Question

1. Assume that if a firm uses one more unit of one input it will have diminishing marginal returns. If the firm uses one more unit of that one input its total output will decrease. (True or False)

2. When a firm produces 200 units of output its average fixed cost is $200. if its average total cost at this output is $500, what is the firm’s average variable cost at this output?

$700

$300

$3.00

None of the answers shown is correct.

More information is needed to answer this question.

3. identify the correct observations of cost curves in the following list. There is more than one answer to this question. You must mark all of the correct answers to receive full credit.

The marginal cost curve passes through the minimum points of the average variable cost and average total cost curves.

Average total cost continually decreases as output increases.

When marginal cost is below average total cost, average total cost decreases.

The average variable cost curve lies below the average total cost curve.

Total variable cost continually increases as output increases.

4. Oil is used in the production of gasoline. Recently, Russia and Saudi Arabia have substantially increased oil production causing the cost of oil to decrease substantially. Simultaneously, due to the Covid-19 pandemic many people are working from home. Based on this information, what would you expect to happen to the price of gasoline?

It will remain the same.

It will increase.

It will decrease.

More information is needed to answer this question.

5. Suppose that the cost to hire a worker for one more hour is $15. The addition to output from hiring the worker for one more hour would be 5 units. The output produced can be sold for $4/unit. Which of the following statements is correct?

The firm should hire the worker for one more hour because MRP > wage rate.

The firm should hire the worker for one more hour because the total output would increase.

The firm should hire the worker for one more hour because the marginal product is positive.

The firm should not hire the worker for one more hour because MRP < wage rate.

The firm should hire the worker for one more hour because it has increasing marginal returns.

Answer 1

Q1. True
Diminishing returns is the decline in marginal output with the increase in input but total output would increase at a decreasing return

Q2. Option 3
AVC = ATC-AFC = 500-200 = 300

Q3. Option 1,3 and 4
MC cuts AVC and ATC at its minimum, MC decreases with the decrease in AC
(Total variable cost would increase or decrease with the output, average total cost decreases initially reaches a minimum and then starts to increase thereafter)

Q4. Option 3
As the demand decreases the price too decreases

Q5. Option 1
MRP = 5*4 = 20
Wage = 15
So, as MRP is greater than wage, the firm must hire one more worker