Exam 6: Production and Cost Analysis in the Long Run

The text considers three methods that can be used to obtain empirical estimates of long-run costs in different industries. Of those three, surveys of expert opinion are considered to be most reliable because they are less subject to bias than the other two methods.

If an industry is characterized by substantial diseconomies of scale, as a particular firm in the industry expands its production capacity we will observe:

As the price of labor increases relative to the price of capital, the firm will move to a more labor-intensive production method to minimize costs.

The fact that supermarkets, a land-intensive form of organization, have become the dominant form of grocery store in the United States suggests that there is little or no potential for input substitution in the grocery store business.

Most of the empirical research on long-run costs suggests that the long-run average cost curve for most firms has a very pronounced U-shape.

If the inputs to a production process are perfect complements, the firm can choose from a virtually infinite array of combinations of the two inputs to minimize the costs of producing a given level of output.

Use the firm's long-run cost-minimizing decision rule to explain the differences in the relative use of capital and labor in agriculture in the United States and the Peoples Republic of China.

X-inefficiency refers to the situation in which:

Which of the following is most likely to create diseconomies of scale?

A change in technology or the relative prices of the inputs used in a production process would cause a manager's choice of inputs to use in the production process to change as well.

Consideration of the minimum efficient scale of operation would suggest that, to minimize production costs, the market should be served by a large number of small firms when the LRAC curve slopes downward over the relevant range of output.

All else constant, as the price of petroleum increases relative to the prices of other inputs to the production process, in their effort to minimize their total costs of production, we can expect to see firms employ:

The evidence on the potential for input substitution in the service sector suggests that:

All else constant, an increase in the level of competition among firms would be expected to reduce the amount of X-inefficiency that exists in a particular industry.

The fact that supermarkets, a land-intensive form of organization, have become the dominant form of grocery store in the United States suggests that:

Studies and recent experience suggest that there is considerable potential for substitution between doctors and nurses in the production of health care services.

Why are isoquants negatively-sloped?

According to the text there appear to be very limited opportunities for input substitution in the production of pipe organs. Which of the following is the most plausible explanation for this observation?

All else constant, a decrease in the per unit price of labor would create an incentive for a firm manager to substitute labor for capital in the firm's production process.

Which of the following statements is correct?