Deck 6: Production and Cost Analysis in the Long Run

Question 1

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?

A) Capital costs have made it too expensive to purchase more capital stock.
B) It requires a large amount of highly trained labor to produce a single pipe organ.
C) The marginal productivity of additional trained workers is zero.
D) The capital used in producing pipe organs is much more expensive than the labor inputs.

Answer 1

B

Question 2

Which of the following statements concerning the long-run average cost LRAC) curve is correct?

A) The LRAC curve represents the least-cost input combination of inputs for producing each level of output.
B) The LRAC curve is derived from a series of short-run marginal cost curves.
C) The short-run cost curve at the minimum point of the LRAC curve represents the least-cost plant size for all levels of output.
D) As output increases, the amount of capital employed by the firm is held constant along the LRAC curve.

Answer 2

A

Question 3

Which of the following would have the least amount of influence on a manager's choice of which inputs to employ in a production process?

A) The price of a competitor's output.
B) The technology of the production process.
C) The marginal productivity of the inputs that can be used in the production process.
D) The prices of the inputs that can be used in the production process.

Answer 3

A

Question 4

X-inefficiency refers to the situation in which:

A) highly competitive firms have less incentive to minimize their costs of production than other firms because the highly competitive firms have almost no chance to earn above-average profits.
B) firms are unable to minimize their costs of production because there is no potential for input substitution.
C) firms that use labor-intensive production methods tend to be less efficient than firms that use capital-intensive production methods.
D) firms with market power have less incentive to minimize their costs of production than more competitive firms.

Question 5

Assume a firm is currently employing 20 units of capital and 100 units of labor in its production process. Assume also that the marginal product of the 20^th unit of capital is 40 units of output, the marginal product of the 100^th unit of labor is 10 units of output and the per unit prices of capital and labor are $20 and $10, respectively. In this case, in order to minimize its costs of production the firm should:

A) hire more capital and less labor.
B) hire more labor and less capital.
C) hire less capital and less labor.
D) hire more capital and more labor.

Question 6

An increase in the amount of competition with other firms that employ "best practices" would be likely to cause a particular firm's labor productivity to:

A) increase
B) stay the same.
C) decrease.
D) cannot be determined without additional information.

Question 7

Which of the following is least likely to limit the ability of a firm to minimize production costs?

A) Resistance by labor.
B) The fact that the firm is a nonprofit organization.
C) An increase in the amount of competition faced by the firm.
D) Legislated input combinations for firms in particular industries, e.g, health care

Question 8

Assume a firm uses two inputs, capital and labor. All else constant, an increase in the price of labor would create an incentive for the firm to:

A) substitute labor for capital in its production function.
B) substitute capital for labor in its production function.
C) hire more capital and labor.
D) hire less capital while holding the amount of labor employed constant.

Question 9

A labor-intensive method of production is one that:

A) requires employees to work harder than they would in other occupations.
B) relies exclusively on labor.
C) relies on large quantities of labor and smaller quantities of capital equipment.
D) combines a small but sophisticated labor force with a large amount of capital.

Question 10

Long-run average cost is defined as:

A) the minimum average cost of producing any level of output when all inputs are variable.
B) the minimum average cost of producing any level of output when the amount of capital is varied and all other inputs are held constant.
C) the average of the short-run costs associated with each amount of capital employed by the firm.
D) the minimum average cost of producing any level of output when all inputs are fixed.

Question 11

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:

A) less of each of the inputs of production.
B) more petroleum and less of the other inputs to production.
C) less petroleum and more of the other inputs to production.
D) the same amount of petroleum since there are no substitutes for petroleum.

Question 12

In which of the following market structures would X-inefficiency be most likely to exist?

A) Perfect competition.
B) Monopolistic competition.
C) Oligopoly.
D) Monopoly.

Question 13

In the case of a short-run production function:

A) all of the inputs are variable.
B) the amount of labor employed is held constant.
C) at least one of the inputs is fixed.
D) all of the inputs are fixed.

Question 14

Which of the following statements is correct?

A) Evidence strongly suggests that legislatively mandated input combinations have greatly reduced production costs in many industries.
B) Legislating input combinations in a particular industry can bias the decision making of the firm's managers and lead to higher-than-necessary costs of production.
C) Legislating input combinations in a particular industry has little or no effect on the decision making of the firm's managers.
D) Legislating input combinations in a particular industry is preferred to relying on market forces to determine the cost-minimizing combination of inputs to a production process.

Question 15

In which of the following situations would a firm be more likely to rely on a capital-intensive method of production?

