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Temple College
ECON 2302
NAME:______________
Spring 1998
2nd EXAM
Please read and follow the instructions carefully for each item on this exam. As with
the 1st exam, this take-home exam is an individual assignment; that is, you may
NOT receive assistance from another person on any of the problems. You MAY
use your homework assignments and lab reports, textbook, class notes, or any other
source to complete the exam (so long as you are working alone). NOTE: In
answering all questions, it is better to provide more explanation rather than less. In
deciding how much to write in response to any item, do NOT assume that the
instructor will “know what you mean.” Your work is due on Tuesday, April 13, 1998.
Use the back of the appropriate page to continue your answer [or add your
own paper] for any of the items on this test.
1. Discuss the factors of production available to an economy. Provide
examples to illustrate.
2. Explain the basic economic principle(s) illustrated by a production
possibilities curve. Why does the production possibilities curve have a
“bowed-out” shape?
3. Refer to the data presented in the table below. Draw the production
possibilities curve that describes this data.
[a] Indicate which of the following multiple choice answers is correct given
a total output of 3 units of capital goods and 4 units of consumers
goods [circle the correct answer]. Explain your answer.
a. cannot occur because the economy is capable of producing greater
total output.
b. will result in the maximum rate of growth available to this economy.
c. would involve an inefficient use of the economy’s scarce resources.
d. is unobtainable in this economy.
A
Capital goods
5
Consumer goods 0
B
4
5
C
3
9
D
2
12
E
1
14
F
0
15
[b] Explain how the data in the previous table [and your production
possibilities curve] reflects the economic principle(s) you identified in
item #2.
[c] Examine the production possibilities
curve to the right. Assume the
horizontal axis represents the output
of capital goods by the economy
over a one-year period and the
vertical axis represents the output of
consumer goods over the same
period. At what point will the
economy depicted by curve achieve
the most rapid rate of growth?
Explain your answer. Which point
indicates that the economy is underemploying its resources? Explain.
Which point is unachievable?
Explain.
4. Describe the adjustments in the production possibilities curves in each of
the following situations: (items [a] – [d])
[a] the economy moves from full employment into a serious recession;
[b] a serious plague reduces the economy’s labor force by one-third;
[c] an increase in the enrollment at technical schools;
[d] new sources of energy are discovered.
5. Look below at the production possibilities curve illustrating the production
possibilities in Sluggerville for producing baseball bats and/or peanuts with
the existing level of resources and technology.
Bats (100,000s)
Peanuts (metric tons)
[a] Show a point U that would indicate unemployed resources in
Sluggerville.
[b] Draw a new curve [on the same graph] that illustrates the results of
improved technology in the production of bats, but no change in the
production efficiency of peanuts.
[c] Show a point G that would indicate a point that is currently unattainable
in the production of peanuts and bats in S.
6. The linear production possibilities
curves for two countries’ economies
(A and B) are presented in the graph
to the right. Assume these two
countries can produce only two
goods, food and shelter. Which of
the following can we correctly
conclude? Explain your answer.
a. the different value systems in
each country make it impossible
to compare the opportunity costs
in the two countries.
b. the opportunity cost of shelter is greater in B than in A.
c. the opportunity cost of food is greater in A than in B.
d. the opportunity cost of shelter is greater in A than in B.
7. Explain the concept of comparative advantage. What are the implications
of comparative advantage for economic policy?
Country “A” production possibilities:
A
B
C
Soup
60
45
30
Nuts
0
15
30
D
15
45
E
0
60
Country “B” production possibilities:
A
B
C
Soup
20
15
10
Nuts
0
15
30
D
5
45
E
0
60
Observe the data provided in the table above. [All data are in tons.]
[a] Draw the production possibilities curves of each country and determine
the marginal rate of transformation in each country. [Answer on back]
[b] If trade occurs between these two countries, which nation should
export which product? Why? [Answer on back]
[c] What are the limits of the terms of trade between the two countries?
[Answer on back]
[d] Assume that prior to any specialization and/or trade, each of the two
countries chooses its own production possibility “C.” As an economic
analyst working for the United Nations, explain why you would advise
these two countries to engage in trade with one another. [Be very
specific: what will be the resulting gains (expressed in units of output)
from trade?] [Answer on back]
8. Given the information in the graphs below, which nation should specialize
in steel production and which should specialize in wheat production?
Explain your answer.
9. Explain why economists distinguish explicit costs from implicit costs of
production.
10. What is the difference between variable and fixed costs? Why is this
distinction important?
11. What is the “law of diminishing marginal returns”? Provide a descriptive
example.
“Whenever a number which is less than the previous average of a
total is added to that total, the average will necessarily fall.
Conversely, whenever a number which is greater than the
previous average of a total is added to that total, the average will
necessarily rise.”
12. Discuss how the above statement helps explain the relationship among a
firm’s marginal cost curve, short-run average variable cost curve, and its
short-run average total cost curve.
13. What is the relationship between a firm’s marginal cost and its marginal
product?
14. Indicate whether the inputs and/or costs listed below are variable or fixed
in the short-run, briefly explaining each:
Input
Meat
Fire insurance
Tires
Property tax
Gasoline
Depreciation
in
in
in
in
in
in
Output
hamburgers.
dry cleaning.
automobiles.
textile production.
trucking services.
aircraft production.
15. Observe the table below. You may copy the table onto the back of this
page or another piece of paper if you need more space to complete the
items that follow.
