Test Questions with Answers
Chapter 10. Supply Theory I.
The Supply Curve. Cost Behaviour
Chapter 10 ― Question 1
An economist ascribes a $8 value to seeing a movie. He buys a ticket for $6 and then loses it. Does he buy a new one?
* Yes, he does. He views the expenditure on the first ticket as sunk costs and therefore as irrelevant. His marginal benefit of seeing the movie exceeds its marginal cost (the price of the second ticket).
Chapter 10 ― Question 2
The supply curve of a commodity has shifted to the right. Which of the following developments is most likely to have caused the shift
- a decline in consumer income
- a decline in the price of an ingredient of the commodity
- a decline in the price of the commodity itself
- an increase in the price of the commodity
* B. Answers C and D lead to movements along the curve. Answer A shifts the demand curve to the left.
Chapter 10 ― Question 3
Distinguish between diminishing returns to scale and diminishing returns.
* Diminishing returns to scale occur when all factors have been increased. Diminishing returns are due to the law of diminishing returns, which states that returns diminish when variable factors are increased while at least one fixed factor remains unchanged.
Chapter 10 ― Question 4
Explain why the short-run ATC curve and the long-run ATC are different.
* The long-run ATC curve is flatter. In the long run, new investment in buildings and/or capital is made. This leads to increasing returns to scale, followed by constant returns to scale and ultimately ends in diminishing returns to scale.
There is a second difference. The long-run ATC curve lies below the short-run ATC curve because investment has lowered ATC - which is why it was made in the first place.
Chapter 10 ― Question 5
Explain why the short-run supply curve and the long-run supply curve are different.
* The short-run supply curve starts where the MC curve intersects the AVC curve. Fixed costs are treated as sunk costs in the short run. The long-run curve starts where the MC curve intersects the ATC curve. That means the long-run supply curve starts at a higher price. Below that price ATC are not covered and production causes losses.
Chapter 10 ― Question 6
If average total costs are declining
- marginal cost is greater than ATC
- marginal cost is greater than AVC
- marginal cost is less than ATC
- the marginal cost curve intersects the ATC curve
*C. Remember that marginal costs lead other costs. When marginal costs fall, other costs also fall. About D: Where they intersect, ATC have been minimised.
Chapter 10 ― Question 7
The price a firm receives for its product is $50 per unit. Its total cost function is 8000 + 10Q. At what quantity do total costs equal total revenues?
* At 200 units.
The following equation can be derived from the information above:
50 x Q = 8000+ 10Q
The solution of this equation is the answer to the question.
50Q = 10Q + 8000
40Q = 8000
Q = 8000
40
Q = 200
Chapter 10 ― Question 8
Which of the following must be true if average variable costs are rising
- marginal cost is below average variable cost
- marginal cost is above average variable cost
- average variable cost is above average total cost
- none of the above
*B. Remember that marginal costs lead other costs. This is why Answer A is wrong. Answer C is nonsense: AVC is one component of ATC and hence always below ATC.
Chapter 10 ― Question 9
If the price elasticity of supply is zero, then
- there is little supply of the commodity
- suppliers will produce the same quantity at any price
- the supply curve is a horizontal line
- there is little demand for the commodity
*B. The supply curve is a vertical line in this case.
Chapter 10 ― Question 10
The difference between the long run and the short run is that
- in the long run all inputs are variable, while in the short run at least one input is fixed
- in the short run all inputs are fixed while in the long run all inputs are variable
- in the short run all costs are sunk costs while in the long run they are fixed costs
- none of the above
*A. In Answer B, the first part is wrong; some inputs are variable in the short run. Answer C is wrong because economists think that fixed costs - not all costs - are sunk costs in the short run.
Chapter 10 ― Question 11
Explain what the short-run profits of a competitive firm consist of.
* Price minus ATC. This is the formula to calculate profit per unit for any firm. For total profits the figure is multiplied by number of units.
Chapter 10 ― Question 12
Explain why in the long run economic profits disappear.
* They are competed away by new entrants. When the industry is in equilibrium P = MC = ATC. The difference between price and ATC no longer exists.
Chapter 10 ― Question 13
A firm's production function is Q = K2L2. What quantity does it produce if it employs 4 units of capital and 8 workers?
- 80 units
- 1024 units
- 320 units
- 4096 units
*B. 16 x 64 = 1024.
Chapter 10 ― Question 14
Please draw and label the four cost curves.
* In case you haven't got it correct: It is ultimately easy. AFC are the only ones that fall constantly. ATC are above AVC because they include fixed and variable costs. The marginal cost curve is the steepest line.
Chapter 10 ― Question 15
If labour supply is inelastic, an increase in the wage rate leads to
- a small decline in the quantity of labour supplied
- no change in the quantity of labour supplied
- a small increase in the quantity of labour supplied
- a large increase in the quantity of labour supplied
*C. Inelasticity of labour means that the percentage change in quantity supplied is lower than the percentage change in the wage rate. This is why Answer B is wrong. Answer A is nonsense; why should an increase in wages lead to a decline in labour supply? Answer D implies that labour supply is elastic.
If you like, print this page for offline comparison or studying.