A) When the rate of technological innovation is low.
B) When capital is relatively expensive.
C) When the firm's output cannot be produced using the assembly line method of production.
D) When labor supply is limited relative to the available amount of capital.

Question 16

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

A) there is little or no potential for input substitution in the grocery store business.
B) transportation costs are insignificant in the grocery store business.
C) land is a relatively inexpensive input in the grocery store business.
D) labor is relatively inexpensive in the grocery store business.

Question 17

In which of the following examples cited in the text is there the least amount of evidence of the potential for input substitution?

A) Automobile production.
B) Pipe organ production.
C) French fry production.
D) Production of health care services.

Question 18

The negatively-sloped part of the long-run average total cost curve is due to which of the following?

A) Diseconomies of scale.
B) Diminishing returns.
C) The difficulties encountered in coordinating the many activities of a large firm.
D) The increase in productivity that results from specialization.

Question 19

A production method that relies on large quantities of machines and equipment and smaller quantities of labor is referred to as a:

A) variable-input-intensive method of production.
B) labor-intensive method of production.
C) technology -intensive method of production
D) capital-intensive method of production.

Question 20

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

A) there may be more opportunities for input substitution than was previously thought, especially in areas such as health care, financial services, and the even the fine arts.
B) the traditional view that the potential for input substitution is extremely limited is correct.
C) while one or two areas of the service sector may see a small amount of input substitution, most areas will see little or none.
D) input substitution will only be feasible so long as the production process requires a relatively small amount of labor to begin with.

Question 21

Which of the following is not cited as one of the factors that accounts for the large-scale production that exists in many sectors of the economy?

A) Economies of scale.
B) Advertising and image differentiation.
C) The minimum efficient scale of operation in many industries is quite high relative to market demand.
D) Risk spreading.

Question 22

The positively-sloped part of the long-run average total cost curve is due to which of the following?

A) Diseconomies of scale.
B) Diminishing returns.
C) The firm being able to take advantage of large-scale production techniques as it expands its output.
D) The increase in productivity that results from specialization.

Question 23

All else constant, an improvement in technology at each scale of operation would cause:

A) a movement up an industry's LRAC curve.
B) a movement down an industry's LRAC curve.
C) an upward shift of an industry's LRAC curve.
D) a downward shift of an industry's LRAC curve.

Question 24

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

A) a decrease in marginal costs.
B) an increase in the marginal product of labor.
C) a decrease in the total fixed costs of production.
D) an increase in the average total costs of production.

Question 25

The list of the major factors that create economies of scale includes all of the following except:

A) specialization and division of labor.
B) quantity discounts.
C) an increase in demand for the firm's output.
D) the use of automation devices.

Question 26

Generally speaking, the inclusion of transportation costs in the total costs of production has the effect of causing the LRAC curve to:

A) shift down.
B) flatten out.
C) shift up.
D) become steeper over the range on economies of scale.

Question 27

In which of the following situations would the minimum efficient scale of operation provide little or no guidance regarding how many firms should serve the market to minimize production costs?

A) When the LRAC curve slopes downward over the relevant range of output.
B) When the LRAC curve hits its minimum point at a relatively low level of output and then increases and the demand for output is quite large.
C) When the LRAC curve hits its minimum point at a relatively low level of output but then remains constant as the scale of operation is increased and the demand for output is quite large.
D) When the LRAC curve initially increases and then decreases beyond some point.

Question 28

Assume the LRAC curve for a particular industry hits its minimum point at a relatively low level of output and then increases, and the demand for industry output is quite large. In this case, consideration of the minimum efficient scale of operation suggest that the market should be served by:

A) a large number of small firms to minimize production costs.
B) a small number of large firms to minimize production costs
C) a large number of large firms to minimize production costs.
D) an indeterminate number of firms of indeterminate size to minimize production costs.

Question 29

Which of the following statements about the beer industry is correct?

A) Over the last 30 years, technological change has resulted in substantial diseconomies of scale in the industry.
B) In 2000, the minimum efficient scale in the industry was approximately 18 million barrels per year.
C) As a result of an increase in the number of microbreweries, the five largest firms in the industry control less than 50 percent of the market.
D) The market share of microbreweries was estimated to be 20 percent in 1990.

Question 30

Much of the research on the minimum efficient scale suggests that for many firms, economies of scale are:

A) relatively modest.
B) nonexistent.
C) substantial.
D) heavily dependent on the minimum efficient scale of the firm's production process.

Question 31

In which of the following situations would consideration of the minimum efficient scale of operation suggest that the market should be served by a single firm to minimize production costs?

