces economies of scale.)

18. A. $80,000; $5,000
(Accounting profit = 120,000 - 40,000 = 80,000
Economic profit = 80,000 - 75,000.= 5,000)