1.   The figure above shows the relationship between labor and output (total product) for a firm, holding constant other factors of production.

a.   What is the average product of the 2nd worker?

b.   What is the marginal product of the 3rd worker?

c.   For what quantities of labor is the marginal product decreasing?

d.   Briefly explain why we expect to see the marginal product of labor decrease, holding other factors of production constant.

2.   Suppose that in 1999 Mustang, Inc. produced 100 million units of a good at an average cost of $6 and in 2000 it expanded its plant capacity and produced 200 million units at an average cost of $6.20.  In this

range, most likely Mustang is experiencing

(Select One)

a.   economies of scale.

b.   diseconomies of scale

c.   neither economies of scale nor diseconomies of scale.

d.   increasing marginal product of labor.

e.   falling input prices.

3.   The graph above represents the cost curves of an individual firm in the perfectly competitive market for pumpkins. The current market price for pumpkins is $6.50.

a.   How many pumpkins will the firm produce to maximize profits in the short-run?

b.   What is the lowest price at which this firm will earn positive profit in the short-run?

c.   What is the lowest price at which this firm will continue to operate, producing a positive quantity of pumpkins, in the short-run?

d.   If there is no change in demand in the long-run, explain what you expect to happen to the market price in the market for pumpkins.

4.   Alex runs a successful ice cream shop. Most of the week the shop is packed, but demand for ice cream is

lower on Tuesdays. If Alex opens the shop on Tuesdays, he expects to have only about 35 customers. To

stay open, he must staff the shop with one employee, who is paid $90 per day. The fixed cost of running the shop works out to $60 per day, including rent and equipment costs. The ice cream cones sell for $3 above

the cost of ingredients, so MR = $3. What should he do?

5.   The graphs below show the market supply and demand curves for smart phones as well as the cost curves for an individual firm that produces smart phones. Assume that the market for smart phones is perfectly    competitive and all the firms have identical cost curves.

a.   What is the short-run market equilibrium price of smart phones?

P =                                

b.   How many smart phones will each individual firm produce in the short run?

Q =                                

c.   Calculate short-run profits (or losses) for the individual firm. Label the area representing profit (or loss) on the graph above.

π =                                

d.   Explain what will happen to supply in the market for smart phones in the long run. How will this affect profit for the individual firms in the market?

e.   What is the long-run, equilibrium price in the market for smart phones?