A) When the LRAC curve slopes downward over the relevant range of output.
B) When the LRAC curve hits its minimum point at a relatively low level of output and then increases and the demand for output is quite large.
C) When the LRAC curve hits its minimum point at a relatively low level of output but then remains constant as the scale of operation is increased and the demand for output is quite large.
D) When the LRAC curve initially increases and then decreases beyond some point.

Question 32

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

A) concentration of production in a small number of very large plants.
B) the use of automation devices.
C) technological advance.
D) division of labor.

Question 33

The "minimum efficient scale" of operation in an industry is defined as:

A) the smallest plant size that can be operated by firms in the industry.
B) the scale of operation at which economies of scale are exhausted.
C) the smallest number of firms that could effectively meet demand for an industry's output.
D) the scale of operation by firms in an industry that is least efficient.

Question 34

The technique that estimates long-run costs and the minimum efficient scale by determining the scale of operation at which most firms in an industry are concentrated is called the:

A) engineering estimation technique.
B) statistical cost estimation technique.
C) survivor approach.
D) back-of-the-envelope approach.

Question 35

Much of the research on the minimum efficient scale suggests that for many firms the LRAC curve is:

A) downward sloping over the relevant range of output.
B) upward sloping over the relevant range of output.
C) U-shaped.
D) flat over a relatively large range of output levels.

Question 36

Diseconomies of scale are illustrated by:

A) a downward sloping long-run average cost curve.
B) a flat long-run average cost curve.
C) an upward-sloping long-run average cost curve.
D) an upward-sloping short-run average total cost curve.

Question 37

Economies of scale are illustrated by:

A) a downward sloping long-run average cost curve.
B) a flat long-run average cost curve.
C) an upward-sloping long-run average cost curve.
D) a downward-sloping short-run average total cost curve.

Question 38

"Learning by doing" has the effect of causing:

A) a movement down the LRAC curve.
B) a movement up the LRAC curve.
C) the LRAC curve to shift up.
D) the LRAC curve to shift down.

Question 39

Which of the following would cause a firm's LRAC curve to shift up?

A) An increase in the amount of "learning by doing."
B) An increase in the price of labor, all else constant.
C) An increase in the amount of output produced by the firm.
D) A decrease in the amount of capital employed by the firm.

Question 40

The use of surveys of experts to estimate long-run production costs may be undermined by the fact that:

A) it is a time-consuming process.
B) it is dependent on the judgments of individuals closely connected with the industry.
C) reporting biases can occur.
D) all of the above.

Question 41

A movement down along a given isoquant causes the marginal rate of technical substitution to:

A) increase.
B) stay the same.
C) decrease.
D) cannot be determined without additional information.

Question 42

Assume a firm produces 500 units of a good by using two inputs, capital and labor, whose per unit prices are $10 and $4. Assume also that the marginal physical product of the last unit of capital is 30 and the marginal physical product of the last unit of labor is 10. To minimize costs this firm should employ:

A) the existing combination of resources.
B) more labor and less capital.
C) more capital and less labor.
D) both more labor and more capital.

Question 43

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.

Question 44

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.

Question 45

The marginal rate of technical substitution MRTS) along an isoquant:

A) is equal to the price ratio at all points along an isoquant.
B) is equal to the ratio of the marginal utilities of the two goods.
C) is equal to the ratio of the marginal products of the two inputs.
D) remains constant as we alter the combinations of the two inputs.

Question 46

Why are isoquants negatively-sloped?

A) Along a single isoquant, the firm can substitute the use of one input for another while holding the total level of output constant.
B) Due to the effects of diseconomies of scale.
C) Because the farther the isoquant is from the origin, the higher the level of output.
D) Because price and quantity demanded are inversely related.

Question 47

Isoquants are convex to the origin due to:

A) the law of diminishing marginal utility.
B) the assumption of the diminishing marginal productivity of each input.
C) the fact that as less capital is used, its marginal productivity falls.
D) the fact that as more labor is used, its marginal productivity rises.

Question 48

Graphically, all else constant, a decrease in the price of labor would be illustrated by:

A) a parallel shift of the isocost line in toward the origin.
B) rotating the isocost line away from the origin along the labor axis.
C) a parallel shift of the isocost line away from the origin.
D) rotating the isocost line in toward the origin along the capital axis.

Question 49

The fact that a firm is using a capital-intensive method of production means that input substitution is not possible.

Question 50

Regarding the production of health care, more recent studies suggest that:

A) economies of scale exist up to a hospital size of approximately 500 beds.
B) hospitals of many different sizes can compete effectively with each other on the basis of cost.
C) the LRAC curve exhibits significant diseconomies of scale beginning with a hospital size of approximately 100 beds.
D) the LRAC for hospitals exhibits a very distinct U shape.

