Problem Set 10

Econ 202 (03, 04, 05) Spring 2003

(Dr. Tin-Chun Lin)

  1. Implicit costs are best thought of as:

(A)Variable costs.

(B)Marginal costs.

(C)Accounting costs.

(D)Opportunity costs.

(E)Sunk costs. (Answer: (D))

  1. A firm is able to produce 9000 units of strawberries per season on 10 acres. It adds one more acre and is able to produce 12000 units per season. The marginal product of land for this farm is:

(A)900 units per acre per year.

(B)1000 units per acre per year.

(C)3000 units per acre per year.

(D)120000 units per acre per year. (Answer: (C))

  1. Diminishing marginal product of labor occurs when

(A)Adding another unit of labor increases output, but not by as large a margin as the previously employed labor.

(B)Adding another unit of labor decreases output.

(C)Adding another unit of labor increases output, by more than the margin of previously employed labor.

(D)None of the above. (Answer: (A))

4.

Laborers / Total Product
0 / 0
1 / 8
2 / 20
3 / 25
4 / 28
5 / 29

According to the table, diminishing returns set in when the ______workers hired.

(A)First.

(B)Second.

(C)Third.

(D)Fourth.

(E)Fifth. (Answer: (C))

  1. When marginal cost is less than average total cost,

(A)Marginal cost must be falling.

(B)Average total cost is falling.

(C)Average total cost is rising.

(D)Average variable cost must be falling. (Answer: (B))

  1. Which of the following is true at the point where diminishing returns set in?

(A)Both marginal product and marginal cost are at a maximum.

(B)Both marginal product and marginal cost are at a minimum.

(C)Marginal product is at a maximum and marginal cost at a minimum.

(D)Marginal product is at a minimum and marginal cost at a maximum. (Answer: (C))

  1. Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys their goods in large quantities and therefore at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices and free parking. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that:

(A)Consumers are boycotting local retailers.

(B)Wal-Mart engages in illegal acts of monopolization.

(C)There are diseconomies of scale in retail sales.

(D)There are economies of scale in retail sales.

(E)Wal-Mart is managed by ruthless business people. (Answer: (D))

  1. Marginal cost is equal to average variable cost when

(A)Average total cost is rising.

(B)Total fixed costs are large relative to variable costs.

(C)Marginal product of labor rising.

(D)Average variable cost is at its minimum. (Answer: (D))

  1. The total product schedule of rubber Duckies, Inc., a firm making rubber boats, is described by the following:

Labor
(Number of workers employed per week) / Output
(Rubber boats per week)
1 / 1
2 / 3
3 / 6
4 / 10
5 / 15
6 / 21
7 / 26
8 / 30
9 / 33
10 / 35

(A)What is the relationship between average product and marginal product at output rates below 30 boats a week? Why?

(Answer: draw a graph. For output rates below 30 boats, which is equivalent to 8 workers per week, the marginal product of labor exceeds the average product and so the average product increases. This happens because hiring an extra worker adds an amount of output to the total that exceeds the level of the (initial) average.)

(B)What is the relationship between average product and marginal product at output rates above 30 boats a week? Why?

(Answer: For output rates above 30 boats per week, that is, for more than 8 workers employed per week, the marginal product is less than the average product so that the average product falls. This occurs because the additional output created by adding a worker falls short of the (initial) average, so the additional worker lowers the average.)

  1. (True or False) If marginal product is at a maximum, then marginal cost is at a minimum.

(Answer: True)