Practice Quiz # 2

  1. Explain the income and substitution effects and use the concepts to describe what happens when the price of a product decreases. A student asserts in class that the income and substitution effects lead to a decrease in the consumption of a normal good when the price decreases. Do you agree with the statement? Explain.
  1. Assume that a consumer purchases a combination of products Y and Z. The MUy is 50 and the Py is $25. The MUz is 20 and the Pz is $5. What should this consumer do to maximize utility?
  1. Jane quit her job at AT&T where she earned $29,000 a year. She cashed in $40,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus and set up a commuter service between Lincoln and Omaha. There are 1000 people who will pay $400 a year each for the commuter service; $280 from each person goes for gas, maintenance, insurance, depreciation, etc. (1) What are Jane’s total revenues? (2) What are Jane’s explicit costs? (3) What is her accounting profit? (3) What is her economic profit (or loss)?
  1. Indicate whether the inputs below are variable (V) or fixed (F) in the short run.

Input Output

Meatinhamburgers.

Fire insuranceindry cleaning.

Tiresinautomobiles.

Property taxintextile production.

Gasolineintrucking services.

Depreciationinaircraft production.

  1. The table below shows the total production of a firm as the quantity of labor employed increases. The quantities of all other resources employed are constant. Compute the marginal and average products and enter them in the table.

MarginalAverage

UnitsTotalproductproduct

of Labor product of labor of labor

00––––––

140______

2100______

3165______

4200______

5225______

6240______

7245______

8240______

  1. At what levels are there increasing returns to labor and at what levels are there decreasing returns to labor?
  1. Describe the relationship between the total product and marginal product.
  1. Describe the relationship between marginal and average product.
  1. In the table below you will find a schedule of a firm’s fixed cost and variable cost. Complete the table by computing total cost, average fixed cost, average variable cost, average total cost, and marginal cost.

TotalTotalAverageAverageAverage

TotalfixedvariableTotalfixedvariabletotalMarginal

product cost cost cost cost cost cost cost

0$100$ 0$_____––––––––––––

1100100_____$______$______$______$_____

2100180______

3100240______

4100320______

5100440______

6100600______

7100800______

81001040______

91001340______

101001800______

  1. Answer the questions below on the basis of the diagram.


:

  1. AVC at 6,000 units of output?
  2. ATC at 6,000 units of output?
  3. AFC at 6,000 units of output?
  4. TVC at 6,000 units of output?
  5. TFC at all levels of output?
  6. TC at 10,000 units of output?
  7. When diminishing returns set in?
  1. What factors explain economies of scale and diseconomies of scale?