NAME:______
You may not attach additional paper to this exam. You may use the back page for additional space. If something is unclear, please do not hesitate to ask for clarification.
1. A local cabinet maker can employ carpenters, and a fixed amount of capital, to assist him in building cabinets for kitchens and bathrooms. The table below gives some information on his monthly short run production.
# of carpenters / Total Product(# of cabinets per month) / Marginal Product / Average Product
0 / 0
1 / 8
2 / 18
3 / 8
4 / 32
5 / 7.2
6 / 38
7 / -2
a. First, complete the table. (8 points)
b. At what quantity of labor is the point of diminishing marginal returns? (2 points all or nothing)
c. Define the principle of diminishing marginal returns to production. (7 points)
d. Why is average product rising between 1 and 2 units of labor, but falling between 6 and 7 units of labor? Explain. (7 points)
e. Ignoring for now the cost of employing carpenters, how many carpenters should he hire? Explain. (6 points)
1. The market for rum is described by the linear functions below.
Market demand for rum: P = 60 – 2Qd where Qd is units per day and P is the price of a gallon of rum.
Rum Market Supply: P = 9 + Qs
NOTE: show your work for partial credit.
2. Evaluate each of the following statements. If a statement is true, explain why; if it is false, identify the mistake and try to correct it. (5 points each)
a. A decreasing marginal product tells us that marginal cost must be rising.
b. When marginal product is falling, total product is falling.
6. What is the difference between marginal, and total utility of the consumption of some good (like candy)? Can marginal utility from the consumption of candy be negative? Briefly explain with an example. (10 points)
7. David has a weekly budget of $500 to spend on fancy bottles of wine at $50 each or steak dinners at $20 each.
a. Write the equation for David’s budget constraint. (3 points)
b. In a clearly labeled graph show his budget constraint. In the graph, identify a specific combination of wine and steak that lies within his budget constraint. Prove that this does not use all of his income. (6 points)
c. What does the slope of David’s budget constraint represent? Please be specific. (5 points)
8. Suppose a generous relative would like to give you a graduation gift of $1000 three years from today.
a. How much total revenue does Jackie need to make in order to break even in the eyes of her accountant? That is, how much total revenue would give Jackie an accounting profit of just zero? (5 points)
b. How much total revenue does Jackie need to make in order for her to want to remain self-employed? That is, how much total revenue would give Jackie an economic profit of just zero? (5 points)
1. The following incomplete table shows a firm’s various costs of producing up to 7 units of output.
a. Complete the table. (4 points)
b. If this firm is a perfectly competitive firm and the market price is $70, determine the firm’s profit-maximizing level of output. Compute economic profit at this output level. (5 points)
c. Using the information in the table, at approximately what price and quantity would the firm decide to shut down in the short run? Explain how you know. (5 points)
Q / TC / TVC / TFC / MC / ATC / AVC0 / 20 / 0 / 20 / X / X
1 / 80 / 60 / 20 / 80 / 60
2 / 130 / 110 / 20 / 65 / 55
3 / 190 / 170 / 20 / 63.33 / 56.67
4 / 260 / 240 / 20 / 65 / 60
5 / 340 / 320 / 20 / 68 / 64
6 / 430 / 410 / 20 / 71.67 / 68.33
7 / 530 / 510 / 20 / 75.71 / 72.86
d. In the long run, this perfectly competitive market will adjust to the level of economic profits found in part b above. Describe this long-run adjustment process. Be sure to explain what happens both in the market and what happens for the typical firm. Graphs are unnecessary. (8 points)
e. Using the information in the table, at approximately what price and quantity would the firm find itself in the long run? (3 points)