Izmir University of Economics Department of Economics, ECON 100 – Principles of Economics Problem Set 3 (Chapters 6 and 7) 1) Economists assume that a perfectly competitive firm's objective is to maximize its A) output price. B) economic profit. C) quantity sold. D) revenue. 2) A firm has fixed costs A) in the short run but not in the long run. B) neither in the long run nor in the short run. C) in the short run and in the long run. D) in the long run but not in the short run. 3) Total cost is the sum of fixed costs and A) variable costs. B) implicit costs. C) accounting costs. D) explicit costs. 4) When the marginal product equals the average product, the A) average product curve is downward sloping. B) average product is at its maximum. C) average product curve is upward sloping. D) marginal product is at its maximum. 5) If the marginal product of labour equals 8 and the average product of labour equals 6, then when one more worker is hired, definitely the A) average product falls. B) average product rises. C) marginal product rises. D) marginal product falls. 6) The long run distinguished from the short run in that, in the long run A) output prices can vary B) the firm no longer maximizes its profit C) resource prices can vary D) the quantities of all resources can be varied Essay Questions 1) The table gives the product schedule for Tracey’s Pencil Factory: Labour (workers) 0 1 2 3 4 5 6 7 8 9 Total product (units per hour) 0 8 20 34 46 56 64 70 74 75 Marginal Product (MP) Average Product (AP) a) Fill the blank columns for Marginal Product and Average Product. b) Does this example reflect or show the law of diminishing returns? Explain briefly. 2) Aylin’s Cake Shop faces the following schedule for producing cakes. Output 0 1 2 3 4 5 6 Total Revenue (TL) 0 30 60 90 120 150 180 Total Cost (TL) 25 49 69 91 117 147 180 a) Find Total Fixed Costs (TFC), Total Variable Costs (TVC), Average Total Costs (AC), Average Fixed Costs (AFC), Average Variable Costs (AVC) and Marginal Costs (MC). b) What is the market price of the product? What is the profit maximizing output? Calculate economic profit/loss for this shop. c) Will the firm choose to operate in the short run? Will the firm choose to operate in the long run?
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