Suppose that Martha's income is $40,000 per year.  She can spend it on health care visits, which cost $80 per visit, or on groceries (standing for "all other goods”), which cost $100 per bag of groceries.  Draw Martha's budget constraint.  Using indifference curves, show Martha's optimum if she buys 300 bags of groceries per year.Suppose Martha's income rises to $42,000 per year, and that she increases her consumption of health care visits by five visits.  Using the graphs for Question 1, draw the new equilibrium.  What is her income elasticity of demand for health care visits?

Calculate the cross-price elasticity of demand between bread and butter where a    20 percent decrease in the price of bread results in a 50 percent increase in the  quantity of butter demanded.  Explain your answer.

MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.  1) A firm has successfully adopted a positive technological change when 1) _______  A) it sees an increase in worker productivity.  B) it produces less pollution in its production process.  C) it can produce more output using the same inputs.  D) can pay its workers less yet increase its output.  2) The difference between technology and technological change is that 2) _______  A) technology involves the use of capital equipment while technological change requires the use of brain power.   B) technology refers to the processes used by a firm to transform inputs into output while technological change is a change in a firm's ability to produce a given level of output with a given quantity of inputs.   C) technology is carried out by firms producing physical goods but technological change is an intellectual exercise into seeking ways to improve production.   D) technology is product-centered, that is, developing new products with our limited resources while technological change is process-centered in that it focuses on developing new production techniques.  3) Suppose a chain of convenience stores reorganized its system of supplying its stores with food. This led to a sharp reduction in the number of trucks that the company had to use and increased the amount of fresh food on store shelves. Which of the following statements best describes the chain stores' actions?  3) _______  A) The firm is able to produce more output (increase its sales) using fewer inputs (less trucks). Therefore, the chain of convenience stores has implemented a positive technological change.  B) The scenario described is an example of management efficiency and not technological change. Essentially, the chain changes its way of operating its business.   C) Technological change refers only to the introduction of new products or improvements to existing product. As such, the scenario described in the question is not technological change.   D) The change implemented is not an example of technological change because it did not require the use of new machinery of equipment.   4) A characteristic of the long run is 4) _______  A) there are both fixed and variable inputs  B) all inputs can be varied.  C) plant capacity cannot be increased or decreased.   D) there are fixed inputs.  5) Which of the following is a factor of production that generally is fixed in the short run? 5) _______  A) raw materials B) labor  C) water D) a factory building  6) Which of the following is a fixed cost? 6) _______  A) costs of raw materials  B) wages to hire assembly line workers  C) payment to hire a security worker to guard the gate to the factory around the clock  D) payments to an electric utility  7) Economic costs of production differ from accounting costs in that 7) _______  A) accounting costs are always larger than economic cost.  B) economic costs include expenditures for hired resources while accounting costs do not.  C) accounting costs include expenditures for hired resources while economic costs do not.  D) economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.  8) Implicit costs can be defined as 8) _______  A) the non-monetary opportunity cost of using the firm's own resources.  B) accounting profit minus explicit cost.   C) the deferred cost of production.  D) total cost minus fixed costs.  9) Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her implicit costs? 9) _______  A) $80,000 B) $70,000 C) $42,000 D) $41,500  10) Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's average fixed cost per day when she produces 50 gyros using two workers? 10) ______  A) $2.00 B) $2.40 C) $4.40 D) $6.80  11) When firms analyze the relationship between their level of production and their costs they separate the time period involved into 11) ______  A) morning and evening.   B) a fixed period and a variable period.  C) the short run and the long run.   D) 6 months or less; 6 months to 1 year; more than 1 year.   12) Which of the following can a firm do in the long run but not in the short run? 12) ______  A) reduce its rate of output by laying off workers  B) increase its variable costs  C) increase its use of raw materials  D) decrease the size of its physical plant  13) Jennifer Borts moves her office from the premises she rents at a local mall to her home. As a result of this move 13) ______  A) Jennifer's implicit costs fall.  B) Jennifer's opportunity costs fall.  C) Jennifer's total costs fall.  D) Jennifer's explicit costs fall and her implicit costs rise.  14) The relationship between the inputs employed by a firm and the maximum output that it can produce with those inputs is the firm's 14) ______  A) production function. B) average product of labor.   C) supply curve, or supply schedule. D) marginal product of labor.  15) Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's variable cost per day when she produces 50 gyros using two workers? 15) ______  A) $100 B) $124.40 C) $220 D) $240  16) Bill owns "Bill's Home of Blues" a store that specializes in selling CDs and DVDs of blues musicians of the 1960s and 1970s. Bill took out a loan from his bank to pay for his store and its initial inventory. Bill pays the bank $900 per week for his loan. The $900 bank payment 16) ______  A) is a fixed cost.  B) is a long-run implicit cost.   C) is a variable cost.  D) is a short-run implicit cost.   17) If four workers can produce 18 chairs a day and five can produce 20 chairs a day, the marginal product of the fifth worker is 17) ______  A) 2 chairs. B) 3 chairs. C) 4 chairs. D) 38 chairs.  