Answer the following as True, False, or Uncertain (TFU)- Points based on the quality of explanation

1. Diminishing marginal utility for goods implies that indifference curves slope upwards.

2. Increasing the output of a pharmaceutical manufacturing facility will tend to decrease the total costs of production by an amount equal to the current average cost of production.

3. The law of diminishing marginal returns creates decreasing returns to scale in production.

4. If a particular facility can be used for abdominal surgery or for the delivery of newborns, then an increase in the local birthrate will tend to decrease the cost of abdominal surgery.

5. The current cost of using a machine is directly related to how much was paid to acquire it.

6. Pareto efficiency is necessary but not sufficient for social welfare maximization.

7. Learning by doing in the workforce decrease marginal costs but not average costs.

8. If Hank's indifference curves for Advil and Aleve are straight lines and he faces fixed relative prices, then he will not change which medication he consumes regardless of income level. (Assume Hank always buys at least one of these meds)

PART 2

1. Richards enjoys guitars (G) and cigarettes (C).

a) Suppose his utility was given by U=20GC. Draw some indifference curves for Richard. (Place cigarettes on the horizontal axis for this and the following parts of the question)

(5 points)

b) Richard has $80,000 to spend on guitars and cigarettes. The price of guitars $4000, and the price of a crate of cigarettes is $200. Plot a budget line for Richard.

(5 points)

c) Using the conditions of optimality discussed in class (MRS = price ratio, and all income is spent), calculate the number of cigarettes and the number of guitars that Richard will consume.

[Hint Marginal Utility of Cigarettes is 20G, and MU of Guitars is 20C]

2. Consider the following data on the production of records taken from joey's Noisy Record Shop while she was operating in the short run. Joey knows that if she increased her labor force from 1 to 7 in increments of one, the numbers of records produced each day would be 8, 8, 17, 30, 40, 45, and 47 respectively. (5 points for each part)

a) If records sell for $20 each, how much money does the third worker add to joey's revenues each day?

b) If workers will work for any wage above $190/day, would Joey be willing to hire the third worker?Would she be willing to hire the fourth?

c) Provide your best estimate in dollars of the cost to Joey of a worker calling in sick for a day and explain.

3. Suppose the demand for drinking water in a remote village near the Sahara is such that if the amount of water doubled, the market price of water would fall to one-quarter the original price. Evaluate the following statement: high rainfall that doubles the annual amount of water would halve the total value of water, indicating a loss to consumers in the village.

4.

5 points each part

Suppose a firm must pay an annual franchise fee, which is a fixed sum, independent of

whether it produces any output. How does this tax affect the firm's fixed, marginal, and average costs?

Now suppose the firm is charged a tax that is proportional to the number of items it produces. Again, how does this tax affect the firm's fixed, marginal, and average costs?

5 points each part

6.

A computer company's cost function, which related its average cost of production (AC) to it cumulative output in thousands of computers (CQ) and its plant size in terms of thousands of computers produced per year (Q) is given by the following: AC = 10-.1(CQ) + .3(Q).

Is there a learning curve effect?

During its existence, the firm has produces a total of 50,000 computers and is producing 10,000 computers this year. Next year it plans to increase its production to 12,000 computers. Will its average cost of production increase or decrease?Explain.