Economics 102Second Examination – 2nd Sem 2009-10

ANSWERS

I. IDENTIFICATION: Identify the following concepts. (40 pts.)1. (degree of) returns to scale - the rate at which output increases in response to proportional increases in all

inputs.2. expansion path - line that joins points of tangency between isocosts and isoquants3. production function- mathematical relationship between inputs and output, in physical terms.4. output elasticity of labor - additional output that can be produced by adding one more unit of a particular

input while holding all other inputs constant. 5. marginal product- additional output that can be produced by adding one more unit of a particular input

while holding all other inputs constant. 6. marginal rate of technical substitution (MRTS)- the rate at which an input can be reduced as one more

unit of another input is added, holding output constant.7. if PK = 1000 and PL= 200, slope of isocost line dK/dL --- PL/PK=200/1000=0.28. technical progress- a shift in the production function that allows a given output level to be produced using

fewer inputs.9. isoquant - curve that shows the various combinations of inputs that produce the same level of output.10. opportunity cost- the cost of a good or service as measured by the alternative uses that are foregone by

producing the good or service.11. long run - the period of time in which allows a firm to vary all its inputs.12. shut-down production - firm’s action whenever price falls below average variable cost.13. marginal revenue = marginal cost (MR=MC) - condition for maximum profit for any firm, in marginal

terms.14. price taker – or perfect competitor - a firm or individual whose decisions regarding buying or selling have

no effect on the prevailing market price of a good or service.15. diseconomies of scale - the phenomenon of increasing long-run average cost as scale of operation is

increased.16. inelastic - a rise in the price will cause total revenues to rise when demand is17. (short run) supply curve - marginal cost curve above the minimum average variable cost18. average product - slope of line from origin to a point on total product curve.19. stage II- stage of production where AP is decreasing but MP >0.20. average product- total output divided by the number of units of an input.

II. SHORT ANSWERS/ DISCUSSION: ( 20 points)

1.

2. Cobb-Douglas production function ,

a) If all inputs are increased by a factor m:

Since output increases by a factor m1.1, degree of homogeneity =1.1 which is greater than 1 so we have IRS (increasing returns to scale).

b)

The value 0.4 means that if K is increased by 1%, holding other factors constant, ouput will increase by 0.4%. It is positive but inelastic..

III. PROBLEMS: (40 pts)1. : min cost s.t. Q=4000

2. .

3. A firm faces the following demand curve: where q is the quantity of product sold per month.

a) Total revenue

b) Marginal revenue curve.

c)

d) Profit = TR-TC