ECN 100A A01 SQ 2020 !"
Virginia Cui ጱ MT 2: 100 A
(A) ᕮຎ
ྌၥḵጱړහғ 36҅ჿړ 72 ړ
൉Ի෸ᳵ 5์21෭ 18:47
ྌ੤ᦶᬰᤈԧ 43 ړᰦ̶

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8 / 16 ړᳯ᷌ 1
FOR THIS QUESTION ENTER NUMERICAL (E.G. 10,
not "ten") VALUES IN EACH BLANK.
You are considering investing in a new alternative fuel
technology called Snake Oil that converts snake
venom into transportation fuel. The cost function of
Snake Oil is C(q) = 64 - 6q + q where q is in barrels of
oil. From a consumer perspective Snake Oil is identical
to conventional oil, so in order to sell snake oil you will
have to sell it at the competitive world oil price of $14
per barrel.
Part 1. You have yet to enter this market, how much
Snake Oil should you produce? You will produce
8 barrels of Snake Oil.
Part 2. Now assume that California is concerned
about the welfare of snakes and charges a one time
license fee of 80 to anyone entering the Snake Oil
business, The oil price is still $14 a barrel. With this
fee in place, now how much Snake Oil will you
produce? You will produce 12
barrels of Snake Oil.
Now assume that Snake Oil is NOT identical to regular
oil. In fact it does all sorts of good things for the
environment and your car, but requires a special type
of car, such as the Chrysler Sidewinder. This means
that the Snake Oil market is distinct from the regular
oil market. The demand curve for Snake oil is
estimated to be D(p) = 880-8p. Also assume there is
NO LICENSE FEE for Parts 3 and 4.
Part 3. The Long-run price of Snake Oil will be $
10 .
Part 4. There will be 100 firms in the
Snake Oil market in the long-run, given the market
demand of D(p) =880 - 8p.
2
8఍૪ࢧᒼ
10 ྋᏟࢧᒼ
q = 10 ྋᏟࢧᒼ
ten ྋᏟࢧᒼ
Ten ྋᏟࢧᒼ
q=10 ྋᏟࢧᒼ
12఍૪ࢧᒼ
zero ྋᏟࢧᒼ
0 ྋᏟࢧᒼ
Zero ྋᏟࢧᒼ
q=0 ྋᏟࢧᒼ
q=0 ྋᏟࢧᒼ
10
ten ྋᏟࢧᒼ
Ten ྋᏟࢧᒼ
$10 ྋᏟࢧᒼ
100
one hundred ྋᏟࢧᒼ
hundred ྋᏟࢧᒼ
One hundred ྋᏟࢧᒼ
Part 1: need to check both output and entry
rule. Output rule says set MC = p or in this
case set MC = -6+ 2q = p = 14. This leads to q*
=10 BUT need to check that Long run AC > p
as well. AC(10) = 64/10 - 6 + 10. This is < 14
so WILL ENTER and q = 10.
Part 2: MC is unchanged so q* = 9. Now AC(9)
= 64/9 -10 + 9 = 6.11 < p = 9. So with the
subsidy we will enter and make q = 9.
Part 3: LR price will be where LRAC = MC with
the subsidy. This means set
AC(q) = 64/q -6+ q = MC(q) = - 6 + 2q; or 64/q =
q or q = 8. This is the LR quantity, the LR price
will set LRAC(8) = MC(8) = 10. So the LR price
10.
Part 4: The number of firms in this market
need to meet demand with each firm produce
q = 8. At a price of 6 there is demand of 880 -
8*10 = 800. Since each firm is producing 8 that
means 100 firms.

