Question

1.

Does the following production function have diminishing marginal returns to labor in the SR? Q = 5LK12 yes O no O Cannot be determined from the information

2) The deadweight loss associated with an import tariff is smaller than a quota of the same impact because ________________.

a. The government receives revenue from the quota and not the tariff.

b. Price increases more with a tariff.

c. Quantity decreases more with a quota.

d. The government receives revenue from the tariff and not the quota.

e. Cannot be determined from the information

3) Will this firm shutdown?

Q = 5

Price: $30

MC = $10

AVC = $25

AFC = $3

a. no

b. yes

Answer 1

1.

Diminishing marginal return to labor means when unit of labor rises, it cause less than proportional change in output.

Q= 5LK^1/2

Now suppose producer increases the quantity of labor by 2 times:

Q'= 5(2L)K^1/2

Q'= 2 (5LK^1/2 )

Q'= 2Q

Here output also increases by 2 times so this production function does not exhibits diminishing marginal return to labor. It exhibits constant marginal return.

So the correct option is:

No

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2.

In case of tariff the government received the revenue while in quotas government does not received any revenue. While the all other things remain same in case of tariff and quotas that is in both case price increase by same amount and quantity also changes by the same amount.

So correct option is:

d. The government receives revenue from the tariff and not the quota.

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3.

Firm will shut down its operation if firm is not able earn the variable cost incurred on production.

Here Price is $30 per unit and on each unit the firm has to incur variable cost = $25.

So as the firm is able to cover its variable cost, it will not shut down its operation.

So Correct option is:

a. no