# Increasing returns to scale in production means A) more than 10% as much of all inputs are required to increase output 10%.

I. Increasing returns to scale in production means

A) more than 10% as much of all inputs are required to increase output 10%.

B) less than 3 times as much of all inputs are required to increase output 3 times.

C) more than twice as much of only one input is required to double output.

D) isoquants must be linear.

II. Another farmer uses M units of machinery and L hours of labor to produce S tons of soybeans, with the following production function S = 50(2L+2M)0.75. This production function exhibits

A) decreasing returns to scale for all output levels.

B) constant returns to scale for all output levels.

C) increasing returns to scale for all output levels.

D) no clear pattern of returns to scale.

IV. Joe owns a small coffee shop, and his production function is q = 3KL where q is total output in cups per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). If Joe’s capital is currently fixed at K=2 machines, what is his short-run production function?

A) q = 6L

B) q = 6

C) q = 6L2

D) q = 6K2

V. The supply curve for a competitive firm is

A) its entire MC curve.

B) its MC curve above the minimum point of the Average Variable Cost curve.

C) its MC curve above the minimum point of the Average Cost curve.

D) its MR curve.

VI. When the price of good X increases and all goods (including X) are normal goods, the income effect leads consumers to buy

A. more of good X and less of other goods.

B. less of all goods.

C. more of all goods.

D. less of good X and more of other goods.

VII. A monopolist maximizes profits at a quantity where

A. Total Revenue equals Total Cost

B. Marginal Revenue equals Marginal Cost

C. Price equals Marginal Cost

D. Price equals Average Cost

VIII. The supply curve for a monopolist

A) its entire MC curve.

B) its MC curve above the minimum point of the Average Variable Cost curve.

C) its MC curve above the minimum point of the Average Cost curve.

D) its MR curve.

E) does not exist.

IX. Suppose the U.S. government imposes a tariff on sugar imports. Which of the following is true?

A) It will reduce the consumer surplus.

B) It will increase the producer surplus.

C) It will increase the government revenue.

D) It will reduce the welfare.

E) All of the above.

XI. Suppose that an individual allocates his or her entire budget between two goods, food and

clothing. Can both goods be inferior? Explain.

Both goods

A. can be inferior because an increase in income does not have to be spent on either good.

B. cannot be inferior because an increase in income must be spent on one of the two goods.

C. cannot be inferior if they are complementary goods.

D. can be inferior because more is not necessarily preferred to less.

E. can be inferior if they are substitute goods.

XI. Isocost lines are straight because the slope of such lines

A. equals the ratio of the marginal products of the inputs, which is fixed.

B. equals the marginal rate of technical substitution, which is fixed.

C. equals the ratio of input prices, and these prices are fixed.

D. equals the ratio of sunk costs to opportunity costs, which is diminishing.

2. Cost Minimization

The production function for a product is given by q = K1/2L1/4 where K is capital, L is labor and q is output.

a) Find the marginal products of labor and capital.

b) Is the marginal product of labor increasing or decreasing with labor? Is the marginal product of capital increasing or decreasing with capital? (Show your work to get credit. Just answering increasing or decreasing will not earn you any points)

c) Using your answers to part a) find the marginal rate of technical substitution between labor and capital.

d) Denote the wage of labor by w and the rental of capital by r. What is the cost minimization condition for a firm? Show it diagrammatically.

e) Now suppose w = 20 and r = 80. What is the minimum cost of producing q = 100.

(You must show your work by clearly writing the equations that you use to derive the cost minimizing levels of L and K.)

3. Equilibrium in a competitive industry

Suppose you are given the following information about a particular industry:

QD = 6500-100P Market demand

QS = 1200P Short run market Supply

C(q) = 784 + q2/400 Firm total cost function

Assume that all firms are identical and that the market is characterized by perfect competition.

a) Using the demand and supply curves above find the short run equilibrium price and quantity in the industry.

b) Using the total cost function derive the marginal cost function for firms in the industry.

c) Using your answers to parts a) and b) find the quantity produced by each firm in a short run competitive equilibrium. Find the profit of each firm in the short run equilibrium.

d) Using your answers to parts a) and c) find the number of firms in a short run equilibrium.

e) Would you expect to see entry into or exit from the industry in the long run? Explain. What effect will entry or exit have on market equilibrium (market price and quantity)?

f) Given the cost curve above, what is the long run equilibrium price in the industry?

Question # 4 Tariffs

Suppose the market price for solar panels in the U.S. will be \$500 per panel in the absence of any trade in solar panels. The price of solar panels in the world market is \$295 per panel.

a) What will be the price of solar panels in the U.S. if the U.S. has free trade in solar panels? Diagrammatically show the gains from trade in solar panels. (Change in welfare as a result of free trade in solar panels compared to the situation of no trade. Show how the different components of welfare such as consumer surplus and producer surplus change.)

b) Now suppose the new Trump administration imposes a tariff of \$45 on imported solar panels. What will be the new price of solar panels in the U.S.? Who will gain from the tariff? Who will lose? Diagrammatically show the welfare impact of this tariff compared to the free trade situation. (Again show the change in welfare in terms of consumer surplus, producer surplus, tariff revenue etc.) 