Turgut Ozal University Department of Economics ECO 152 Spring 2014 Assist. Prof. Dr. Umut UNAL PROBLEM SET #5

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1 Turgut Ozal University Department of Economics ECO 152 Spring 2014 Assist. Prof. Dr. Umut UNAL PART A - Definitions 1) Define these terms: Perfect competition Homogeneous products Total revenue Total cost Short run Long run Marginal product Law of diminishing returns PROBLEM SET #5 Part B Multiple Choices 2. Jerry and George have the same cost structures in housing painting except that Jerry uses his garage as the office and George rents an office for $20,000/year. Jerry can rent his garage space to anyone with rental payment $20,000/year if he quits his painting business. Both Jerry and George could work for Cornell and earn salaries of $40,000 if they quit house painting and went and got a real job. Assume that the house painting business is a perfectly competitive industry, then in the short-run, a. Jerry earns more accounting profit and economic profit that George does. b. Jerry earns more economic profit than George does. However, Jerry earns the same accounting profit as George does. c. Jerry earns the same accounting profit and economic profit as George does. d. Jerry earns more accounting profit than George does. However, they earn the same amount of economic profit.

2 3. The range of output levels over which a firm s average variable cost is decreasing is the same as the range of output levels over which its a. marginal cost is increasing b. fixed cost is increasing c. average product is increasing d. average fixed cost is increasing 4. Dan runs a house painting business in a perfectly competitive house painting market. The table shows his variable cost structure. When he works as a house painter, Dan gives up a job salary of $10,000/year. He uses his garage as part of the house painting business. This garage could be rented to another user for $6,000/year. If the market price to paint a house is $280/house, how many houses should Dan paint per year to maximize his profit and what is the value of his total annual economic profit? Houses Painted TVC MC , , , , , , a. Houses painted=300, economic profit=$36,000/year. b. Houses painted=300, economic profit=$26,000/year. c. Houses painted=300, economic profit=$20,000/year.

3 d. Houses painted=400, economic profit=$20,000/year. 5. To make the best predictions about the decision of a firm, we should take into account firm s a. accounting costs b. explicit costs c. opportunity costs d. implicit costs 6. The short run is a time frame in which a. the quantity of at least one resource is fixed and the quantities of other resources can be varied b. the quantities of all resources can be varied c. there are entries and exits to industries d. all costs are explicit 7. In the long run a firm can vary a. the amount of capital used but not the amount of labor b. the amount of capital is not used but not the amount of labor c. both its labor and its capital d. neither its labor nor its capital 8. When the total product curve is drawn in a figure that measures employment along the horizontal axis, it is a graph that shows the a. minimum cost of producing a given amount of output using different techniques b. maximum profit attainable for each unit of output sold per unit of labor employed c. maximum output attainable for each quantity of labor employed d. minimum output attainable for each quantity of labor employed 9. The steeper the slope of the total product curve, the a. larger is the marginal product of labor b. smaller is the marginal product of labor c. higher is the level of the total cost curve

4 d. more efficient is the technology employed 10. The law of diminishing returns implies that, with the use of capital fixed, as the use of labor rises, a. total product will fall eventually b. the marginal product of labor will fall eventually c. the total product of labor will fall below the marginal product of labor d. the production process will become technologically inefficient eventually 11. If a firm s marginal product of labor is less than its average product of labor, then an increase in the quantity of labor definitely will a. decrease total product b. decrease average product of labor c. increase marginal product of labor d. not change average product of labor 12. The slope of a firm s isocost line is equal to the ratio of a. the marginal products of its inputs b. the input prices c. the rate at which one input can be substituted for another in production d. None of the above Part C Problems 13. The following table gives total output or total product as a function of labor units used: Labor Total Output

5 5 15 a. Define diminishing returns. b. Does the table indicate a situation of diminishing returns? Explain your answer. 14. A female student who lives on the fourth floor of Bates Hall is assigned to a new room on the seventh floor during her junior year. She has 11 heavy boxes of books and stuff to move. Discuss the alternative combinations of capital and labor that might be used to make the move. How would your answer differ if the move were to a new dorm 3 miles across campus, and to a new college 400 miles away? 15. Since the end of World War II, manufacturing firms in the United States and in Europe have been moving farther and farther outside of central cities. At the same time, firms in finance, insurance, and other parts of the service sector have been locating near the downtown areas in tall buildings. One major reason seems to be that manufacturing firms find it difficult to substitute capital for land, while service sector firms that use office space do not. a. What kinds of buildings represent substitution of capital for land? b. Why do you think that manufacturing firms might find it difficult to substitute capital for land? c. Why is it relatively easier for a law firm or an insurance company to substitute capital for land? d. Why is the demand for land likely to be very high near the center of a city? e. One of the reasons for substituting capital for land near the center of a city is that land is more expensive near the center. What is true about the relative supply of land near the center of a city? (Hint: What is the formula for the area of a circle?)

6 16. A firm can use three different production technologies, with capital and labor requirements at each level of output as follows: Technology Technology Technology Daily Output K L K L K L a. Suppose the firm is operating in a high-wage country, where capital cost is $100 per unit per day and labor cost is $80 per worker per day. For each level of output, which technology is the cheapest? b. Now suppose the firm is operating a low-wage country, where capital cost is $100 per unit per day but labor cost is only $40 per unit per day. For each level of output, which technology is cheapest? c. Suppose the firm moves from a high-wage to a low-wage country but that its level of output remains constant at 200 units per day. How will its total employment change? d. Draw the isoquants for given output levels 17) During the early phases of industrialization, the number of persons engaged in agriculture usually drops sharply, even as agricultural output is growing. Given what you know about production technology and production functions, can you explain this seeming inconsistency?

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