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Econ 2106 Dr. J. King Spring 2013 Practice Exam 2 Due at the beginning of class on Tuesday, March 5th. Use Scantron form 2052 or20052. 1. 2. 3. 4. 5. The relationship between averages and marginals implies that a. both marginal and average product curves increase at a decreasing rate. b. marginal returns will typically go through three distinct phases. c. the average product curve and the marginal product curve intersect at the highest point on the marginal product curve. d. the marginal product curve is everywhere below the average product curve. e the average product curve and the marginal product curve intersect at the highest point on the average product curve. If a firm is experiencing increasing marginal returns to its only variable input, then a. the total product curve is increasing at an increasing rate. b. the marginal product curve is rising. c. the total cost curve is increasing at a decreasing rate. d. the marginal cost curve is falling. e. all of the above. The marginal cost curve intersects a. the average total cost curve at the lowest point on the average total cost curve. b. the average variable cost curve at the lowest point on the average variable cost curve. c. the average fixed cost curve at the lowest point on the average fixed cost curve. d. both a and b are correct but c is not e. a, b, and c are all correct. Mike’s Mowers operates in the perfectly competitive lawn mowing industry with a market price of $40 and MC = 2q. What is Mike’s profit maximizing output? a. 10 b. 20 c. 40 d. it depends on how many mowers Mike owns. e. it depends on how many employees Mike has. If corn and wheat are alternative pursuits for a farmer (i.e., substitutes in production), an increase in the supply of corn will take place: a. When the price of corn falls. b. When the price of wheat falls. c. When the demand for corn rises. d. When the price of corn rises. e. When the price of wheat rises. 6. 7. 8. 9. 10. 11. If the price of a substitute good falls, then a. demand will shift in, equilibrium price will fall and equilibrium quantity will rise. b. supply will shift out, equilibrium price will fall and equilibrium quantity will rise. c. demand will shift out, equilibrium price will rise and equilibrium quantity will rise. d. demand will shift in, equilibrium price will fall and equilibrium quantity will fall. e. supply will shift in, equilibrium price will fall and equilibrium quantity will fall. Jim operates a donut shop in a market where he takes the price of $1 per donut as given. His total cost of production is given by TC(q) = 20 + 0.01q2 and his marginal cost of production is given by MC(q) = 0.02q. At his profit maximizing output level of q* = ______, Jim earns ______ profit. a. 50 donuts; $5 b. 20 donuts; $20 c. 50 donuts; $49 d. 2,000 donuts; $1,580 e. Jim should shut down The typical total product curve a. reaches its highest point at the output level where marginal product is zero. b. has an inflection point where the technology switches from increasing to diminishing marginal returns. c. is falling when there are negative marginal returns. d. starts at the origin e. all of the above Optimal Scale represents a. the lowest possible total cost of production. b. the lowest possible average total cost of production. c. the output level that allows the firm to reach the minimum point of average total cost. d. the largest size that a firm can reach without offering health insurance to its employees. e. the output level that allows the firm to reach the minimum point of marginal cost. The Law of Diminishing Returns states that a. as the amount of an input is increased, holding all else constant, the marginal product of the increasing input will eventually fall. b. as output is increased, the marginal cost of additional output will eventually rise. c. as output is increased, we will eventually reach a point where a doubling of output will more than double costs. d. if all inputs are increased in equal proportions, then the marginal product of each input will eventually fall. e. the marginal product of an input normally goes through three distinct phases. Anytime a firm faces a situation where MR < MC, the firm should a. increase output. b. lower price. c. reduce output. d. shut down. e. none of the above. 12. 