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Quiz 3 - Answers PDF

This document contains a 7 question quiz on topics related to intermediate microeconomics including demand and supply, costs of production, profit maximization, and revealed profitability. The questions cover calculating changes in demand and equilibrium quantity given changes in price, identifying characteristics of production functions, solving profit maximization problems for firms in both competitive and non-competitive markets, and properties of rational firm behavior.

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Shiying Zhang
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113 views2 pages

Quiz 3 - Answers PDF

This document contains a 7 question quiz on topics related to intermediate microeconomics including demand and supply, costs of production, profit maximization, and revealed profitability. The questions cover calculating changes in demand and equilibrium quantity given changes in price, identifying characteristics of production functions, solving profit maximization problems for firms in both competitive and non-competitive markets, and properties of rational firm behavior.

Uploaded by

Shiying Zhang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Intermediate Microeconomics Quiz 3 (Chapter 15-19)

Name: __________ Student ID: __________ Class: __________


Only for Intermediate Microeconomics (Fall 2020, Tsinghua SEM). Please do not distribute.

1. (1 pt) An economy has 200 consumers of Type 1 and 100 consumers of Type 2. Each Type
1 consumer demands 10 units of the good regardless of the price and each Type 2 demands
max(16 − 2p, 0). If now the price of the good increases from 7 to 9, then which of the
following statements is CORRECT?
A. The demand of good decreases for Both Types of consumers.
B. The total demand of good stays the same.
C. The total demand of good will further decrease when the price goes up to 10.
D. The total demand of good decreases from 2200 to 2000.

2. (1 pt) The price elasticity of demand for a certain agricultural product is constant and equal
to -2. The price elasticity of supply for this product is constant and equal to 1. Originally the
equilibrium price of this good was 1 and the equilibrium quantity was 300 million. Then it was
discovered that consumption of this product was unhealthy. The quantity that would be
demanded at any price fell by 48.8%. The equilibrium quantity of this good dropped by:
A. 48.8% B. 51.2% C. 20% D. 80%

3. (1 pt) A firm uses only two inputs to produce its output. These inputs are perfect substitutes.
This firm
A. has constant returns to scale.
B. has constant returns to scale.
C. has decreasing returns to scale.
D. may have increasing returns to scale or constant returns to scale or decreasing returns
to scale.

4. (1 pt) Which of the following statements is CORRECT?


A. If a firm’s technology exhibits constant returns-to-scale, then doubling its output level
from y’ to 2y’ will double the average production cost.
B. If a firm’s technology exhibits increasing returns-to-scale, then doubling its output level
from y’ to 2y’ requires more than doubling the total production cost.
C. If a firm’s technology exhibits decreasing returns-to-scale, then doubling its output
level from y’ to 2y’ requires more than doubling all input levels.
D. If production technology has non-decreasing marginal products for all inputs, we can
conclude that this technology has increasing returns to scale.

5. (1 pt) Suppose a firm in a perfectly competitive market is in a short-run circumstance in


which x2 ≡ x2′ . Its production function is y = f(x1 , x2′ ), which is strictly concave. The firm
aims at maximizing the profit, and its optimal production plan is (x1∗ , y ∗ ). What will happen to
x1∗ and y ∗ if there is an increase in the price of input x1 ?
A. Both x1∗ and y ∗ will increase.
B. Both x1∗ and y ∗ will decrease.
C. x1∗ will increase and y ∗ will decrease.
D. x1∗ will decrease and y ∗ will increase.

6. (2 pt) The production function of a firm in a perfectly competitive market is: 𝑞 = 𝐾 1/3 𝐿1/3 ,
the price of the product is 1, the wage rate is w=4 per labor (L) and the rental rate is r=1 per
capital (K). In the short run, 64 units of fixed capital cannot be adjusted immediately. In the
long run, both labor and capital can be freely adjusted.
(a) Solve the firm’s profit maximization problem in the short run.

−
Suppose now that capital used −for production is fixed at K in the short run, and we do not
know the specific values for K , w and r.
(b) Given w and r, what is the capital stock the firm wishes to choose if it could be adjusted?

Answer:
1 4 1
(a) in the short run: max 𝑞 − (16 𝑞 3 + 64), 𝑞 ∗ = ，𝐿∗ = 3√3
√3

𝑟 1
(b) max 𝐾 1/3 𝐿1/3 − 𝑟𝐾 − 𝜔𝐿, 𝐿∗ = 𝜔 𝐾 ∗ , 𝐾 ∗ = 27𝑟 2 𝑤

7. (3 pt) Revealed Profitability (assume single input)


1. What is the revealed profitability result of a rational firm?
2. If a firm’s input choices violate the revealed profitability result of a rational firm, show that
it also violates the profit maximization condition.
3. If a firm’s input choices violate the revealed profitability result of a rational firm, is it
possible that the slope of its supply function is negative?

Answer:
(a) The firm’s technology set must lie under all the iso-profit lines. Other Answers including
ΔpΔy ≥ ΔωΔx are also right.
(b) See the slides. Any reasonable answer is OK.
(c) Yes. It is possible.

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