ᒼໜ 1ғ
ᒼໜ 2ғ
ᒼໜ 3ғ
ᒼໜ 4ғ
8 / 16 ړᳯ᷌ 2
At Hilltop, after the zombie apocalypse has caused
the fall of civilization, Jesus has invented a new way to
generate electricity. It involves paying workers to
walk around in circles tied to a generator. Workers
make w = $10 per hour. The production function is q
= (1/2)KL, , as long as there is at least 1 machine, where
K is the amount of machine-hours and L is the amount
of worker hours
Parts 1 and 2. Using an optimal mix of inputs, Jesus
can currently produce 320 kWh of electricity using
160 worker/hours of labor at a total cost of $3200.
Given these facts, we can conclude that Jesus's
machine costs r = $ [ᭌೠ] /
per hour. We can also conclude that Jesus's
electricity system exhibits
[ᭌೠ] returns to scale.
Now assume that Neegan has devised a new machine
that can use "walkers" (e.g. zombies) instead of living
workers. The production function is the same as
Jesus's, q = (1/2) KL, as long as there is at least 1
machine, and now "labor" is provided by the walking
dead, who do not need to be compensated, so w = 0.
However, Neegan's machine costs three times as
much per hour as Jesus's machine, and the demand
for electricity at the Sanctuary, where Neegan lives, is
twice as high, or 1280 kWh.
Parts 3 and 4. Given these facts, we can conclude that
Neegan would produce 1280 KWh at a higher total
cost than Jesus's machine. Neegan's electricity
system exhibits diseconomies of scale .

400
increasing
higher total cost ఍૪ࢧᒼ
lower average cost ྋᏟࢧᒼ
diseconomies of scale ఍૪ࢧᒼ
economies of scale ྋᏟࢧᒼ
Note that q = (1/2) KL = 320. In the first
machine L = 160 so K must be 320/(1/2)L =
640/160 = 4. If the total cost is $3200 and
160x10 = 1600 is being spent on labor, then
the cost of capital must be 3200 - 1600 =
1600. So the price of capital must be 1600/4 =
400.
If you double K and L, you more than double
output so this exhibits INCREASING RTS.
At the Sanctuary, the cost of the machine is 3 x
400 but labor is free, so the best combination
of inputs would be to buy the minimum 1
machine and use free labor for the rest. That
means the production costs are all fixed, and
marginal costs are zero. Total cost to produce
any amount of electricity is 1200, which is less
than at Hilltop. This is extremely large
economies of scale.

4 / 4 ړᳯ᷌ 3
The above figure shows 2 different Isoquants for a
production process. Which of the following can
definitely be concluded from this figure?
Capital and Labor are perfect substitutes.

The process exhibits decreasing returns to scale.

The marginal product of capital is greater than the
marginal product of labor ( ).
None of the alternatives.
A constant slope would indicates perfect
substitutes, and this slope is not constant. The
convex shape of the isoquant implies that
there are parts where MPK is smaller than
MPL (small slope). Last, the picture shows that
the bundle (50,50) lies above the q = 100
isoquant, while the bundle (100,100) falls on
the q = 200. This means a bundle smaller than
(50,50) produced q = 100 and that doubling
that bundle would not reach q = 200. So the
process has decreasing RTS.

0 / 4 ړᳯ᷌ 4
Ashby lumber company has the following production
function
q= 20L - 2L2
where q is the number of trees processed and L is the
quantity of labor Ashby employs.
For what values of L is the MP diminishing?
L > 20
L < 5
L > 5 ఍૪ࢧᒼ
L > 0 ྋᏟࢧᒼ
MPL = dq/dL = 20-4L
This is at its maximum when L = 0 and declines
for all L > 0.

0 / 4 ړᳯ᷌ 5
Lectures in microeconomics can be delivered either
by an instructor (labor) or a movie (capital) or any
combination of both. Yet the it gets harder and harder
to substitute more movies for an instructor the more
movies are already used. Which graph in the above
figure best represents the isoquants for lectures in
microeconomics when capital per day is on the
vertical axis and labor per day is on the horizontal
axis?
Graph A
Graph C
Graph D ఍૪ࢧᒼ
Graph B ྋᏟࢧᒼ

0 / 4 ړᳯ᷌ 6
If we use only wood and glue to make bookcases and
we always have to use them in fixed proportions.
Headquarters has ordered us to produce 100
bookcases. Which of the following would affect the
optimal amount of wood used in the production of
100 bookcases?
The price of wood
None of these ྋᏟࢧᒼ
The price of glue
All of these.
The price of bookcases ఍૪ࢧᒼ
For fixed proportions, we get L-shaped
isoquants. The optimal bundle will actually not
depend upon the price of wood or glue
because we need them both no matter what
they cost. Similarly if we have to hit the 100
isoquant the price of bookcases is not
relevant, although if the price is too low,
headquarters may regret ordering up 100
cases to be produced.

