Question 1

The point of tangency between the short-run average total cost (SRATC)curve and the long-run average cost (LRAC)curve occurs

Accepted Answer

A) at the point of minimum SRATC. 
B) at a point where average total cost is falling but the marginal cost is rising. 
C) at a point where both the average total cost and the marginal cost are rising. 
D) at an output level for which the quantity of the fixed factor is optimal. 
E) only when the LRAC curve is at its minimum. 
A) at the point of minimum SRATC. 
B) at a point where average total cost is falling but the marginal cost is rising. 
C) at a point where both the average total cost and the marginal cost are rising. 
D) at an output level for which the quantity of the fixed factor is optimal. 
E) only when the LRAC curve is at its minimum.

Question 2

Suppose a firm is using 1500 units of labour and 20 units of capital to produce 100 tonnes of mineral ore.The price of labour is $40 per unit and the price of capital is $1000 per unit.The MPL equals 24 and the MPK equals 600.In this situation,

Accepted Answer

A) the firm is minimizing its costs. 
B) the firm should increase the use of both inputs. 
C) the firm could lower its production costs by decreasing labour input and increasing capital input. 
D) the firm could lower its production costs by increasing labour input and decreasing capital input. 
E) the firm should decrease the use of both inputs. 
A) the firm is minimizing its costs. 
B) the firm should increase the use of both inputs. 
C) the firm could lower its production costs by decreasing labour input and increasing capital input. 
D) the firm could lower its production costs by increasing labour input and decreasing capital input. 
E) the firm should decrease the use of both inputs.

Question 3

Which of the following conditions indicate cost minimization,assuming two inputs,labour ( L)and capital (K)?

Accepted Answer

A) PK ∙ MPK = PL ∙ MPL 
B) MPL = MPK 
C) MPK/PK = MPL/PL 
D) MPK/PL = MPL/PK 
E) PK = PL 
A) PK ∙ MPK = PL ∙ MPL 
B) MPL = MPK 
C) MPK/PK = MPL/PL 
D) MPK/PL = MPL/PK 
E) PK = PL

Question 4

In recent years,garbage collection has changed dramatically.Twenty-five years ago a crew of up to 4 or 5 workers and 1 truck collected residential garbage.Now collection is often done by one driver and 1 more fully automated truck.What is an explanation for this change?

Accepted Answer

A) Over long periods of time,labour is always replaced by capital. 
B) Over long periods of time,capital is always replaced by labour. 
C) Firms and municipalities substituted away from an increasingly expensive factor (labour)and toward an increasingly inexpensive factor (capital). 
D) Firms and municipalities substituted away from a factor whose price was falling (labour)and toward a factor whose price was rising(capital). 
E) The marginal product of labour was falling over time while the marginal product of capital was rising. 
A) Over long periods of time,labour is always replaced by capital. 
B) Over long periods of time,capital is always replaced by labour. 
C) Firms and municipalities substituted away from an increasingly expensive factor (labour)and toward an increasingly inexpensive factor (capital). 
D) Firms and municipalities substituted away from a factor whose price was falling (labour)and toward a factor whose price was rising(capital). 
E) The marginal product of labour was falling over time while the marginal product of capital was rising.

Question 5

An individual isocost line is a downward sloping straight line.The negative slope reflects

Accepted Answer

A) decreasing factor prices. 
B) increasing factor prices. 
C) that each factor price has a negative value. 
D) a change in relative factor prices. 
E) constant factor prices. 
A) decreasing factor prices. 
B) increasing factor prices. 
C) that each factor price has a negative value. 
D) a change in relative factor prices. 
E) constant factor prices.

Question 6

Suppose that capital costs $100 per unit and labour costs $40 per unit.If the marginal product of capital is 200 and the marginal product of labour is 60,a cost-minimizing firm should

Accepted Answer

A) employ more capital and less labour. 
B) employ more of both capital and labour. 
C) employ less of both capital and labour. 
D) employ less capital and more labour. 
E) not change its current factor use. 
A) employ more capital and less labour. 
B) employ more of both capital and labour. 
C) employ less of both capital and labour. 
D) employ less capital and more labour. 
E) not change its current factor use.

Question 7

A change in the technique for producing an existing product is known as

Accepted Answer

A) product innovation. 
B) investment. 
C) invention. 
D) an increase in productivity. 
E) process innovation. 
A) product innovation. 
B) investment. 
C) invention. 
D) an increase in productivity. 
E) process innovation.

Question 8

When a firm seeks to minimize costs of producing a given level of output,it does NOT need to know

Accepted Answer

A) the available alternative methods of production. 
B) the level of output that maximizes its profits. 
C) the cost of the factors of production it uses. 
D) its production function. 
E) how its costs change as its production methods change. 
A) the available alternative methods of production. 
B) the level of output that maximizes its profits. 
C) the cost of the factors of production it uses. 
D) its production function. 
E) how its costs change as its production methods change.