[a] Complete the table by finding the average and marginal product.
Inputs of Labor
0
1
2
3
4
5
6
7
Total Product
Average Product
Marginal Product
0
8
18
25
30
33
34
33
[b] Based on the data in the table, draw a total product curve and a
marginal product curve on a piece of the graphing paper provided. BE
NEAT. Be sure to label and scale your axes correctly. Arrange your
graphs so that you can put the total product curve on the top half of
the paper and the marginal product curve on the bottom half. On your
graph, show that the slope of the total product curve between any two
points equals the marginal product of labor [shows the relationship
between the points on the graphs]. Indicate on each graph the
regions of (1) increasing marginal returns to labor, (2) decreasing
marginal returns to labor, and (3) negative marginal returns to labor.
[c] Describe the relationship between marginal and average product.
[d] At what input-output level will average variable cost begin to rise?
Explain.
16. Assume that a firm has a plant if fixed size and that it can vary its output
only by varying the amount of labor it employs. The table below shows
the relationships between the amount of labor employed, the output of
the firm, the marginal product of labor, and the average product of labor.
Quantity
of labor
employed
0
1
2
3
4
5
6
7
8
9
10
Total
output
0
10
22
36
48
58
66
72
76
78
78
Marginal
product
of labor
-10
12
14
12
10
8
6
4
2
0
Average
product
of labor
Total
variable
cost
Marginal
cost
Average
variable
cost
-10.00
11.00
12.00
12.00
11.60
11.00
10.28
9.50
8.66
7.80
[If you require more space to complete the table than is provided, you may recopy this table onto the
back of this page.]
[a] Assume each unit of labor costs the firm $20. Compute the total cost
of labor for each quantity of labor the firm might employ and enter
these figures into the table.
[b] Now determine the marginal cost of the firm’s product as the firm
increases its output. Enter these figures into the table.
[c] If labor is the only variable input, the total cost of labor and the total
variable cost are equal. Find the average variable cost of the firm’s
product. Enter these figures into the table.
[d] Describe the relationship between the firm’s marginal product of labor
and its marginal cost.
[e] Describe the relationship between the average product of labor and the
average variable cost.
17. Consider the diagram below. Curves 1-8 are the short-run average cost
curves which occur with plants of different sizes
[a] On the graph, show the range of outputs for: (1) economies of scale;
(2) diseconomies of scale; and (3) minimum efficient scale.
[b] In the long run, what plant size should the firm build if it wants to
produce: (1) 6,000 units; (2) 14,000 units?
18. Explain the circumstances under which a firm might encounter a rather
extended range of output over which long-run average costs are
relatively constant.
19. What are the characteristics of a perfectly competitive market [pure
competition]? Give four examples of perfectly competitive markets.
20. How would you describe the demand curve for the product of a perfectly
competitive firm? ….for a perfectly competitive industry?
21. Explain the differences among the average, total, and marginal revenue
curves for a perfectly competitive firm. What is the shape of the marginal
revenue curve for the perfectly competitive firm?
22. The following table shows short-run marginal costs for a perfectly
competitive firm:
Output
Marginal Cost
100
$5
200
$10
300
$20
400
$40
500
$70
[a] Use these data to draw the firm’s marginal cost curve on a piece of
graphing paper.
[b] Suppose that the firm’s shut-down price is $10. Indicate on your graph
the firm’s short-run supply curve.
23. Suppose there are 100 identical firms like the one in problem #22. On a
separate piece of graphing paper, draw the short-run market supply curve.
24. Suppose the wage for workers in a table factory is $5 per hour. Complete
the following table. Then, use the data to draw the firm’s short-run supply
curve for tables. You may copy the table onto another page if you need
more space.
Tables
per hour
3
4
5
6
Number
of Workers
15
18
23
33
Additional
Workers
Additional
Labor Cost
--
--
Additional
Marginal
Material Cost
Cost
--
--
25. You’ve been hired by an unprofitable firm to determine whether it should
shut down operations. The firm currently uses 70 workers to produce 300
units of output per day. The daily wage per worker is $100 and the price
of the firm’s output is $30. The cost of other variable inputs is $500 per
day. Although you do not know the firm’s fixed cost, you know that it is
high enough that the firm’s total cost exceeds its total revenue. Advise
the firm’s management: should the firm continue to operate at a loss?
Explain your answer.
26. Consider the choices facing an unprofitable (and perfectly competitive)
firm. The firm currently produces 100 units per day at a price of $22. The
firm’s total cost is $3,000 per day and its variable cost is $2,500 per day.
At the current output level, the marginal cost of production is $45.
[a] Critically appraise the following statement by the firm’s accountant:
“Given our current production level, our variable cost exceeds our total
revenue. We should shut down our production facility.”
[b] Illustrate your answer with a graph showing the standard short-run cost
curves and the marginal revenue curve of this perfectly competitive
firm.
27. Below is a graph indicating the economic effects of a governmentmandated minimum wage. Examine the graph and then discuss the pros
and cons of the minimum wage. In your answer, be sure to make
arguments both for and against the minimum wage. Base these
arguments on economic principles (economic theory). Support the
theoretical arguments with empirical data [use the experimental data from
experiment #5]. What empirical evidence, if any, is provided by the
McConnell and Brue text to support each argument?
28. Explain the economic effects of a price floor for agricultural products.
Sketch a graph to illustrate.