Question 1

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 2

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 3

Suppose a shipping company employs 2000 workers,operates 400 delivery trucks and makes 1.5 million domestic shipments in one year.The next year they increase their workforce to 3000 workers,operate 600 trucks and make 2.8 million domestic shipments in one year.This firm 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

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 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

A very-long-run consideration that could change a firm's production function is

Accepted Answer

A) rising cost of the factors of production. 
B) increasing returns to scale of operation. 
C) an improvement in education that increases the quality of the economy's labour force. 
D) diminishing returns. 
E) size of the plant. 
A) rising cost of the factors of production. 
B) increasing returns to scale of operation. 
C) an improvement in education that increases the quality of the economy's labour force. 
D) diminishing returns. 
E) size of the plant.

Question 7

Assume a firm is using 10 units of capital and 10 units of labour to produce 10 widgets per hour.By doubling both inputs the result is a doubling of output.This firm is experiencing

Accepted Answer

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

Question 8

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

Question 9

Assume a firm is using 10 units of labour and 10 units of capital and is producing 10 units of output per hour.Now both inputs are doubled,resulting in output rising to 18 units per hour.The firm is experiencing

Accepted Answer

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

Question 10

Consider the short-run and long-run cost curves for a firm.If there is an improvement in the firm's technology,

Accepted Answer

A) the firm will move to a lower point on both its long-run and short-run average cost curves. 
B) the firm will move to a lower point on its long-run average cost curve only. 
C) both the long-run and short-run average cost curves will shift downward. 
D) there will be a downward shift in the long-run average cost curve but not in the short-run average cost curve. 
E) there will be no change in the cost curves in the long run. 
A) the firm will move to a lower point on both its long-run and short-run average cost curves. 
B) the firm will move to a lower point on its long-run average cost curve only. 
C) both the long-run and short-run average cost curves will shift downward. 
D) there will be a downward shift in the long-run average cost curve but not in the short-run average cost curve. 
E) there will be no change in the cost curves in the long run.

Question 11

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 12

The creation of a new product is called

Accepted Answer

A) process innovation. 
B) a rise in productivity. 
C) creative destruction. 
D) investment. 
E) product innovation. 
A) process innovation. 
B) a rise in productivity. 
C) creative destruction. 
D) investment. 
E) product innovation.

Question 13

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 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

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 16

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)rises and the price of labour (L)falls.If the firm decides to keep its output unchanged,it will 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 17

Suppose RioTintoAlcan is considering the construction of a new aluminum smelter in Northern Quebec,the operation of which requires a great deal of electricity.Suppose also that the price of electricity is predicted to rise significantly in the near future.As a result,the firm decides to build a plant using existing technology that is more expensive but uses less electricity per tonne of aluminum produced.This behaviour is an example of

Accepted Answer

A) short-run profit maximization. 
B) short-run cost minimization. 
C) the long-run principle of substitution. 
D) innovation away from changes in factor prices. 
E) long-run economies of scale. 
A) short-run profit maximization. 
B) short-run cost minimization. 
C) the long-run principle of substitution. 
D) innovation away from changes in factor prices. 
E) long-run economies of scale.

Question 18

FIGURE 8-4
-Refer to Figure 8-4,with the isoquants and isocost line as shown.A firm that is producing at point A can reduce its costs for producing 1000 units by employing

Accepted Answer

A) less capital and less labour. 
B) more capital and less labour. 
C) less capital and more labour. 
D) more capital and more labour. 
E) less capital and the same labour. 
A) less capital and less labour. 
B) more capital and less labour. 
C) less capital and more labour. 
D) more capital and more labour. 
E) less capital and the same labour.

Question 19

FIGURE 8-1
-Refer to Figure 8-1.For which of the four firms is output increasing less than in proportion to inputs for all output levels?

Accepted Answer

A) Firm A 
B) Firm B 
C) Firm C 
D) Firm D 
E) none of the four firms 
A) Firm A 
B) Firm B 
C) Firm C 
D) Firm D 
E) none of the four firms

Question 20

Suppose a firm is using 100 units of labour and 50 units of capital to produce 200 completed client tax returns per day.The price of labour is $10 per unit and the price of capital is $5 per unit.The MPL equals 2 and the MPK equals 5.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.

Exam 8: Producers in the Long Run

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

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

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

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

A very-long-run consideration that could change a firm's production function is

Assume a firm is using 10 units of capital and 10 units of labour to produce 10 widgets per hour.By doubling both inputs the result is a doubling of output.This firm is experiencing

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.

Assume a firm is using 10 units of labour and 10 units of capital and is producing 10 units of output per hour.Now both inputs are doubled,resulting in output rising to 18 units per hour.The firm is experiencing

Consider the short-run and long-run cost curves for a firm.If there is an improvement in the firm's technology,

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

The creation of a new product is called

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

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

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

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)rises and the price of labour (L)falls.If the firm decides to keep its output unchanged,it will move toward the point

FIGURE 8-4 -Refer to Figure 8-4,with the isoquants and isocost line as shown.A firm that is producing at point A can reduce its costs for producing 1000 units by employing

FIGURE 8-1 -Refer to Figure 8-1.For which of the four firms is output increasing less than in proportion to inputs for all output levels?

Suppose a firm is using 100 units of labour and 50 units of capital to produce 200 completed client tax returns per day.The price of labour is $10 per unit and the price of capital is $5 per unit.The MPL equals 2 and the MPK equals 5.In this situation,

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Suppose a firm is using 100 units of labour and 50 units of capital to produce 200 completed client tax returns per day.The price of labour is $10 per unit and the price of capital is $5 per unit.The MP_L equals 2 and the MP_K equals 5.In this situation,