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ECON 634: Practice Problems for Exam #2 (Key at bottom of document)

Q1 Suppose at the current output level, Average Product = 25 and Marginal Product = 35. If so,
A Average Product is rising as output increases
B Total Product is falling as output increases
C Total Product is at its maximum value
D Average Product is falling as output increases

Q2 The firms short-run production function can be approximated as Q = 150L 5L
2
where L is hours
of labor hired per day, the wage rate is $20 per hour, and the firms output sells for $5 per unit.
the optimal amount of Labor to hire is:
A 8.7 C. 14.6
B 11.3 D. 12.9

Q3 The firms only variable input in the short run is labor. At its current usage of labor the marginal
product of labor = 12. The firm can sell its product for $5 per unit and labor costs the firm $70
per unit of labor. The firms current usage of labor ______.
A is optimal
B is too high, the firm should reduce its labor usage
C is too low, the firm should increase its labor usage
D may be either too high or too low, one cannot determine that without more information

SCENARIO 1
A firms production function is estimated as Q = 200K + 50L 0.1K
2
0.2L
2
where K is capital
and L is labor.

Q4 (Using Scenario 1) If the firm is using 100 units of K and 25 units of L, the price of capital is $60
per unit, and the price of labor is $20 per unit, then the firm:
A should increase its usage of capital and decrease its usage of labor
B should increase its usage of labor and decrease its usage of capital
C is optimally using capital and labor
D should increase both capital and labor, but increase labor more

Q5 The firms production function is Q = 10K
1/2
L
1/2
; the price of capital is $20 per unit; the price of
labor is $10 per unit; and the firm has a budget of $500. In order to maximize output given the
$500 budget the firm should use
A 40 units of L and 5 units of K
B 20 units of L and 10 units of K
C 30 units of L and 10 units of K
D 25 units of L and 12.5 units of K

Q6 At K=3 and L=2 the firms output is Q = 40 while at K=6 and L=4 the firms output is Q = 70. Over
this range of changing input levels the firm exhibits _____
A decreasing returns to scale
B increasing returns to scale
C constant returns to scale

Q7 A firm in a perfectly competitive market where the current market price is $6 per unit is
producing at an output with average total cost of $8 per unit, an average variable cost of $5 per
unit, and marginal cost = $6. If so, the firm should:
A shut-down since it will be losing money
B maintain current output level since it will be earning a positive economic profit
C maintain current output level even though it will have losses rather than a profit
D increase its output level

Q8 A Natural Monopoly refers to a monopoly outcome arising due to
A a single firm having control over a key natural resource
B government granting a single firm the right to produce the product
C legal protection from competition because the firm has a patent or copyright
D the production technology having very large economies of scale compared to the demand in the
market

Q9 A firms production function is Q = 50K
0.5
L
0.2
, so a 10% increase in L with no change in K will
cause _____
A a 5% rise in K
B no change in Q since L was not also increased
C a 2% rise in Q
D a 5% rise in Q

Q10 A firms Total Variable Cost function is TVC = 100Q 4Q
2
+ Q
3
. If so, then Marginal Cost is
minimized at Q =
A 0.33 C 2.75
B 1.33 D 3.33

Q11 If the firms short-run total cost is increasing at a _____ rate, then its short run total product is
increasing at a _____rate?
A increasing, increasing C decreasing, decreasing
B decreasing, increasing D increasing, decreasing


Q12 If the Potts Corporation has monthly fixed costs of $10,000, constant average variable costs of
$1, and can sells its product for $5 per unit, then its monthly break-even sales volume is ____
units.
A 1000 C 4250
B 2500 D 5000



Q13 Suppose the widget industry is perfectly competitive and that the lowest point on the long-run
average cost curve for each of the identical widget producers was at $10 and an output of 100
units. The market demand curve for widgets is QD = 40,000 2,000P. How many firms will be
producing do-dadds at the long-run equilibrium outcome?
A 200 C 150
B 350 D 600

Q14 Suppose a monopolist faces a demand curve of P=100-4Q and that MC is a constant $2. The
profit-maximizing monopoly output is.
A 12.25
B 15
C 17.5
D 24.5

Q15 The monopoly price in the above question would be ____, and the perfectly competitive price
would be ____.
A 12.25, 24.50
B 48, 4
C 51, 4
D 4, 51.50













Answer key: 1.) A, 2.) C, 3.) B, 4.) A, 5.) D, 6.) A, 7.) C, 8.) D, 9.) C, 10.) B, 11) D, 12) B, 13) A, 14) A, 15) C