18) The law of diminishing marginal returns states 18) ______  A) average total costs of production initially fall and after some point starts to rise at a decreasing rate as output increases.  B) that at some point, adding more of a variable input to a given amount of a fixed input will cause the marginal product of the variable input to decline.  C) that at some point, adding more of a fixed input to a given amount of variable inputs will cause the marginal product of the variable input to decline.  D) that in the presence of a fixed factor, at some point average product of labor starts to fall as more and more variable inputs are added.   Figure 11-1 19) Refer to Figure 11-1. The marginalproduct of the 3rd worker is 19) ______  A) 57. B) 19. C) 15. D) 11.  20) Refer to Figure 11-1. The average product of the 4th worker  20) ______  A) is 68. B) is 17.  C) is 11. D) cannot be determined.  21) Refer to Figure 11-1. Diminishing marginal productivity sets in after  21) ______  A) the 2nd worker is hired. B) the 3rd worker is hired.  C) the 4th worker is hired. D) the 5th worker is hired.  22) In the short run, if marginal product is at its maximum, then 22) ______  A) marginal cost is at its minimum. B) average variable cost is at its minimum.  C) average cost is at its minimum. D) total cost is at its maximum.   23) When a firm produces 50,000 units of output, its total cost equals $6.5 million. When it increases its production to 70,000 units of output, its total cost increases to $9.4 million. Within this range, the marginal cost of an additional unit of output is 23) ______  A) $41.43. B)  $134.29. C) $135. D) $145.  24) If fixed costs do not change, then marginal cost 24) ______  A) equals the change in variable cost divided by the change in output.   B) equals the change in average fixed cost divided by the change in output.  C) equals the change in average variable cost divided by the change in output.  D) also remains constant.  25) Which of the following explains why the marginal cost curve has a U shape? 25) ______  A) Initially, the marginal product of labor falls, then rises.   B) Initially, the average product of labor rises, then falls.   C) Initially, the average cost of production rises, then falls.   D) Initially, the marginal product of labor rises, then falls.   26) Which of the following statements is false?  26) ______  A) Marginal cost will equal average total cost when marginal cost is at its lowest point.   B) Marginal cost will equal average total cost when average total cost is at its lowest point.   C) When marginal cost is less than average total cost, average total cost will fall.   D) When marginal cost is greater than average total cost, average total cost will rise.   27) When the average total cost is $16 and the total cost is $800, then the number of units the firm is producing is 27) ______  A) impossible to determined with the information given.  B) 12,800.  C) 784.  D) 50.  28) If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35, what is the firm's average fixed cost at that level of output?  28) ______  A) $65  B) $50  C) $15  D) It is impossible to determine without additional information.  29) If average total cost is $50 and average fixed cost is $15 when output is 20 units, then the firm's total variable cost at that level of output is 29) ______  A) $1,000.  B) $700.  C) $300.  D) impossible to determine without additional information.  Table 11-7 Quantity of Lanterns Fixed Cost (dollars) Variable Cost (dollars) Total Cost (dollars) Average Total Cost (dollars)   75 200   170   370   4.93   80 200   230   430   5.36   90 200   7.67 100 200   810 115 200 11.8 117 200 1264 1464 12.5 120 200 1480 Table 11-7 shows cost data for Lotus Lanterns, a producer of whimsical night lights. 30)  Refer to Table 11-7. What is the variable cost of production when the firm produces 115 lanterns? 30) ______  A) $1,556 B) $1,157 C) $956 D) $10.05  31)  Refer to Table 11-7. What is the average total cost of production when the firm produces 120 lanterns? 31) ______  A) $1,680 B) $72 C) $14 D) $12.3  32)  Refer to Table 11-7. What is the average variable cost per unit of production when the firm produces 90 lanterns? 32) ______  A) $490 B) $33.67 C) $7.67 D) $5.44  33)  Refer to Table 11-7. What is the marginal cost per unit of production when the firm produces 100 lanterns? 33) ______  A) $420 B) $32 C) $11.1 D) $8.1  34) Long-run cost curves are U-shaped because 34) ______  A) of the law of demand. B) of the law of supply.  C) of the law of diminishing returns. D) of economies and diseconomies of scale.  Figure 11-10 35) Refer to Figure 11-10. Suppose for the past 8 years the firm has been producing Qdunits per period using plant size ATC4. Now, following a permanent change in demand, it plans to cut production to Qc units. What will happen to its average cost of production? 35) ______  A) In the short run, its average cost falls from $47 to $41, and in the long run, average cost falls even further to $37.   B) In the short run, its average cost rises from $47 to $55, and in the long run, average cost falls to $37.  C) In the short run, its average cost falls from $47 to $37, and in the long run, average cost rises to $41.  D) In the short run, its average cost rises from $47 to $55, and in the long run, average cost falls to $41.   36) Refer to Figure 11-10. Identify the minimum efficient scale of production. 36) ______  A) Qa B) Qb C) Qc D) Qd  37) In the long run 37) ______  A) the firm is more profitable than it is in the short run.   B) the firm's fixed costs are greater than its fixed costs in the short run.   C) all of the firm's costs are explicit costs; there are no implicit costs of production.   D) all of the firm's costs are variable costs.   38) Which of the following statements regarding a firm's long-run average total cost (LRATC) curve and its short-run average total cost (SRATC) curve is true?  38) ______  A) The LRATC shows the lowest cost at which a firm is able to produce a given level of output when no inputs are fixed.  B) The contribution of average fixed cost to LRATC is greater than its contribution to SRATC.   C) The shape of the LRATC is affected by the law of diminishing returns.   D) The SRATC, but not the LRATC, can be used by a firm's managers for planning.