Econ 101 Section 3– Principles of Microeconomics

Instructor: C. Burkart

Exam #8  [40 points total]

October 19, 2005

 

Questions 1 to 5 are worth 2 points each.  Clearly circle the one best answer to each question.  You will not receive credit if your answer choice is unclear or ambiguous.

 

1.      How long is the long run?

    1. Long enough for diminishing returns to set in.
    2. Long enough for the firm to make a profit.
    3. Long enough that all costs can become variable.
    4. Long enough that all costs can become fixed.

 

2.      In what way does the spreading effect change average total cost as output rises?

    1. The spreading effect reduces ATC, because a firm's total fixed cost will decline as more is produced.

b.      The spreading effect reduces ATC, because a given fixed cost can be spread across more units of output.

    1. The spreading effect increases ATC, because it reflects the fact that workers are spread out across more tasks when output rises.
    2. The spreading effect increases ATC, because it reflects the fact that firms are less efficient when they operate on a larger scale.

 

3.      Daisy incurs $7,200 per month in fixed costs operating her floral shop. She pays her employees $9.00 per hour and has three assistants each working 120 hours per month. Her other variable costs are $800 per month. What are Daisy's total variable costs and total costs each month?

a.      Total variable costs are $4,040; total costs are $11,240.

    1. Total variable costs are $800; total costs are $8,000.
    2. Total variable costs are $3,240; total costs are $11,240.
    3. Total variable costs are $800; total costs are $11,240.

 

4.      For cities that provide snow removal, which of the following is a fixed cost?

    1. Purchase of salt or other substances used to melt snow

b.      Purchase of snow removal equipment

    1. Wages for snow plow drivers
    2. Gasoline for snow plows

 

5.      A firm producing in the short run uses two inputs, capital and labor. The quantity of capital is fixed and generates a monthly cost of $6,000. The quantity of labor can be varied, and the wage rate per hour of labor is $20. If 400 hours of labor are hired for the month, and 140 units of output are produced, what is the firm's average total cost for the month?

    1. $43.00
    2. $2.80
    3. $123.00
    4. $100.00

 

 

Quantity

 

 

 

 

of cars

TC

VC

ATC

MC

0

$500,000

$0

 

 

1

$540,000

$40,000

$540,000

$40,000

2

$560,000

$60,000

$280,000

$20,000

3

$570,000

$70,000

$190,000

$10,000

4

$590,000

$90,000

$147,500

$20,000

5

$620,000

$120,000

$124,000

$30,000

6

$660,000

$160,000

$110,000

$40,000

7

$720,000

$220,000

$102,857

$60,000

8

$800,000

$300,000

$100,000

$80,000

9

$920,000

$420,000

$102,222

$120,000

Question 6 [10 pts.] The table to the right shows a car manufacturer’s total cost of producing cars.

 

What is the manufacturer’s fixed cost?     $500,000       

 

For each level of output, calculate the variable cost (VC), average total cost (ATC) and the marginal cost (MC), entering these in the table.  For MC, enter the “in-between” numbers in the next box.  The first several output levels have been done for you.

 

What is the minimum cost output? 8 cars

 

 

 

 

 

Quantity

Output of

 

 

 

 

of labor

footballs

AFC

AVC

ATC

MC

0

0

 

 

 

 

1

300

$6.67

$3.33

$10.00

$3.33

2

800

$2.50

$2.50

$5.00

$2.00

3

1,200

$1.67

$2.50

$4.17

$2.50

4

1,400

$1.43

$2.86

$4.29

$5.00

5

1,500

$1.33

$3.33

$4.67

$10.00

Question 7 [10 pts.] Mark and Jeff operate a small company that produces souvenir footballs.  Their fixed

cost is $2,000 per month and they can hire workers for $1,000 a month.  Their monthly production is given in the table on the right.

 

For each quantity of labor, calculate average fixed cost (AFC), average variable cost (AVC), average total cost (ATC) and marginal cost (MC).  For MC, enter the “in-between” numbers in the next box.  Enter these in the blanks provided. 

 

At what level of output is Mark and Jeff’s total cost minimized?  1,200 footballs

 

NOTE: be careful in calculating the marginal cost of the last football produced at each output cutoff, and recall that MC =

 

 

 

 

Question 8 [10 pts.] The table below shows three possible combinations of fixed cost and average variable cost.

Choice

Fixed cost

Average variable cost

ATC of Q=12,000

ATC of Q=22,000

ATC of Q=30,000

1

$8,000

$1.00

$1.67

$1.36

$1.27

2

$12,000

$0.75

$1.75

$1.30

$1.15

3

$24,000

$0.25

$2.25

$1.34

$1.05

 

For each of the three choices, calculate the ATC of producing 12,000, 22,000, and 20,000 units and enter them in the spaces provided.  For each output quantity, which choice results in the lowest ATC?

12,000 units: Choice  1

22,000 units: Choice  2

30,000 units: Choice  3

 

Suppose that the firm historically has produced 12,000 units but experiences a sharp, permanent increase in demand that leads it to produce 22,000 units. 

 

What will its ATC be in the short run?     $1.36     What will its ATC be in the long run?    $1.30