COMM 295 Midterm 2020
Numerical FIB and Essay Questions
Q 25
Your firm’s cost function for producing plexiglass is given by C(q) = 15 + 2q + 0.5q2. You are
currently producing q = 5 units, and you receive a request to produce and sell one additional
unit. The difference between your marginal cost of producing one more unit and your average
variable cost of producing 6 units is _____. (Input a number, such as "56", with no dollar sign or
quotation marks.)
MC = dC/dq = 2+q
At q = 5, MC = 7
AVC (q = 6) = 2 +0.5q = 5
The difference = 2
Q 26
Refer to the previous question regarding the plexiglass cost function. Your boss believes that
when averaged over a large number of firms the supply function (as measured by marginal cost)
is flat. In other words, your boss believes there is no statistical evidence that the marginal cost
of producing plexiglass increases with higher levels of production. Suppose you have cost data
from a large number of firms which produce plexiglass, and you use regression to estimate the
quadratic cost function C = a + bQ + cQ2 + e. You obtain estimates for the “a”, “b” and “c”
coefficients and the standard errors for those three estimates. Identify the steps you would take
to test your boss’ beliefs about the plexiglass supply function.
Your answer should take the form:
Step One: Estimate the regression equation and collect coefficient estimates and standard
errors.
Step Two:
Step Three:
Etc.
MC = b+2cQ
1: Run regression to find the values of a, b and c and their corresponding standard errors.
2. If MC increases with Q, then c > 0.
3. For c to be significant t-stat for c = c/standard error of c > 2. The null H is c = 0. If t-stat > 2,
we reject the null H, which indicates that c > 0 or that MC increases with Q. If t < 2, then we
cannot reject c = 0. That means MC is constant = b.
Numerical FIB and Essay Questions
Q 25
Your firm’s cost function for producing plexiglass is given by C(q) = 15 + 2q + 0.5q2. You are
currently producing q = 5 units, and you receive a request to produce and sell one additional
unit. The difference between your marginal cost of producing one more unit and your average
variable cost of producing 6 units is _____. (Input a number, such as "56", with no dollar sign or
quotation marks.)
MC = dC/dq = 2+q
At q = 5, MC = 7
AVC (q = 6) = 2 +0.5q = 5
The difference = 2
Q 26
Refer to the previous question regarding the plexiglass cost function. Your boss believes that
when averaged over a large number of firms the supply function (as measured by marginal cost)
is flat. In other words, your boss believes there is no statistical evidence that the marginal cost
of producing plexiglass increases with higher levels of production. Suppose you have cost data
from a large number of firms which produce plexiglass, and you use regression to estimate the
quadratic cost function C = a + bQ + cQ2 + e. You obtain estimates for the “a”, “b” and “c”
coefficients and the standard errors for those three estimates. Identify the steps you would take
to test your boss’ beliefs about the plexiglass supply function.
Your answer should take the form:
Step One: Estimate the regression equation and collect coefficient estimates and standard
errors.
Step Two:
Step Three:
Etc.
MC = b+2cQ
1: Run regression to find the values of a, b and c and their corresponding standard errors.
2. If MC increases with Q, then c > 0.
3. For c to be significant t-stat for c = c/standard error of c > 2. The null H is c = 0. If t-stat > 2,
we reject the null H, which indicates that c > 0 or that MC increases with Q. If t < 2, then we
cannot reject c = 0. That means MC is constant = b.
