Section Problems 9

Econ 401: Intermediate Microeconomic Theory Winter 2009 Section Problems Topic 9: Cost Functions These problems will be solved in your section on Monday, February 9, or Tuesday, February 10. Part 1: Regular Questions 1. Question 18 in Perlo , Microeconomics, Chapter 7. 2. Question 21 in Perlo , Microeconomics, Chapter 7. 3. Question 40 in Perlo , Microeconomics, Chapter 7. 4. Question 31 in Perlo , Microeconomics, Chapter 7. 5. Suppose a rm?s production function is: q = L0:5 + K0:5. Assume that the price of labor is w = 1 and the price of capital is r = 1. Determine the long run total cost and marginal cost functions. Now suppose that wage rises to w = 2. Determine again the long run total cost and marginal cost functions. 6. Question 27 in Perlo , Microeconomics, Chapter 7. 7. Question 28 in Perlo , Microeconomics, Chapter 7. Part 2: Multiple Choice Questions 8. Fixed costs are (a) a production expense that does not vary with output. (b) a production expense that changes with the quantity of output produced. (c) equal to total cost divided by the units of output produced. (d) the amount by which a rm?s cost changes if the rm produces one more unit of output. 1 9. Variable costs are (a) a production expense that does not vary with output. (b) a production expense that changes with the quantity of output produced. (c) equal to total cost divided by the units of output produced. (d) the amount by which a rm?s cost changes if the rm produces one more unit of output. 10. Which of the following will cause the marginal cost curve of making cigarettes to shift? (a) A $5 million penalty charged to each cigarette maker. (b) A $1 per pack tax on cigarettes. (c) A $1 million advertising campaign by the American Cancer Soci- ety. (d) All of the above. 11. Which of the following will cause the average cost curve of making cigarettes to shift? (a) A $5 million penalty charged to each cigarette maker. (b) A $1 per pack tax on cigarettes. (c) A $1 an hour wage increase paid to all cigarette production work- ers. (d) All of the above. 12. When the isocost line is tangent to the isoquant, then (a) the marginal rate of technical substitution equals the ratio of wage and the price of capital. (b) the rm is producing that level of output at minimum cost. (c) the last dollar spent on capital yields as much extra output as the last dollar spent on labor. (d) All of the above. 2 13. Suppose that each worker must use only one shovel to dig a trench, and shovels are useless by themselves. In the long run, the rm?s cost function is (a) C = (w=r) q: (b) C = (w + r)=q: (c) C = (w + r): (d) C = (w + r) q: 14. If a rm currently produces 8 units of output, the marginal rate of technical substitution, dK=dL, is -2, and the ratio of the wage and the price of capital, w=r, is 1, then (a) the rm is minimizing the cost of producing 8 units of output. (b) the rm could reduce its cost of producing 8 units of output by using less labor and more capital. (c) the rm could reduce its cost of producing 8 units of output by using more labor and less capital. (d) we can conclude that the rm should produce more than 8 units of output. 15. If labor and capital are perfect substitutes, the production function is given by: q = 2(L + K), and prices are: w = 2 and r = 1, then the rm?s long run cost function is given by: (a) C(q) = 6q. (b) C(q) = q. (c) C(q) = 0:5q. (d) C(q) = 4q. 16. Long-run average cost is never greater than short-run average cost be- cause in the long run (a) capital costs equal zero. (b) the rm can move to the lowest possible short-run cost curve. (c) wages always increase over time. (d) wages always decrease over time. 3