Question 1

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

Accepted Answer

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

Question 2

A firm trying to maximize its profits in the long run should

Accepted Answer

A)  charge the lowest price possible given the minimum possible cost. 
B)  select the most technically efficient method of production regardless of the level of production. 
C)  maximize the marginal product of all factors of production. 
D)  charge the highest price. 
E)  minimize the cost of producing the level of production it chooses. 
A)  charge the lowest price possible given the minimum possible cost. 
B)  select the most technically efficient method of production regardless of the level of production. 
C)  maximize the marginal product of all factors of production. 
D)  charge the highest price. 
E)  minimize the cost of producing the level of production it chooses.

Question 3

If a firm is using labour and capital such that the MP of labour is two times the MP of capital, and the price of labour is four times the price of capital, the firm should in order to minimize its costs of producing its output.

Accepted Answer

A)  decrease both capital and labour 
B)  decrease capital and increase labour 
C)  not alter its present factor mix 
D)  increase both labour and capital 
E)  increase capital and decrease labour 
A)  decrease both capital and labour 
B)  decrease capital and increase labour 
C)  not alter its present factor mix 
D)  increase both labour and capital 
E)  increase capital and decrease labour

Question 4

The slope of an isoquant measures

Accepted Answer

A)  the capital/labour ratio. 
B)  the marginal rate of (technical) substitution between factors. 
C)  the marginal cost of a given level of output. 
D)  the ratio of prices of inputs. 
E)  the ratio of prices of goods. 
A)  the capital/labour ratio. 
B)  the marginal rate of (technical) substitution between factors. 
C)  the marginal cost of a given level of output. 
D)  the ratio of prices of inputs. 
E)  the ratio of prices of goods.

Question 5

Suppose a firm employs two inputs, X and Y, and that at their current levels of use MPX/PX >
MPY/PY. To minimize the cost of production, the firm should hire

Accepted Answer

A)  more input Y only if its price falls. 
B)  more input Y and less input X. 
C)  more input X only if its price decreases. 
D)  more input X only if its price increases. 
E)  more input X and less input Y. 
A)  more input Y only if its price falls. 
B)  more input Y and less input X. 
C)  more input X only if its price decreases. 
D)  more input X only if its price increases. 
E)  more input X and less input Y.

Question 6

The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.   FIGURE 8- 6
-Refer to Figure 8- 6. Suppose there is a change in relative factor prices and the cost- minimizing method of producing 2000 golf tees is now at point D. If the total cost of producing 2000 golf tees is still $60, it must be the case that

Accepted Answer

A)  the price of labour rose and the price of capital fell. 
B)  the price of labour fell and the price of capital remained constant. 
C)  the price of labour and capital both fell. 
D)  the price of labour fell and the price of capital rose. 
E)  the price of labour and capital both rose. 
A)  the price of labour rose and the price of capital fell. 
B)  the price of labour fell and the price of capital remained constant. 
C)  the price of labour and capital both fell. 
D)  the price of labour fell and the price of capital rose. 
E)  the price of labour and capital both rose.

Question 7

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 will be to

Accepted Answer

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

Question 8

In the long run, decreasing returns to scale are likely to be caused by

Accepted Answer

A)  decreasing costs. 
B)  diminishing returns to the variable factor. 
C)  management diseconomies. 
D)  increasing specialization. 
E)  a decrease in factor prices. 
A)  decreasing costs. 
B)  diminishing returns to the variable factor. 
C)  management diseconomies. 
D)  increasing specialization. 
E)  a decrease in factor prices.

Question 9

With respect to innovation, which of the following statements is true?

Accepted Answer

A)  The utilization rate of existing plant and equipment and its durability are independent of the pace of innovation. 
B)  Innovation is often endogenous to the economic system. 
C)  The principal incentive to innovation does not appear to be related to profits. 
D)  Government policy cannot influence the rate of innovation. 
E)  Innovation is exogenous to the economic system. 
A)  The utilization rate of existing plant and equipment and its durability are independent of the pace of innovation. 
B)  Innovation is often endogenous to the economic system. 
C)  The principal incentive to innovation does not appear to be related to profits. 
D)  Government policy cannot influence the rate of innovation. 
E)  Innovation is exogenous to the economic system.

