Microeconomics II

Spring 2023 Crystal Wong

Exam 1 Review and Practice

Exam Format:
Multiple Choice Questions
Short Questions
Time: 15:30-16:20 Wednesday, April 12 in class

You may bring your own calculator but no other electronic devices are allowed. Only standard
calculators are allowed (i.e. you are not allowed to use your cellphone as your calculator).
Whoever that cheats in the exam will automatically fail this class and in addition will be
punished according to the University's regulation. I will strictly enforce this policy.

Chapters/Topics Covered
Chapter 6: Firms and Production
Chapter 7: Costs
Chapter 2: Market equilibrium
Chapter 8: Competitive firms and markets
Chapter 9: Applications of the competitive model

Chapter 6: Firms and Production

Production function
Short Run vs. Long Run production
Marginal, Average and Total Product (curves)
Why the MP curve must cut the AP curve at its maximum point?

Short Run:
The law of diminishing marginal returns

Long Run:
Isoquants and properties of isoquants
Shapes of isoquants when:

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Inputs are perfect substitutes; perfect complements and when the production technology is Cobb-
Douglas.
Marginal Rate of Technical Substitution (MRTS)
Constant, increasing and decreasing returns to scale.
Inference of the returns to scale when technology is Cobb-Douglas
Long run cost curve

Chapter 7: Costs
Short Run:
Total cost=Total fixed cost +total variable cost
Marginal Cost, Average Variable Cost, Average Fixed Cost, Average Total Cost, Total Fixed
Cost, Total Variable Cost (and the curves)
Why the MC curve must cut the AVC curve at its minimum point? (and their underlying
relationship with MP and AP).

Long Run:
Derivation of isoquants
Input choice
Golden rule of cost minimization
Graphical derivation of the optimal input choice combing using the isoquant and isocost analysis
Derivation of expansion path and cost function
Long run cost curve

Chapter 2: Market equilibrium

Demand function; Inverse demand function; solving for equilibrium price and quantity;
comparative statics

Chapter 8: Competitive firms and markets

Short run and long run analysis;

profit maximizing output rule:

MR(𝑞 ∗ ) = 𝑀𝐶(𝑞 ∗ )

Short run shut down rule:

𝑃 ≤ 𝑚𝑖𝑛𝐴𝑉𝐶

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Long run shut down rule:
𝑃 ≤ 𝑚𝑖𝑛𝐴𝑇𝐶

Long run supply curve=min ATC if firms are identical;

Price=min ATC in the long run

Derive individual and market supply

Chapter 9: Applications of the competitive model

Producer surplus; consumer surplus; deadweight loss; the deadweight loss associated with
different policies.

Multiple Choice Questions

1. The above figure shows the cost curves for a typical firm in a market and three possible market
supply curves. If there are 100 identical firms, the short-run market supply curve is best represented
by

a. curve A.
b. curve B.
c. curve C.
d. either curve A or B, but definitely not C.

2. If the marginal product of labor is constant for all levels of output, then the average product of
labor

a. is constant.
b. equals the marginal product of labor.
c. Both A and B above.
d. Either A or B above but not both.

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3. A competitive firm has the short-run cost function 𝑐(𝑦) = 2𝑦 3 − 16𝑦 2 + 128𝑦 + 10. The firm
will produce a positive amount in the short run if and only if the price is greater than

a. $192.
b. $48.
c. $99.
d. $96.

4. An orange grower has discovered a process for producing oranges that requires two inputs. The
production function is Q = min{2x1, x2}, where x1 and x2 are the amounts of inputs 1 and 2 that
he uses. The prices of these two inputs are w1 = $5 and w2 = $2, respectively. The minimum cost
of producing 140 units is therefore

a. $980.
b. $630.
c. $1,400.
d. $280.

5. Long-run average cost is never greater than short-run average cost because in the long run

a. capital costs equal zero.

b. the firm can move to the lowest possible isocost curve.
c. wages always increase over time.
d. wages always decrease over time.

6. Suppose MPL = 0.5 ∗ (q/L) and MPK = 0.5 ∗ (q/K). In the long run, the firm will hire equal
amounts of capital and labor

a. all of the time.

b. only when w = r.
c. only when w = 0.5 ∗ r.
d. at no point in time.

