Deck 7: Production Theory and Estimation

Question 1

Use the following to answer questions below:


-Refer to the total product (TP) curve graph. At what quantity of labor is the marginal product of labor increasing?

A) 2
B) 5
C) 8
D) None of the above is correct.

Answer 1

2

Question 2

Use the following to answer questions below:


-Refer to the total product (TP) curve graph. At what quantity of labor is the marginal product of labor decreasing?

A) 2
B) 4
C) 8
D) None of the above is correct.

Answer 2

8

Question 3

Use the following to answer questions below:


-Refer to the total product (TP) curve graph. At approximately what quantity of labor is the marginal product of labor equal to the average product of labor?

A) 5
B) 8
C) 9.5
D) 10.5

Answer 3

8

Question 4

Use the following to answer questions below:


-Refer to the total product (TP) curve graph. At approximately what quantity of labor is the marginal product of labor closest to zero?

A) 1
B) 5
C) 8
D) 9.5

Question 5

Use the following to answer questions below:


-Refer to the total product (TP) curve graph. At approximately what quantity of labor is the marginal product of labor closest to its maximum value?

A) 2
B) 5
C) 8
D) 9.5

Question 6

Use the following to answer questions below:


-Refer to the isoquant graphs. Which of the four graphs shows an isoquant where capital (K) and labor (L) are perfect substitutes?

A) Graph A
B) Graph B
C) Graph C
D) Graph D

Question 7

Use the following to answer questions below:


-Refer to the isoquant graphs. Which of the four graphs shows an isoquant where capital (K) and labor (L) are perfect complements?

A) Graph A
B) Graph B
C) Graph C
D) Graph D

Question 8

Use the following to answer questions below:


-Refer to the isoquant maps graph. Assume that the four isoquants in each graph represent output levels of 100, 200, 300, and 400. Which of the four graphs shows an isoquant map in which returns to scale are continuously increasing?

A) Graph A
B) Graph B
C) Graph C
D) None of the above is correct.

Question 9

Use the following to answer questions below:


-Refer to the isoquant maps graph. Assume that the four isoquants in each graph represent output levels of 100, 200, 300, and 400. Which of the four graphs shows an isoquant map in which returns to scale are continuously decreasing?

A) Graph A
B) Graph B
C) Graph C
D) None of the above is correct.

Question 10

Use the following to answer questions below:


-Refer to the isoquant maps graph. Assume that the four isoquants in each graph represent output levels of 100, 200, 300, and 400. Which of the four graphs shows an isoquant map in which returns to scale are constant?

A) Graph A
B) Graph B
C) Graph C
D) None of the above is correct.

Question 11

Use the following to answer questions below:


-Refer to the isoquant maps graph. Assume that the four isoquants in each graph represent output levels of 100, 200, 300, and 400. Which of the four graphs shows an isoquant map in which returns to scale are first increasing and then decreasing?

A) Graph D
B) Graph C
C) Graph B
D) None of the above is correct.

Question 12

Use the following to answer questions below:


-Refer to the isoquant maps graph. Assume that the four isoquants in each graph represent output levels of 100, 200, 300, and 400. Which of the four graphs shows an isoquant map in which returns to scale are first decreasing and then increasing?

A) Graph D
B) Graph C
C) Graph B
D) None of the above is correct.

Question 13

Use the following to answer questions below:


-Refer to the isocost lines graph. Which of the following shifts represents an increase in the rental price of capital?

A) Line A to Line B
B) Line B to Line A
C) Line C to Line D
D) Line D to Line C

Question 14

Use the following to answer questions below:


-Refer to the isocost lines graph. Which of the following shifts represents a decrease in the wage rate of labor?

A) Line A to Line B
B) Line B to Line A
C) Line C to Line D
D) Line D to Line C

Question 15

Use the following to answer questions below:


-Refer to the isocost lines graph. Which of the following shifts represents an increase in total cost while the rental price of capital and the wage rate of labor are constant?

A) Line A to Line B
B) Line B to Line C
C) Line C to Line B
D) Line D to Line B

Question 16

Use the following to answer questions below:


-Refer to the equilibrium graph. What is the marginal rate of technical substitution at point A?

A) 1.25
B) 0.80
C) 0.50
D) None of the above is correct.

Question 17

Use the following to answer questions below:


-Refer to the equilibrium graph. What is the marginal rate of technical substitution at point B?

A) 2.00
B) 0.80
C) 0.50
D) None of the above is correct.

Question 18

Use the following to answer questions below:


-Refer to the equilibrium graph. If total cost is $80 at point A, what are the rental price of capital (r) and the wage rate of labor (w)?

A) r = $10 and w = $8
B) r = $8 and w = $10
C) r = $5 and w = $4
D) None of the above is correct

Question 19

Use the following to answer questions below:


-Refer to the equilibrium graph. If total cost is $100 at point B, what are the rental price of capital (r) and the wage rate of labor (w)?