Question 10

A firm's least- cost position for producing a given output level occurs at that point where

Accepted Answer

A)  the isocost line intersects the highest isoquant. 
B)  the isocost and isoquant intersect the vertical axis. 
C)  the isocost and isoquant intersect the horizontal axis. 
D)  the isocost line and the isoquant are tangent to each other. 
E)  the isoquant is closest to the origin. 
A)  the isocost line intersects the highest isoquant. 
B)  the isocost and isoquant intersect the vertical axis. 
C)  the isocost and isoquant intersect the horizontal axis. 
D)  the isocost line and the isoquant are tangent to each other. 
E)  the isoquant is closest to the origin.

Question 11

Suppose that a firm is using 100 units of labour and 50 units of capital to produce 200 fax machines per day. The price of labour is $5 per unit and the price of capital is $2 per unit. The MPL equals 5 and the MPK equals 2. In this situation, the firm

Accepted Answer

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

Question 12

The fact that isoquants are downward sloping indicates

Accepted Answer

A)  a change in relative factor prices. 
B)  the diminishing marginal productivity of a variable factor. 
C)  the diminishing marginal productivity of a fixed factor. 
D)  that a reduction in the use of one factor requires an increase in the use of the other factor in order to keep output constant. 
E)  that each factor input has a negative marginal productivity. 
A)  a change in relative factor prices. 
B)  the diminishing marginal productivity of a variable factor. 
C)  the diminishing marginal productivity of a fixed factor. 
D)  that a reduction in the use of one factor requires an increase in the use of the other factor in order to keep output constant. 
E)  that each factor input has a negative marginal productivity.

Question 13

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

Accepted Answer

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

Question 14

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

Question 15

Which of the following cost curves demonstrate increasing returns to scale?

Accepted Answer

A)  returns to scale have nothing to do with the shape of the long- run average cost curve 
B)  a horizontal long- run average cost curve 
C)  a downward- sloping long- run average cost curve 
D)  an upward- sloping long- run average cost curve 
E)  a vertical long- run average cost curve 
A)  returns to scale have nothing to do with the shape of the long- run average cost curve 
B)  a horizontal long- run average cost curve 
C)  a downward- sloping long- run average cost curve 
D)  an upward- sloping long- run average cost curve 
E)  a vertical long- run average cost curve

Question 16

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. $$\begin{array}{l}
\begin{array} { | l | l | l | } 
\hline \begin{array} { l } 
\text { Production } \
\text { Method }
\end{array} & \text { MPK } & \text { MPL } \
\hline \text { A } & 50 & 4 \
\hline \text { B } & 45 & 8 \
\hline \text { C } & 40 & 12 \
\hline \text { D } & 35 & 16 \
\hline \text { E } & 30 & 20 \
\hline \text { F } & 25 & 24 \
\hline \text { G } & 20 & 28 \
\hline
\end{array}\
\text { TABLE 8- } 2
\end{array}$$
-Refer to Table 8- 2. Suppose capital costs $6 per unit and labour costs $4 per unit and the firm is employing production method A. How should this firm adjust its use of capital and labour to minimize costs?

Accepted Answer

A)  employ less capital and less labour 
B)  employ less capital and more labour 
C)  employ more capital and more labour 
D)  employ more capital and less labour 
E)  there is insufficient information to know 
A)  employ less capital and less labour 
B)  employ less capital and more labour 
C)  employ more capital and more labour 
D)  employ more capital and less labour 
E)  there is insufficient information to know

Question 17

FIGURE 8- 4
-Refer to Figure 8- 4. The firm is initially minimizing the cost of producing 1000 units of output. Suppose the factor prices then change such that the price of capital (K) falls and the price of labour
(L) rises. If the firm decides to leave its output unchanged, it will now move toward the point

Accepted Answer

A)  A. 
B)  B. 
C)  C. 
D)  D. 
E)  unknown as there is insufficient information to know 
A)  A. 
B)  B. 
C)  C. 
D)  D. 
E)  unknown as there is insufficient information to know

Question 18

Movement from one point to another along an isocost line implies a change in

Accepted Answer

A)  expenditure. 
B)  output levels, holding factor combinations constant. 
C)  factor combinations, holding expenditure constant. 
D)  factor prices. 
E)  the level of output, independent of what happens to factor combinations. 
A)  expenditure. 
B)  output levels, holding factor combinations constant. 
C)  factor combinations, holding expenditure constant. 
D)  factor prices. 
E)  the level of output, independent of what happens to factor combinations.