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7. The above figure shows the cost curves for a typical firm in a competitive market. If p = 10,
then

a. the firm will maximize its profit by producing 5 units.

b. the firm will maximize its profit by producing 60 units.
c. producing 5 or 60 units will yield equal profits.
d. Not enough information.

8. The above figure shows supply and demand curves for milk. In an effort to help farmers, the
government passes a law that establishes a $3 per gallon price support. As a result, consumer
surplus falls by

a. a.
b. b + f.
c. f + g.
d. b + f - c.

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9. If output is produced according to Q = 4LK, the price of K is $10, and the price of L is $5, then
the cost minimizing combination of K and L capable of producing 2 units of output is

a. L = 0.35 and K = 0.35.

b. L = 1 and K = 0.50.
c. L = 0.50 and K = 1.
d. L = 1 and K = 1.

10. A competitive firm has a long-run total cost function 𝐶(𝑦) = 3𝑦 2 + 675 for y > 0 and
C(0) = 0. Its long-run supply function is described as

a. y = p/6 if p > 90, y = 0 if p < 90.

b. y = p/3 if p > 88, y = 0 if p < 88.
c. y = p/3 if p > 93, y = 0 if p < 99.
d. y = p/6 if p > 93, y = 0 if p < 93.
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11. The production function is 𝑓(𝐿, 𝑀) = 5𝐿2 𝑀2 , where L is the number of units of labor and M
is the number of machines. If the amounts of both factors can be varied and if the cost of labor is
$9 per unit and the cost of using machines is $64 per machine, then the total cost of producing 12
units of output is

a. $438.
b. $108.
c. $576.
d. $115.20.

12. A firm has the short-run total cost function 𝐶(𝑦) = 9𝑦 2 + 144. At what quantity of output is
short-run average cost minimized?
a. 4

b. 16
c. 0.75
d. 3

13. Nathan has a production function 4𝑥1 + 𝑥2 . If the factor prices are $12 for factor 1 and $2 for
factor 2, how much will it cost her to produce 30 units of output?

a. $795
b. $60
c. $90
d. $1,500

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14. The above figure shows supply and demand curves for apartment units in a large city. If the
city government passes a law that establishes $350 per month as the legal maximum rent, the
consumer's net gain in surplus equals

a. c - f.
b. b - f.
c. d - f.
d. The answer cannot be determined from the information given.

15. Brand X is one of many firms in a competitive industry where each firm has a constant marginal
cost of 2 dollars per unit of output. If marginal cost for Brand X rises to 4 dollars per unit and
marginal costs of all other firms in the industry stay constant, by how much does the price in the
industry increase?
a. 2 dollars
b. 1 dollar
c. 0 dollar
d. 2/n, where n is the number of firms in the industry

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Short Questions:

1) Carmela's pasta factory employs workers and pasta machines according to the following
production function
f(L,K) = L.5K.5
The hourly cost of capital is $10 and the hourly cost of workers is $40.

a. Write out the Lagrangian for the cost-minimization problem.

b. Derive the optimal capital to labor ratio. Describe the long-run output expansion path.

c. Suppose Carmela wishes to produce 1000 units of pasta. How much labor and capital should
she employ? How much will it cost to produce?

d. An order arrives doubling the amount of pasta Carmela needs to produce. Assuming she is
unable to purchase more capital, how much will it cost to meet the new production level?

e. In the long-run, Carmela will be able to employ more capital as well as labor. If Carmela
continues to produce 2000 units of output, how much will it cost in the long run?

f. In words, explain why the cost in the long run is different than in the short run.

2) Suppose that there are 80 firms in a market, each with the following cost function:
C(q) = 100 + 4q2

a. Derive the short-run market supply curve.

b. Suppose the market demand is

QD = 1280 - 30p
Find the equilibrium market quantity and price.

c. How much output will each firm produce? How much profit is each firm making?

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3) The domestic demand curve, domestic supply curve, and world supply curves for a good are
given in the above figure. All the curves are linear. Initially, the country allows imports. Then
imports are banned. Calculate how consumer and producer surplus change because of the ban. Is
the country better off with the ban on imports? Why?

4) Consider a firm with the following production technology: f(K,L)=min{4K,L} where K stands
for capital and L stands for labor. The cost of capital is denoted as r and wage is denoted as w.

a. Suppose r=20 and w=5, show a diagram the long run average cost curve of this firm.

b. now suppose w increases to 10 and r=20, show in the diagram you work out in a. the new long
run average cost curve of this firm.