A) r = $10 and w = $10
B) r = $20 and w = $10
C) r = $50 and w = $10
D) None of the above is correct

Question 20

Use the following to answer questions below:


-Refer to the equilibrium graph. The change from point A to point B is the result of _____. It causes the capital-to-labor ratio to _______.

A) an increase in the wage rate of labor; increase
B) an increase in the wage rate of labor; decrease
C) an increase in the rental price of capital; increase
D) an increase in the rental price of capital; decrease

Question 21

Which of the following is an example of a capital input?

A) Money
B) Shares of stock
C) Long-term bonds
D) A hammer

Question 22

Which of the following is an example of an intermediate product?

A) A personal computer
B) A barrel of crude oil
C) A sports car
D) A house

Question 23

Which of the following is not an assumption associated with the definition of a production function?

A) Technology remains constant.
B) Both inputs and outputs are measured in monetary units.
C) The function shows the maximum level of output possible with a given combination of inputs.
D) All units of the inputs are homogeneous.

Question 24

The marginal product of labor is equal to

A) the additional labor required to produce one more unit of output.
B) average product when average product is at a minimum.
C) the additional output produced by hiring one more unit of labor.
D) the slope of a ray drawn from the origin to a point on the total product curve.

Question 25

The average product of labor is equal to

A) the additional labor required to produce one more unit of output.
B) marginal product when average product is at a minimum.
C) the additional output produced by hiring one more unit of labor.
D) the slope of a ray drawn from the origin to a point on the total product curve.

Question 26

The output elasticity of labor is

A) equal to one at the level of output where average product is at a maximum.
B) the percentage change in labor required to produce one more unit of output.
C) equal to the ratio of total product to the quantity of labor employed.
D) a measure of the percentage change in output that can result when the quantity of labor is held constant.

Question 27

The point of inflection on the total product curve corresponds to the level of output where

A) stage II of production begins.
B) average product is at a maximum.
C) marginal product is at a maximum.
D) All of the above are correct.

Question 28

The law of diminishing returns

A) is reflected in the negatively sloped portion of the marginal product curve.
B) is the result of specialization and division of labor.
C) applies in both the short run and the long run.
D) All of the above are correct.

Question 29

Stage II of production begins at the point

A) of inflection of the total product curve.
B) where average and marginal product are equal.
C) where total product is at a maximum.
D) where marginal product is at a maximum.

Question 30

The marginal revenue product of labor for a firm

A) will increase if the price of the firm's output increases.
B) is the firm's demand curve for labor.
C) will decrease if the firm hires more labor.
D) All of the above are correct.

Question 31

An isoquant that is

A) farther from the origin represents greater output.
B) flatter represents the trade-offs between inputs that are poor substitutes.
C) negatively sloped represents input combinations associated with stage I of production.
D) All of the above are correct.

Question 32

The absolute value of the slope of a convex isoquant

A) is equal to the marginal rate of technical substitution.
B) is equal to the ratio of the marginal products of the two inputs.
C) decreases from left to right.
D) All of the above are correct.

Question 33

The combination of inputs is optimal

A) at points of tangency between isoquants and isocosts.
B) if the marginal revenue product is equal to the marginal resource cost for all inputs.
C) if the marginal rate of technical substitution between every pair of inputs is equal to the ratio of the prices of those inputs.
D) All of the above are correct.

Question 34

An isocost line will be shifted farther away from the origin

A) if the prices of both inputs increase.
B) if total cost increases.
C) if there is an advance in technology.
D) All of the above are correct.

Question 35

If isoquants are plotted on a graph with capital measured on the vertical axis and labor on the horizontal axis, then an increase in the wage rate will cause the isocost line

A) to become steeper and the optimal quantity of labor will decrease.
B) to become steeper and the optimal quantity of labor will increase.
C) to become flatter and the optimal quantity of labor will decrease.
D) to become flatter and the optimal quantity of labor will increase.

Question 36

A line that connects all points where the marginal rate of technical substitution is equal to the ratio of input prices is called the

A) input demand curve.
B) total product curve.
C) expansion path.
D) isocost line.

Question 37

Suppose that three isoquants that represent 10, 20, and 30 units of output are plotted on a graph and a straight line is drawn from the origin through the isoquants. If the portion of the line between the isoquants that represent 10 and 20 units of output is longer than the portion of the line between the isoquants that represent 20 and 30 units of output, then the firm represented by these isoquants

A) has engaged in product innovation.
B) is experiencing increasing returns to scale.
C) is experiencing decreasing returns to scale.
D) will maximize profits by producing 10 units of output.

Question 38

If the output elasticities of all inputs used by a firm are summed together, then the total

A) will be greater than one if returns to scale are decreasing.
B) will be equal to one if returns to scale are constant.
C) will be less than one if returns to scale are increasing.
D) All of the above are correct.

