Question

5. A consumer buys two goods. If the prices of both goods fall by 10% and the consumer's income falls by 20%, then a. the slope of the consumer's budget line will change. b. the consumer's budget line will shift out from the origin with the slope unchanged. c. the consumer's budget line will shift in toward the origin with the slope unchanged. d. the consumer's budget line will not change. 6. The figure at the right shows the isoquant map and the output expansion path for a firm that has increasing returns to scale. If the firm is using input combination “b,” its average costs are exp. path K; K2 a. less than with "a" b. the same as with "d" c. greater than with “g” d. the same as with "C" h b K Q3 Q1 L 7. Firms usually have isoquants that are strictly convex. This is because of a. the limited supply of an input. b. decreasing returns to scale. c. the law of diminishing returns. d. the law of diminishing marginal rates of technical substitution. 8. A firm produces Q using labor L and capital K and a production function that has diminishing marginal rates of technical substitution. The price of a unit of L is w = 20 and the price of a unit of Kis r = 8. Suppose the firm is producing 100 units of Q using an input mix for which the marginal product of capital is 5 and the marginal product of labor is 2. What, if anything, should the firm do to reduce its costs? a. Use more L and less K. b. Use more K and less L. c. Nothing; the firm is already minimizing costs. d. It is impossible to say without knowing what the production function is.

Answer 1

5. ans. c

since the prices fall in the same proportion, there is no change in slope of the supply curve. but since fall in income is more than fall in prices, the budget line will shift in

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