Question 1

The long-run average cost (LRAC)curve shows

Accepted Answer

A) the lowest unit cost at which the firm can produce a given output. 
B) the highest unit costs of producing a given output. 
C) the operation of the law of diminishing returns. 
D) what happens to the fixed costs in the long run. 
E) the same as the short-run average cost curve. 
A) the lowest unit cost at which the firm can produce a given output. 
B) the highest unit costs of producing a given output. 
C) the operation of the law of diminishing returns. 
D) what happens to the fixed costs in the long run. 
E) the same as the short-run average cost curve.

Question 2

A firmʹs long-run average cost curve

Accepted Answer

A) shows the minimum cost of producing each possible level of output with a fixed factor. 
B) shows the relationship between marginal cost and output given that the economically most efficient method of production is employed. 
C) is the boundary between attainable and unattainable cost levels,with known production technologies and given factor prices. 
D) is horizontal in most situations. 
E) is an envelope of short-run average variable cost curves. 
A) shows the minimum cost of producing each possible level of output with a fixed factor. 
B) shows the relationship between marginal cost and output given that the economically most efficient method of production is employed. 
C) is the boundary between attainable and unattainable cost levels,with known production technologies and given factor prices. 
D) is horizontal in most situations. 
E) is an envelope of short-run average variable cost curves.

Question 3

Suppose Farmer Smith hires 4 workers and leases 2 tractors and 15 hectares of farmland for one growing season,and produces 120 000 bushels of crop.The next year he hires 8 workers and leases 4 tractors and 30 hectares of farmland,and produces 240 000 bushels of crop.This firm (the farmer)is exhibiting ________ returns to scale.

Accepted Answer

A) decreasing 
B) increasing 
C) constant 
D) marginal 
E) variable 
A) decreasing 
B) increasing 
C) constant 
D) marginal 
E) variable

Question 4

Canada has a much lower population density than does Japan.Therefore,the price of land (relative to the price of labour)is lower in Canada than in Japan.Consider a Canadian firm and a Japanese firm,both producing rice,both having access to the same technologies,and both striving to minimize costs.Now suppose that the relative price of land rises in Canada but remains the same in Japan.The effect on the use of inputs will be to

Accepted Answer

A) increase the land/labour ratio for both the Canadian and the Japanese firms. 
B) decrease the land/labour ratio for both the Canadian and the Japanese firms. 
C) increase the land/labour ratio for the Canadian firm. 
D) decrease the land/labour ratio for the Canadian firm. 
E) not change the land/labour ratio for either firm. 
A) increase the land/labour ratio for both the Canadian and the Japanese firms. 
B) decrease the land/labour ratio for both the Canadian and the Japanese firms. 
C) increase the land/labour ratio for the Canadian firm. 
D) decrease the land/labour ratio for the Canadian firm. 
E) not change the land/labour ratio for either firm.

Question 5

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.Should this profit-maximizing firm ever consider moving from point E (output level Q3 on SRATC2)to point F (output level Q5 on SRATC3)?

Accepted Answer

A) No,because they are already producing at their lowest possible cost at point E. 
B) Yes,because the firm can take advantage of economies of scale. 
C) Yes,because SRATC3 is the optimal plant size for this firm. 
D) No,because producing at point F implies a higher cost per unit of output. 
E) Yes,if the product price rises enough to lead the firm to expand to plant size 3. 
A) No,because they are already producing at their lowest possible cost at point E. 
B) Yes,because the firm can take advantage of economies of scale. 
C) Yes,because SRATC3 is the optimal plant size for this firm. 
D) No,because producing at point F implies a higher cost per unit of output. 
E) Yes,if the product price rises enough to lead the firm to expand to plant size 3.

Question 6

The principle of substitution plays a central role in resource allocation because it demonstrates that

Accepted Answer

A) firms will find it profitable to make abundant use of relatively scarce factors. 
B) methods of producing the same commodity will not differ from one country to another. 
C) firms can use all factors of production interchangeably with no impact on their costs. 
D) prices will be relatively low for those factors for which demand is high relative to supply. 
E) relative factor prices reflect relative scarcities of factors in the economy and so firms will find it profitable to make abundant use of relatively abundant factors. 
A) firms will find it profitable to make abundant use of relatively scarce factors. 
B) methods of producing the same commodity will not differ from one country to another. 
C) firms can use all factors of production interchangeably with no impact on their costs. 
D) prices will be relatively low for those factors for which demand is high relative to supply. 
E) relative factor prices reflect relative scarcities of factors in the economy and so firms will find it profitable to make abundant use of relatively abundant factors.