Question 19

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

Accepted Answer

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

Question 20

The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.   FIGURE 8- 6
-Refer to Figure 8- 6. Suppose the firm is currently producing at point E and the prices of capital and labour each increase by 30 percent. If the firm wants to minimize the cost of producing the same level of output, the firm's chosen factor combination would be at point

Accepted Answer

A)  G. 
B)  E. 
C)  not determinable from the information provided. 
D)  A. 
E)  C. 
A)  G. 
B)  E. 
C)  not determinable from the information provided. 
D)  A. 
E)  C.

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

A firm trying to maximize its profits in the long run should

If a firm is using labour and capital such that the MP of labour is two times the MP of capital, and the price of labour is four times the price of capital, the firm should in order to minimize its costs of producing its output.

The slope of an isoquant measures

Suppose a firm employs two inputs, X and Y, and that at their current levels of use MPX/PX > MPY/PY. To minimize the cost of production, the firm should hire

In the long run, decreasing returns to scale are likely to be caused by

With respect to innovation, which of the following statements is true?

A firm's least- cost position for producing a given output level occurs at that point where

Suppose that a firm is using 100 units of labour and 50 units of capital to produce 200 fax machines per day. The price of labour is $5 per unit and the price of capital is $2 per unit. The MPL equals 5 and the MPK equals 2. In this situation, the firm

The fact that isoquants are downward sloping indicates

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

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.

Which of the following cost curves demonstrate increasing returns to scale?

Movement from one point to another along an isocost line implies a change in

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

Economic Issues and Concepts

Economic Theories, Data, and Graphs

Demand, Supply, and Price

Elasticity

Markets in Action

Consumer Behaviour

Producers in the Short Run

Competitive Markets

Monopoly, Cartels, and Price Discrimination

Imperfect Competition

Economic Efficiency and Public Policy

How Factor Markets Work

Labour Markets

Interest Rates and the Capital Market

Market Failures and Government Intervention

The Economics of Environmental Protection

Taxation and Public Expenditure

The Gains From International Trade

Trade Policy

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Exam 8: Producers in the Long Run

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

A firm trying to maximize its profits in the long run should

If a firm is using labour and capital such that the MP of labour is two times the MP of capital, and the price of labour is four times the price of capital, the firm should in order to minimize its costs of producing its output.

The slope of an isoquant measures

Suppose a firm employs two inputs, X and Y, and that at their current levels of use MPX/PX > MPY/PY. To minimize the cost of production, the firm should hire

In the long run, decreasing returns to scale are likely to be caused by

With respect to innovation, which of the following statements is true?

A firm's least- cost position for producing a given output level occurs at that point where

Suppose that a firm is using 100 units of labour and 50 units of capital to produce 200 fax machines per day. The price of labour is $5 per unit and the price of capital is $2 per unit. The MPL equals 5 and the MPK equals 2. In this situation, the firm

The fact that isoquants are downward sloping indicates

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

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.

Which of the following cost curves demonstrate increasing returns to scale?

Movement from one point to another along an isocost line implies a change in

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

Economic Issues and Concepts

Economic Theories, Data, and Graphs

Demand, Supply, and Price

Elasticity

Markets in Action

Consumer Behaviour

Producers in the Short Run

Competitive Markets

Monopoly, Cartels, and Price Discrimination

Imperfect Competition

Economic Efficiency and Public Policy

How Factor Markets Work

Labour Markets

Interest Rates and the Capital Market

Market Failures and Government Intervention

The Economics of Environmental Protection

Taxation and Public Expenditure

The Gains From International Trade

Trade Policy

Filters