13. On a total product curve with labor on the horizontal axis, the inflection point represents the quantity of labor where a. the marginal product of labor is at its highest b. we change from diminishing marginal returns to labor to negative marginal returns to labor. c. adding another worker decreases total output d. output goes from increasing at a decreasing rate to increasing at an increasing rate. e. none of the above. Q 0 4 6 8 TC 20 30 60 90 Based on the information in the above table, what is the marginal cost of the 6th unit of output? a. 60 b. 30 c. 15 d. 10 e. can’t tell without information on variable costs. 14. 15. 16. 17. A firm earning zero profit will a. continue to operate b. be forced into bankruptcy c. increase output d. not have enough revenue to pay a salary to its owners e. none of the above. Which of the following gives total fixed cost? a. TC – TVC b. AFC*q c. (ATC – AVC)*q d. the vertical intercept of the total cost curve e. all of the above. A perfectly competitive firm’s supply curve is the same as a. the upward sloping portion of the marginal product curve b. the upward sloping portion of the marginal cost curve c. the marginal cost curve above the average total cost curve d. the marginal cost curve above the average variable cost curve e. the marginal cost curve above the average fixed cost curve For a firm, the short‐run is defined as a. a period of less than one year. b. a period of time in which at least one input remains fixed in proportion. c. a period of less than five years. d. a period of less than six months. e. a period of time in which all inputs are fixed. Use the following supply and demand functions for the market for sod to answer questions 18 and 19: QD = 100 – 5P QS = 2 + 9P 18. The equilibrium price and quantity in this market are a. Q* = 102 ; P* = $4 b. Q* = 98 ; P* = $14 c. Q* = 14 ; P* = $65 d. Q* = 65 ; P* = $7 e. Q* = 31.4 ; P* = $13.72 19. At a price of $15, there is a a. surplus of 25 units b. shortage of 137 units c. surplus of 112 units d. surplus of 17 units e. shortage of 17 units 20. If a firm initially experiences a decreasing marginal product of labor, then a. the marginal product of labor curve starts above the average product of labor curve and the average product of labor curve is rising. b. the marginal product of labor curve starts above the average product of labor curve and the average product of labor curve is falling. c. the marginal product of labor curve starts below the average product of labor curve and the average product of labor curve is rising. d. the marginal product of labor curve starts below the average product of labor curve and the average product of labor curve is falling. e. the marginal product of labor curve will be the same as the average product of labor curve. 21. If incomes rise and at the same time a technological breakthrough lowers the cost of producing weazils, then a. the price of weazils will definitely fall b. the price of weazils will definitely rise c. the equilibrium quantity of weazils will definitely rise d. the price will fall if weazils are an inferior good e. none of the above 22. Suppose that an effective price floor on milk is removed. This would cause the a. price and the quantity exchanged to increase b. price and the quantity exchanged to decrease c. price to decrease and the quantity exchanged to increase d. price to increase and the quantity exchanged to decrease e. price and the quantity exchanged to remain where they were when the price floor was in effect Consider the following graph to answer questions 23 through 28: P S 8 6 4 2 D 3 6 9 12 Q 23. The equilibrium price and quantity are given by: a. P* = 8; Q*=12 b. P*=8; Q*=9 c. P*=7; Q*=6 d. P*=4; Q*=6 e. P*=4; Q*=3 24. In equilibrium, consumer surplus is equal to a. $4 b. $6 c. 9 units d. $12 e. $15 25. In equilibrium, producer surplus is equal to a. $5 b. $6 c. $12 d. $15 e. none of the above 26. A price floor at $6 would cause a _____ of ______ units. a. surplus; six b. shortage; six c. surplus; four d. shortage; four e. a price floor at $6 would have no effect on this market. 27. A price ceiling at $8 would cause a ______ of _______ units. a. surplus; nine b. shortage; nine c. surplus; twelve d. shortage; twelve e. a price ceiling at $9 would have no effect on this market. 28. 29. 30. How much deadweight loss would result from a price ceiling set at $2? a. $2 b. $3 c. $6 d. $27 e. none of the above A price taking firm will shut down in the short‐run if a. it earns no profit. b. there are a large number of buyers and sellers. c. it suffers a loss. d. there is a change in tastes and preferences. e. total revenue is less than total variable cost. For a perfectly competitive firm, marginal revenue is always a. equal to price. b. less than price. c. equal to average total cost. d. less than average variable cost. e. greater than price.

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