Question

1. Suppose the demand for good X shifts left(inward). Which of the following statements could TRUE?

I. The price of good X increased.
II. The price of a substitute good decreased.
III. The price of a complement good increased.

(Chapter 5)

I, II and III

I

II

II and III

2. If marginal product is below average product:

The total product must fall

Total revenue will fall

The average product will fall

Average variable cost will fall

3. The production function given by Q = 10(0.7K^2.2 + 0.3L^2.1)^0.45 has _____ returns to scale.

increasing

decreasing

constant

instant

4. A firm is producing 50 units of output at a total cost of $2,000, with a per-unit variable cost of $20. What is the firm's average fixed cost?

20

12

28

4

5. Average variable cost:

does not change with the level of the firm's output.

is associated with the firm's variable inputs.

captures the wear and tear of using capital in production.

always decreases as the firm increase output

Answer 1

Ans 1. Option 4

If price of good X' s substitute decreased, then people will shift their consumption from X to the other good decreasing X's demand and if price of good X's complement increases then people will require less of good X, decreasing its demand and shifting demand curve leftwards.

Ans 2. Option c

Marginal product is additional production by additional input and average product is production per unit of input. So, decrease in marginal product will lead to decrease in average product.

Ans 3. Option b

Production function, Q = 10(0.7K^2.2 + 0.3L^2.1)^0.45

Suppose both K and L increases ny factor t, then new output,

Q' = 10[0.7(tK)^2.2 + 0.3(tL)^2.1]^0.45 = t^0.945 * Q

Thus, output increases by less than t, hence, decreasing returns to scale.

Ans 4. Option a

Total variable cost = 20*50 = $1000

Total fixed cost = Total cost - Total variable cost = 2000 - 1000 = $1000

=> Average fixed cost = 1000/50 = $20 per unit

Ans 5. Option b

The cost per unit of variable input is called average variable cost.