Question 7

For many firms the LRAC curve is U-shaped.The downward-sloping portion of the LRAC curve can be explained by

Accepted Answer

A) economies of scale. 
B) the spreading of overhead. 
C) both A and B. 
D) declining prices of the fixed factor. 
E) decreasing short-run marginal cost. 
A) economies of scale. 
B) the spreading of overhead. 
C) both A and B. 
D) declining prices of the fixed factor. 
E) decreasing short-run marginal cost.

Question 8

A profit-maximizing firm will increase its use of capital and decrease its use of labour when the

Accepted Answer

A) marginal product of capital is higher than the marginal product of labour. 
B) marginal product of capital,per dollar spent on capital,is greater than the marginal product of labour,per dollar spent on labour. 
C) average product of capital is higher than the average product of labour. 
D) total product of capital is higher than the total product of labour. 
E) marginal product of capital,per dollar spent on capital,is less than the marginal product of labour,per dollar spent on labour. 
A) marginal product of capital is higher than the marginal product of labour. 
B) marginal product of capital,per dollar spent on capital,is greater than the marginal product of labour,per dollar spent on labour. 
C) average product of capital is higher than the average product of labour. 
D) total product of capital is higher than the total product of labour. 
E) marginal product of capital,per dollar spent on capital,is less than the marginal product of labour,per dollar spent on labour.

Question 9

A firm operates at its least-cost position for a given level of output by equating

Accepted Answer

A) the marginal product of each factor. 
B) the marginal product per dollar spent for each factor. 
C) the price of each input. 
D) the total expenditure on each input. 
E) the average product for each factor. 
A) the marginal product of each factor. 
B) the marginal product per dollar spent for each factor. 
C) the price of each input. 
D) the total expenditure on each input. 
E) the average product for each factor.

Question 10

Isoquants are usually drawn convex when viewed from the origin,reflecting the standard assumption

Accepted Answer

A) that both factors are subject to the law of diminishing returns. 
B) that the variable factor is subject to the law of diminishing returns. 
C) the positive marginal productivity of all factors. 
D) negative marginal productivity of all factors. 
E) that both factors are subject to increasing returns. 
A) that both factors are subject to the law of diminishing returns. 
B) that the variable factor is subject to the law of diminishing returns. 
C) the positive marginal productivity of all factors. 
D) negative marginal productivity of all factors. 
E) that both factors are subject to increasing returns.

Question 11

Suppose Farmer Smith hires 4 workers and leases 2 tractors and 15 hectares of farmland for one growing season,and produces 120 000 bushels of crop.The next year he hires 8 workers and leases 4 tractors and 30 hectares of farmland,and produces 210 000 bushels of crop.This firm (the farmer)is exhibiting ________ returns to scale.

Accepted Answer

A) decreasing 
B) increasing 
C) constant 
D) marginal 
E) variable 
A) decreasing 
B) increasing 
C) constant 
D) marginal 
E) variable

Question 12

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 labour is $5 and the price of 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 13

The fact that new methods to extract oil are developed as oil prices increase suggests

Accepted Answer

A) that methods of production do not change in response to factor -price changes. 
B) that invention is exogenous. 
C) that invention does respond to economic signals and is endogenous. 
D) that oil has many close substitutes. 
E) nothing; changes in technology occur regardless of market prices. 
A) that methods of production do not change in response to factor -price changes. 
B) that invention is exogenous. 
C) that invention does respond to economic signals and is endogenous. 
D) that oil has many close substitutes. 
E) nothing; changes in technology occur regardless of market prices.

Question 14

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.Each of the three SRATC curves shows

Accepted Answer

A) technically inefficient methods of production,given that they lie above the LRAC. 
B) the lowest cost attainable,given that the plant size is the largest it can possibly be. 
C) the output that is possible when all factors of production are fixed. 
D) the lowest cost attainable,holding the plant size constant. 
E) optimal plant sizes in the long run. 
A) technically inefficient methods of production,given that they lie above the LRAC. 
B) the lowest cost attainable,given that the plant size is the largest it can possibly be. 
C) the output that is possible when all factors of production are fixed. 
D) the lowest cost attainable,holding the plant size constant. 
E) optimal plant sizes in the long run.

Question 15

Suppose a firm employs two kinds of inputs,capital at $100 per unit,and labour at $25 per unit.If the marginal product of capital is 50,then the firm should ________ in order to minimize its production costs.

