S. Klepper, Economics 73-100, Fall 2008

Quiz 4

The local steel industry has been depressed for many years, resulting in a great deal of unemployment in the Pittsburgh region. In order to stimulate the steel industry, suppose the state of Pennsylvania offers to pay 20% of the cost of labor used by steel producers. Suppose that labor is the only variable input of production and the plan has no effect on the price of steel, which is determined through international competition.

Which of the following statements concerning the effects of this plan in the short run are correct? Mark true for a correct answer and false for an incorrect one and provide explanations for each of your answers.

_____1. The marginal cost of production of local steel producers would fall by 20% at every level of output.

_____2. The average variable cost of production of local steel producers would fall by 20% at every level of output.

_____3. The marginal cost curve will not cross the average total cost curve of local steel producers where the average total cost curve attains a minimum.

_____4. The average fixed cost of local steel producers would decline by 20% at every level of output.

_____5. The average total cost of local steel producers would decline by 20% at every level of output.