MICROECONOMICS

PROBLEM SET 4
CHAPTER 7.3, 7.4 & 7.7

1. Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the
vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost
curve will be:
A) 500.
B) 25/500.
C) -4/5.
D) 25/20 or 1.25.

2) When an isocost line is just tangent to an isoquant, we know that:

A) output is being produced at minimum cost.
B) output is not being produced at minimum cost.
C) the two products are being produced at the least input cost to the firm.
D) the two products are being produced at the highest input cost to the firm.

3) A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The
marginal product of labor is 3, and the marginal product of capital is 5. The firm:
A) is producing its current output level at the minimum cost.
B) could reduce the cost of producing its current output level by employing more capital and less labor.
C) could reduce the cost of producing its current output level by employing more labor and less capital.
D) could increase its output at no extra cost by employing more capital and less labor.

4) Assume that a firm's production process is subject to increasing returns to scale over a broad range of outputs. Long-
run average costs over this output will tend to:
A) increase.
B) decline.
C) remain constant.
D) fall to a minimum and then rise.

5) Suppose the long-run cost function is C = 2q2. What is the cost-output elasticity for this case?
A) 1
B) 2
C) 1/2
D) 4

6) A variable cost function of the form: VC = 23 + Q + 7Q2 implies a marginal cost curve that is:
A) linear.
B) downward sloping.
C) U-shaped.
D) quadratic.

7) A logarithmic variable cost function implies that:

A) marginal cost is increasing at a decreasing rate.
B) marginal cost is increasing at an increasing rate.
C) marginal cost is constant.
D) marginal cost is decreasing as quantity increases.