Accepted Answer

A) employ more capital and less labour 
B) employ more labour and less capital 
C) employ more labour and more capital 
D) not change its current factor use 
E) There is insufficient information to make a recommendation. 
A) employ more capital and less labour 
B) employ more labour and less capital 
C) employ more labour and more capital 
D) not change its current factor use 
E) There is insufficient information to make a recommendation.

Question 16

A cost-minimizing firm will increase its use of labour and decrease its use of capital when the

Accepted Answer

A) marginal product of capital is higher than the marginal product of labour. 
B) marginal product of capital,per dollar spent on capital,is greater than the marginal product of labour,per dollar spent on labour. 
C) average product of capital is higher than the average product of labour. 
D) total product of capital is higher than the total product of labour. 
E) marginal product of capital,per dollar spent on capital,is less than the marginal product of labour,per dollar spent on labour. 
A) marginal product of capital is higher than the marginal product of labour. 
B) marginal product of capital,per dollar spent on capital,is greater than the marginal product of labour,per dollar spent on labour. 
C) average product of capital is higher than the average product of labour. 
D) total product of capital is higher than the total product of labour. 
E) marginal product of capital,per dollar spent on capital,is less than the marginal product of labour,per dollar spent on labour.

Question 17

ʺThe bigger the volume,the lower the cost,and we pass these savings on to youʺ is a familiar advertising slogan.It implies essentially that the

Accepted Answer

A) total cost of the firm will remain constant as output expands. 
B) firm expects to experience increasing returns over the relevant range of output. 
C) average fixed cost will decline or remain constant over the long run. 
D) consumer is able to pay less today because the total cost of the firm is expected to decline tomorrow. 
E) firm is altruistic. 
A) total cost of the firm will remain constant as output expands. 
B) firm expects to experience increasing returns over the relevant range of output. 
C) average fixed cost will decline or remain constant over the long run. 
D) consumer is able to pay less today because the total cost of the firm is expected to decline tomorrow. 
E) firm is altruistic.

Question 18

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.If this firm is producing at point B,then

Accepted Answer

A) this firm is producing a level of output that is technically inefficient in the long run. 
B) this firm is experiencing decreasing returns to scale. 
C) this firm could produce the same level of output at a lower cost with plant size 2. 
D) it should employ more of its variable factors of production. 
E) plant size 1 is optimal. 
A) this firm is producing a level of output that is technically inefficient in the long run. 
B) this firm is experiencing decreasing returns to scale. 
C) this firm could produce the same level of output at a lower cost with plant size 2. 
D) it should employ more of its variable factors of production. 
E) plant size 1 is optimal.

Question 19

Suppose that capital costs $6 per unit and labour costs $3 per unit.If the marginal product of capital is 3 and the marginal product of labour is 6,the cost-minimizing firm should

Accepted Answer

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

Question 20

When there is no other way of producing a given level of output with a smaller total value of inputs,the firm is operating at

Accepted Answer

A) minimum cost. 
B) maximum output. 
C) maximum profit. 
D) optimal output. 
E) maximum cost. 
A) minimum cost. 
B) maximum output. 
C) maximum profit. 
D) optimal output. 
E) maximum cost.

Exam 8: Producers in the Long Run

The long-run average cost (LRAC)curve shows

A firmʹs long-run average cost curve

The principle of substitution plays a central role in resource allocation because it demonstrates that

For many firms the LRAC curve is U-shaped.The downward-sloping portion of the LRAC curve can be explained by

A profit-maximizing firm will increase its use of capital and decrease its use of labour when the

A firm operates at its least-cost position for a given level of output by equating

Isoquants are usually drawn convex when viewed from the origin,reflecting the standard assumption

The fact that new methods to extract oil are developed as oil prices increase suggests

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.Each of the three SRATC curves shows

Suppose a firm employs two kinds of inputs,capital at $100 per unit,and labour at $25 per unit.If the marginal product of capital is 50,then the firm should ________ in order to minimize its production costs.

A cost-minimizing firm will increase its use of labour and decrease its use of capital when the

ʺThe bigger the volume,the lower the cost,and we pass these savings on to youʺ is a familiar advertising slogan.It implies essentially that the

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.If this firm is producing at point B,then

Suppose that capital costs $6 per unit and labour costs $3 per unit.If the marginal product of capital is 3 and the marginal product of labour is 6,the cost-minimizing firm should

When there is no other way of producing a given level of output with a smaller total value of inputs,the firm is operating at

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