ECO 110 – Introduction to Economics

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ECO 220 – Intermediate Microeconomics
Professor Mike Rizzo
Second COLLECTED Problem Set – This is an assignment that WILL be collected and
graded. Please feel free to talk about the assignment with your friends or with your group
and I strongly encourage you to submit your assignment as a group.
Monday, April 4th
Monday, April 11th
1. True or False. If the marginal product of labor is decreasing, then the average
product of labor must also be decreasing. Explain.
2. Nicholson, Chapter 6, Problem 6.7.
3. Nicholson, Chapter 6, Problem 6.10
4. Nicholson, Chapter 7, Internet Exercise #2.
5. A firm purchases capital and labor in competitive markets at prices of r = 6 and w =
4, respectively. With the firm’s current input mix, the marginal product of capital is
12 and the marginal product of labor is 18. Is this firm minimizing its costs? If so,
explain how you know. If not, explain what the firm ought to do.
6. True or false. If marginal cost lies below average fixed cost, the firm should shut
down in the short run. Explain.
7. Suppose all firms in a competitive industry are operating at output levels for which
price is equal to long-run marginal cost. True or false and explain. This industry is
necessarily in long-run equilibrium.
8. The marginal and average cost curves of taxis in Metropolis are constant at $0.20
per mile. The demand curve for taxi-trips in Metropolis is given by P = 1-0.00001Q,
where P is the fare in dollars per mile, and Q is measured in miles per year. If the
industry is perfectly competitive and each cab can provide exactly 10,000 miles per
year of service, how many cabs will there be in equilibrium and what will be the
equilibrium fare?
9. Now suppose that the city council of Metropolis decides to curb congestion in the
downtown area by limiting the number of taxis to 6. Applicants participate in a
lottery, and the six winners get a medallion, which is a permanent license to operate
a taxi in the city. What will the equilibrium fare now be? How much economic profit
will each medallion holder earn? If medallions can be traded in the marketplace and
the rate of interest is 10% per year, how much will the medallions sell for? Will the
person who buys a medallion at this price earn a positive economic profit?
10. In the tariff example we did in class, give an intuitive explanation for the social loss
that each of the dead weight loss triangles represent.
11. True, False and Explain. Cheap foreign goods hurt American producers and are
therefore bad according to the efficiency criterion.
12. True, False and Explain. If an excise tax is imposed on a factor of production in
perfectly inelastic supply (e.g. land in Wyoming), there will be no effect on social
welfare. What will such a tax do?

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