0 / 4 ړᳯ᷌ 7
If capital is fixed in the short run and labor is variable,
increasing the price of labor will __________. (Assume
that before and after the price change the firm finds it
optimal to produce
a positive quantity of output.):
Increase the firm's marginal cost. ྋᏟࢧᒼ

Lead the firm to use more capital in the short run.
Lead the firm to use less capital in the long-run.
None of these. ఍૪ࢧᒼ
The price of the variable input will affect a
firm’s marginal cost in the short run but not
the optimal level of the fixed input.

0 / 4 ړᳯ᷌ 8
During the middle ages, the production function for
books was q = 3k + 2L where k was the number of
printing presses and L was the number of monk-hours
of labor writing by hand. If the rental rate of printing
presses was r = $10 and the wages (in terms of food
and lodging) for monks was w = $5, then the cost
function of books was
TC(q) = (r/3) * q = (10/3) * q
TC(q) = (w*2)*q = (5*2)*q
TC(q) = (r/3 + w/2) * q = (10/3 + 5/2) * q
TC(q) = (w/2)*q = (5/2)*q ྋᏟࢧᒼ
TC(q) = (3*r + 2*w)*q = (3*10 + 2*5)*q ఍૪ࢧᒼ
Given that printing presses are less than twice
as productive as monks, and were twice as
expensive as monks, the least cost mix is to use
all monks. One would get 2 books per hour
from a unit of labor, so you would need only
1/2 of an hour at $w per hour to produce each
book. So TC(q) = w/2 * q.

4 / 4 ړᳯ᷌ 9
The University of California's Office of the President
recently completed a new $50 million building in
downtown Oakland to house systemwide
administrators. Due to the coronavirus crisis, half
those administrators are now laid off. The UC could
have the remaining administrators work from home
with no drop in productivity, or given the extra space,
could have them work at the new building safely.
Oakland based Clorox is offering to buy the building
for $5 million. The sunk cost to UC of using the
building is
$55 million.
$5 million.
zero.
$45 million.
$50 million.

4 / 4 ړᳯ᷌ 10
You are the new manager at Upper Crust Bakery in
Davis. Assume that the cost function for making
Ciabbata loaves at Upper Crust Baker is C(q) = 30 - 3q
+ (1/24) q . If the price of loaves is 5 then how many
loaves would you have Upper Crust produce?

3
11.09
none of these
9.38
8
64
Set q such that MC = p = 5.
MC = -3+ 1/8 q = 5, therefore 8 * 8 = q .
So q = 8. Now need to check that we don't shut
down, or
is AVC < p?
AVC = -3 + 1/24 q = 8/3 - 3 < 0 so definitely
keep operating at q = 8.
2 2
2

4 / 4 ړᳯ᷌ 11
Each of the diagrams above traces out 3 Isoquants for
a particular production process. Which picture is
consistent with Capital and Labor being perfect
substitutes for all values of L and K?
Diagram B
Diagram D
Diagram C
Diagram A
None of these
A constant MRTS - or Isoquant slope, is one
definition of perfect substitutes. Note that
figure A has areas where slopes are constant
but also areas where the slope is zero.

4 / 4 ړᳯ᷌ 12
Hipster Dave is a high-power consultant who makes
$100 an hour in consulting fees. He is also into new
technology and he has leased a Hindenburg, the
new hydrogen power vehicle made by VolksWagen.
Because hydrogen is still a new technology, VW
makes the fuel available for free to Hipster Dave.
Dave also has a VW Passat, which is the same kind of
car as the Hindenburg, but uses regular gasoline.
Unfortunately, a supply disruption has limited the
number of available hydrogen fueling stations, and
Hipster Dave now has to drive two hours to Oakland,
California in order to refuel his Hindenburg. He lives
next door to a gas station and refueling his Passat
takes no time, but costs $50 to refill his tank.
Hipster Dave says, "its a pain to have to drive to
Oakland, but the fuel is free so I'm willing to do it to
save the money." However, every time he fills his
tank, Hipster Dave is incurring roughly $150 in
[word_answer] costs.
opportunity
ྋᏟᒼໜ Opportunity
opportunity cost
oportunity
opportunity
Oportunity
Opportunity cost
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