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Solution Set B

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Solution Set Bb,B,BB,set,Set,SET

    Test #2

    Practice Test #2: Answer Key

    thExam number 2 will take place on Monday, April 8, 2013. This, the second of two practice

    exams, will be the subject of class on Wednesday. It will not be graded, but will serve only as practice material accurately representing the content and format of the exam.

    1.) Walter used to work as a high school teacher for $40,000 per year but quit in order to start his own painting business. To invest in his painting business, he withdrew $20,000 from his savings, which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter asked Tyler the accountant and Greg the economist to calculate his painting business’s costs.

    a. Tyler says his costs are $25,900, and Greg says his costs are $66,500.

    b. Tyler says his costs are $25,000, and Greg says his costs are $65,000.

    c. Tyler says his costs are $66,500, and Greg says his costs are $66,500.

    d. Tyler says his costs are $75,000, and Greg says his costs are $41,500.

    2.) Suppose that a firm has only one variable input, labor, and firm output is zero when labor is zero. When the firm hires 6 workers it produces 90 units of output. Fixed cost of production are $6 and the variable cost per unit of labor is $10. The marginal product of the seventh unit of labor is 4. Given this information, what is the total cost of production when the firm hires 7 workers?

    a. $66

    b. $76

    c. $906

    d. $946

    3.) Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that marginal cost of the third worker hired is $40, and the average total cost when three workers are hired is $50. What is the total cost of production when three workers are hired?

    a. $50

    b. $90

    c. $120

    d. $150

     4.) At Bert's Bootery, the total cost of producing twenty pairs of boots is $400. The marginal cost of producing the twenty-first pair of boots is $83. We can conclude that the

    a. average variable cost of 21 pairs of boots is $23.

    b. average total cost of 21 pairs of boots is $23.

    c. average total cost of 21 pairs of boots is $15.09.

    d. marginal cost of the 20th pair of boots is $20.

     5.) Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that the average total cost when 5 units of output are produced is $30, and the marginal cost of the sixth unit of output is $60. What is the average total cost when six units are produced?

    a. $10

    b. $25

    c. $30

    d. $35

    Table 1

    Eileen’s Elegant Earrings produces pairs of earrings for its mail order catalogue business. Each pair is shipped

    in a separate box. She rents a small room for $150 a week in the downtown business district that serves as her

    factory. She can hire workers for $275 a week. There are no implicit costs.

    Number of Boxes of Marginal Cost of Cost Total Cost Workers Earrings Product Factory of of

    Produced per of Labor Workers Inputs

    Week

     0 0

     1 330 $150 $275 $425

     2 630

     3 150 $825 $975

     4 890

     5 950 60 $1,375

     6 10 $1,800

     6.) Refer to Table 1. What is the marginal product of the second worker?

    a. 110

    b. 200

    c. 260

    d. 300

     7.) Refer to Table 1. What is the total cost associated with making 890 boxes of earrings per week? a. $1,250

    b. $1,325

    c. $1,400

    d. $1,575

     8.) Refer to Table 1. During the week of July 4th, Eileen doesn't produce any earrings. What are her costs during

    the week?

    a. $0

    b. $150

    c. $275

    d. $425

     9.) Refer to Table 1. One week, Eileen earns a profit of $125. If her revenue for the week is $1100, how many

    boxes of earrings did she produce?

    a. 140

    b. 330

    c. 780

    d. 950

     10.) Refer to Table 1. Eileen has received an order for 3,000 boxes of earrings for next week. If she expects that the

    trend in the marginal product of labor will continue in the same direction, it is most likely that her best

    decision will be to

    a. not commit to meeting the order until she can move to a larger room and hire more workers to

    produce the earrings.

    b. close her business until she is able to hire more productive workers.

    c. hire about 12 new workers and hope she can satisfy the order.

    d. commit to meeting the order and then take three weeks to complete the job.

Figure 1 Cost

    MC

    ATC

    AVC

    QuantityABCD

     11.) Refer to Figure 1 The efficient scale of production occurs at which quantity?

    a. A

    b. B

    c. C

    d. D

     12.) Refer to Figure 1. Quantity C represents the output level where the firm

    a. maximizes profits.

    b. minimizes total costs.

    c. produces at the efficient scale.

    d. minimizes marginal costs.

     13.) Refer to Figure 1 Quantity B represents the output level where the firm

    a. maximizes profits.

    b. minimizes average variable costs.

    c. produces at the efficient scale.

    d. minimizes marginal costs.

     14.) Marcia is a fashion designer who runs a small clothing business in a competitive industry. Marcia specializes in

    making designer dresses. Marcia sells 10 dresses per month. Her monthly total revenue is $5,000. The

    marginal cost of making a dress is $400. In order to maximize profits, Marcia should

    a. make more than 10 dresses per month.

    b. make fewer than 10 dresses per month.

    c. continue to make 10 dresses per month.

    d. We do not have enough information with