Question 9

The following table shows the marginal products of capital (K)and labour (L)for various methods for Firm ABC to produce 1000 toys per day.   TABLE 8-2
-Refer to Table 8-2.As this firm switches from production method A to production method G,production is

Accepted Answer

A) moving farther and farther away from cost minimization. 
B) becoming more capital intensive and less labour intensive. 
C) becoming more profitable. 
D) becoming more labour intensive and less capital intensive. 
E) remaining at a cost-minimizing level of output. 
A) moving farther and farther away from cost minimization. 
B) becoming more capital intensive and less labour intensive. 
C) becoming more profitable. 
D) becoming more labour intensive and less capital intensive. 
E) remaining at a cost-minimizing level of output.

Question 10

The figure below shows a family of cost curves for a firm.The subscripts 1,2,and 3 for the SRATC curves refer to different plant sizes.
   FIGURE 8-3
-Refer to Figure 8-3.The minimum efficient scale is achieved by this firm at output level

Accepted Answer

A) Q1. 
B) Q2. 
C) Q3. 
D) Q4. 
E) Q5. 
A) Q1. 
B) Q2. 
C) Q3. 
D) Q4. 
E) Q5.

Question 11

Assume a firm is using 6 units of capital and 6 units of labour to produce 6 baskets.Now it doubles both inputs resulting in a new total of 16 baskets being produced.This firm is experiencing

Accepted Answer

A) decreasing returns to scale. 
B) increasing returns to scale. 
C) constant returns to scale. 
D) diseconomies of scale. 
E) increasing costs. 
A) decreasing returns to scale. 
B) increasing returns to scale. 
C) constant returns to scale. 
D) diseconomies of scale. 
E) increasing costs.

Question 12

Consider a firm that uses only labour and capital as inputs.At the present use of labour and capital,the MP of labour is four times the MP of capital,and the price of labour is twice the price of capital.In order to minimize its costs,the firm should

Accepted Answer

A) substitute capital for labour until their marginal products are equal. 
B) decrease both capital and labour. 
C) decrease capital and increase labour. 
D) increase both labour and capital. 
E) stay at its present factor mix. 
A) substitute capital for labour until their marginal products are equal. 
B) decrease both capital and labour. 
C) decrease capital and increase labour. 
D) increase both labour and capital. 
E) stay at its present factor mix.

Question 13

What information is displayed by an isoquant?

Accepted Answer

A) the whole set of technically efficient factor combinations that can produce varying levels of output 
B) various levels of output that can be produced with different factor combinations 
C) various levels of output that can be produced with a fixed factor combination 
D) the whole set of technically efficient factor combinations that can produce a single level of output 
E) the alternative factor combinations that require the same expenditure 
A) the whole set of technically efficient factor combinations that can produce varying levels of output 
B) various levels of output that can be produced with different factor combinations 
C) various levels of output that can be produced with a fixed factor combination 
D) the whole set of technically efficient factor combinations that can produce a single level of output 
E) the alternative factor combinations that require the same expenditure

Question 14

When a cost-minimizing firm is faced with an increase in the relative price of labour,it adjusts its factor usage so as to

Accepted Answer

A) increase the marginal product of capital relative to the marginal product of labour. 
B) increase the marginal product of labour relative to the marginal product of capital. 
C) use more labour per unit of output than before. 
D) use more of both capital and labour per unit of output. 
E) maintain the previous usage of labour. 
A) increase the marginal product of capital relative to the marginal product of labour. 
B) increase the marginal product of labour relative to the marginal product of capital. 
C) use more labour per unit of output than before. 
D) use more of both capital and labour per unit of output. 
E) maintain the previous usage of labour.

Question 15

Suppose capital costs $280 per unit and labour costs $16 per unit.For a profit - maximizing firm operating at its optimal factor mix,if the marginal product of capital is 70,the marginal product of labour must be

Accepted Answer

A) 4. 
B) 6. 
C) 8. 
D) 12. 
E) 16. 
A) 4. 
B) 6. 
C) 8. 
D) 12. 
E) 16.

Question 16

In defining a firmʹs long-run average cost curve,

Accepted Answer

A) factor prices are held constant and technology is assumed to change. 
B) factor prices are held constant and the quantity of factors of production used is varied. 
C) factor prices are varied and the quantity of factors of production is held constant. 
D) technology,factor prices,and the quantity of factors of production are all varied. 
E) the time period must be longer than one year. 
A) factor prices are held constant and technology is assumed to change. 
B) factor prices are held constant and the quantity of factors of production used is varied. 
C) factor prices are varied and the quantity of factors of production is held constant. 
D) technology,factor prices,and the quantity of factors of production are all varied. 
E) the time period must be longer than one year.

Question 17

Although capital is a variable factor in the long run,once chosen it often becomes a fixed factor for a long time.A profit-maximizing firm must therefore select a method of production that is

Accepted Answer

A) economically efficient at current factor prices. 
B) technologically advanced beyond methods currently used. 
C) labour intensive,as labour is always a variable factor. 
D) economically efficient at current factor prices and sufficiently flexible to adapt to changing factor prices over time. 
E) adaptable to wide ranges of output over time. 
A) economically efficient at current factor prices. 
B) technologically advanced beyond methods currently used. 
C) labour intensive,as labour is always a variable factor. 
D) economically efficient at current factor prices and sufficiently flexible to adapt to changing factor prices over time. 
E) adaptable to wide ranges of output over time.