Question 51

A firm is more likely to use a labor-intensive method of production when the relative amount of available labor is greater than the available amount of capital.

Question 52

An isocost line represents:

A) all the combinations of inputs to a production process that result in the same total costs of production.
B) all the combinations of inputs that result in the same amount of output.
C) all of the combinations of two inputs for which the amount of money spent on each of the inputs is equal.
D) all of the levels of output that result in the same total cost.

Question 53

The slope of the isocost line:

A) changes as the combination of labor and capital is altered by the firm.
B) is equal to the ratio of the marginal productivities at all points along the isocost line.
C) is equal to the negative of the ratio of the prices of the outputs.
D) is equal to the negative of the ratio of the prices of the inputs.

Question 54

Assuming capital and labor are substitutes, an improvement in technology that affects only the productivity of capital would cause a firm to employ more capital but leave the amount of labor employed unchanged.

Question 55

Assume a firm produces 500 units of a good by using two inputs, capital and labor, whose per unit prices are $10 and $4. Assume also that the marginal physical product of the last unit of capital is 30 and the marginal physical product of the last unit of labor is 10. What will change to move the firm to a new cost-minimizing equilibrium?

A) The marginal product of capital will fall and the marginal product of labor will increase.
B) The marginal product of labor will fall and the marginal product of capital will increase.
C) The price of labor will rise.
D) The price of capital will rise.

Question 56

Assume a firm produces 500 units of a good by using two inputs, capital and labor, whose per unit prices are $10 and $4. Assume also that the marginal physical product of the last unit of capital is 30 and the marginal physical product of the last unit of labor is 10. Is this firm minimizing its costs of producing 500 units of output?

A) No, because the marginal products of the two inputs are not equal.
B) No, because the MRTS and the price ratio for the two inputs are not equal.
C) No, because the prices of the two inputs are not equal.
D) The answer cannot be determined without more information.

Question 57

Which of the following statements about production isoquants is correct?

A) They show all the combinations of two inputs that result in the same level of output.
B) They are usually concave to the origin.
C) They show all the combinations of two inputs that yield the same cost of production.
D) They represent lower levels of output the farther they are from the origin.

Question 58

For the simple case of a production function with two inputs in which the inputs are perfect complements, each isoquant is represented by:

A) a vertical line.
B) a horizontal line
C) a downward sloping straight line.
D) a line that forms a right angle.

Question 59

All else constant, an increase in the price of labor would cause the total amount of output that can be produced with a fixed amount of spending to . This would result in a movement to a isoquant.

A) increase; lower
B) increase; higher
C) decrease; lower
D) decrease; higher

Question 60

In the long-run production function, all of the inputs to the production process are allowed to vary.

Question 61

When a firm is experiencing economies of scale, the minimum point of the firm's short-run average total cost curve shifts down as it expands its scale of production.

Question 62

An increase in the number of people in the United States with health insurance could cause the cost of providing health care services to increase as the incentive for health care providers to minimize costs decreases.

Question 63

One of the primary sources of diseconomies of scale is the inefficiencies associated with managing large scale operations.

Question 64

There is considerable evidence to support the assertion that legislated input combinations have reduced the costs of production in affected industries.

Question 65

Evidence suggests that as the amount of market power possessed by the firms in an industry increases, the amount of X-inefficiency will decrease.

Question 66

One of the major motivations for labor resistance to productivity enhancing changes in a production process is the resulting threat to job security.

Question 67

X-inefficiency refers to the situation in which firms with market power are operating in the upward-sloping segment of their long-run average cost curve.

Question 68

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.

Question 69

The "minimum efficient scale" of operation in an industry is defined as the scale of operation in an industry that is least efficient.

Question 70

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

Question 71

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.

Question 72

"Learning by doing" results in decreased average costs of production and is illustrated by a downward shift of the firm's long-run average cost curve.

Question 73

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.

Question 74

Studies and experience suggest that labor and capital are highly complementary inputs to the production of pipe organs.

Question 75

Failure to account for the increased transportation costs that would result from building fewer and more centrally located production facilities could result in firm managers selecting a scale of operation that is larger than the optimum.

Question 76

Diseconomies of scale are illustrated graphically by an upward shift of the firm's long-run average cost curve.

Question 77

In the long-run average cost function, only the amount of capital is allowed to vary.

Question 78

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.

Question 79

Labor resistance can be a major impediment to increased productivity in many firms.

Question 80

Assume that as a firm expands its scale of operation, the minimum point of its short-run average total cost curve is unchanged. In this case, we would say that the firm is experiencing diseconomies of scale.