Question 18

The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets per month.   TABLE 8-1
-Refer to Table 8-1.If the price of both labour and capital is $10,which production technique minimizes the costs of producing 1000 units of output?

Accepted Answer

A) A 
B) B 
C) C 
D) D 
E) Any of the techniques have the same cost. 
A) A 
B) B 
C) C 
D) D 
E) Any of the techniques have the same cost.

Question 19

One hundred years ago,in North America and Europe it was commonplace for middle class households to employ housemaids.As you know,this is quite rare today.Most such households now have dishwashers,washing machines and dryers.What is an explanation of this change?

Accepted Answer

A) Over long periods of time,labour is always replaced by capital. 
B) Over long periods of time,capital is always replaced by labour. 
C) Households substituted away from a factor whose price was falling (labour)and toward a factor whose price was rising (capital). 
D) Households substituted away from an increasingly expensive factor (labour)and toward an increasingly inexpensive factor (capital). 
E) The marginal product of labour was falling over time while the marginal product of capital was rising. 
A) Over long periods of time,labour is always replaced by capital. 
B) Over long periods of time,capital is always replaced by labour. 
C) Households substituted away from a factor whose price was falling (labour)and toward a factor whose price was rising (capital). 
D) Households substituted away from an increasingly expensive factor (labour)and toward an increasingly inexpensive factor (capital). 
E) The marginal product of labour was falling over time while the marginal product of capital was rising.

Question 20

The figure below shows a family of cost curves for a firm.The subscripts 1,2,and 3 for the SRATC curves refer to different plant sizes.
   FIGURE 8-3
-Refer to Figure 8-3.Suppose this firm is producing output level Q 3 with plant size 2.Now suppose this firm changes to plant size 3 and is producing output level Q 5.We can say that

Accepted Answer

A) the firm is then operating with the optimal plant size. 
B) this firm has experienced economies of scale. 
C) output has increased more than in proportion to the increase in inputs. 
D) output has increased exactly in proportion to the increase in inputs. 
E) output has increased less than in proportion to the increase in inputs. 
A) the firm is then operating with the optimal plant size. 
B) this firm has experienced economies of scale. 
C) output has increased more than in proportion to the increase in inputs. 
D) output has increased exactly in proportion to the increase in inputs. 
E) output has increased less than in proportion to the increase in inputs.

Exam 8: Producers in the Long Run

The point of tangency between the short-run average total cost (SRATC)curve and the long-run average cost (LRAC)curve occurs

Suppose a firm is using 1500 units of labour and 20 units of capital to produce 100 tonnes of mineral ore.The price of labour is $40 per unit and the price of capital is $1000 per unit.The MPL equals 24 and the MPK equals 600.In this situation,

Which of the following conditions indicate cost minimization,assuming two inputs,labour ( L)and capital (K)?

In recent years,garbage collection has changed dramatically.Twenty-five years ago a crew of up to 4 or 5 workers and 1 truck collected residential garbage.Now collection is often done by one driver and 1 more fully automated truck.What is an explanation for this change?

An individual isocost line is a downward sloping straight line.The negative slope reflects

Suppose that capital costs $100 per unit and labour costs $40 per unit.If the marginal product of capital is 200 and the marginal product of labour is 60,a cost-minimizing firm should

A change in the technique for producing an existing product is known as

When a firm seeks to minimize costs of producing a given level of output,it does NOT need to know

The following table shows the marginal products of capital (K)and labour (L)for various methods for Firm ABC to produce 1000 toys per day. TABLE 8-2 -Refer to Table 8-2.As this firm switches from production method A to production method G,production is

The figure below shows a family of cost curves for a firm.The subscripts 1,2,and 3 for the SRATC curves refer to different plant sizes. FIGURE 8-3 -Refer to Figure 8-3.The minimum efficient scale is achieved by this firm at output level

Assume a firm is using 6 units of capital and 6 units of labour to produce 6 baskets.Now it doubles both inputs resulting in a new total of 16 baskets being produced.This firm is experiencing

Consider a firm that uses only labour and capital as inputs.At the present use of labour and capital,the MP of labour is four times the MP of capital,and the price of labour is twice the price of capital.In order to minimize its costs,the firm should

What information is displayed by an isoquant?

When a cost-minimizing firm is faced with an increase in the relative price of labour,it adjusts its factor usage so as to

Suppose capital costs $280 per unit and labour costs $16 per unit.For a profit - maximizing firm operating at its optimal factor mix,if the marginal product of capital is 70,the marginal product of labour must be

In defining a firmʹs long-run average cost curve,

Although capital is a variable factor in the long run,once chosen it often becomes a fixed factor for a long time.A profit-maximizing firm must therefore select a method of production that is

One hundred years ago,in North America and Europe it was commonplace for middle class households to employ housemaids.As you know,this is quite rare today.Most such households now have dishwashers,washing machines and dryers.What is an explanation of this change?

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