Question 39

Which of the following is not a characteristic of production technologies that can be described by the Cobb-Douglas production function?

A) The marginal product of an input divided by the average product of that input is constant.
B) The exponents will sum to one if returns to scale are constant.
C) Linear regression can be used to estimate the parameters of the function.
D) All of the above are characteristics of the Cobb-Douglas production function.

Question 40

If the marginal product of labor is 2, the marginal product of capital is 4, the wage rate is $3, the rental price of capital is $6, and the price of output is $1.50, then the firm should

A) increase output by hiring more labor, more capital, or both.
B) hold output constant, but hire more labor and less capital.
C) decrease output by reducing the quantity of capital, reducing the number of units of labor, or both.
D) None of the above is correct.

Question 41

Comparative advantage is the basis for

A) efficient production.
B) international trade.
C) economies of scale.
D) the capital-labor trade-off.

Question 42

A country that has an abundance of cheap labor will tend to

A) import goods that are produced using a lot of labor.
B) refrain from international trade entirely.
C) export goods that are produced using a lot of labor.
D) export goods that are produced using little labor.

Question 43

Intra-industry trade refers to

A) international trade in differentiated products.
B) the exchange of information between firms in the same industry.
C) the exchange of information between firms in different industries.
D) barter between competing firms.

Question 44

Which of the following acronyms refers to the use of computers to design new products?

A) CDP
B) ADP
C) CAM
D) CAD

Question 45

By using computers to design and manufacture products, firms are able to

A) reduce production costs.
B) reduce the optimal lot size.
C) reduce the time required to introduce new products.
D) All of the above are correct.

Question 46

In his Unrelenting Innovation: How to Build a Culture for Market Dominance (San Francisco: Jossey-Boss, 2013), Gerard J. Tellis states that the single most important driver of innovation in any firm is

A) Its labor and human capital
B) Its capital (physical capital)
C) Government or national culture
D) Its culture

Question 47

Toyota Corporation was one of the first firms to pioneer just-in-time production, which is an example of

A) Product innovation
B) Process innovation
C) Business culture
D) None of the above

Question 48

Consider the following scenario: the firm estimates that currently, its marginal product of labor is 40, while the marginal product of capital is 160. The firm pays $40 in the rental price of capital and $10 in wage. Can this firm improve its profits by adjusting its labor and capital combination while holding the overall costs of production constant? And if yes, how? (Assume the standard assumptions about the production function, i.e. diminishing marginal products).

A) No, as the firm optimizes its production already.
B) Yes, the firm should reduce its labor level and increase its capital stock.
C) Yes, the firm should reduce its capital stock and increase its labor level.
D) Not enough information is provided.

Question 49

Consider the following scenario: the firm estimates that currently, its marginal product of labor is 40, while the marginal product of capital is 160. The firm pays $40 in the rental price of capital and $15 in wage. Can this firm improve its profits by adjusting its labor and capital combination while holding the overall costs of production constant? And if yes, how? (Assume the standard assumptions about the production function, i.e. diminishing marginal products).

A) No, as the firm optimizes its production already.
B) Yes, the firm should reduce its labor level and increase its capital stock.
C) Yes, the firm should reduce its capital stock and increase its labor level.
D) Not enough information is provided.

Question 50

Consider the following scenario: the firm estimates that currently, its marginal product of labor is 80, while the marginal product of capital is 160. The firm pays $40 in the rental price of capital and $15 in wage. Can this firm improve its profits by adjusting its labor and capital combination while holding the overall costs of production constant? And if yes, how? (Assume the standard assumptions about the production function, i.e. diminishing marginal products).

A) No, as the firm optimizes its production already.
B) Yes, the firm should reduce its labor level and increase its capital stock.
C) Yes, the firm should reduce its capital stock and increase its labor level.
D) Not enough information is provided.

Question 51

Inputs that cannot be easily varied during the time period under consideration are called

A) short run inputs.
B) long run inputs.
C) fixed inputs.
D) variable inputs.

Question 52

Inputs that can be easily varied during the time period under consideration are called

A) short run inputs.
B) long run inputs.
C) fixed inputs.
D) variable inputs.

Question 53

How many years does the long-run refer to?

A) Above 1 year.
B) Above 5 years.
C) Above 10 years.
D) Depends on the industry.

Question 54

Short-run is a time of period during which

A) all inputs can be varied.
B) some but not all inputs can be varied.
C) none of the inputs can be varied.
D) the firm cannot change production.

Question 55

Production function can be represented as

A) an equation.
B) a table.
C) a graph.
D) an equation, a table and a graph.

Question 56

If marginal product of labor is below average product of labor, then

A) average product of labor is flat.
B) average product of labor is increasing.
C) average product of labor is decreasing.
D) may be increasing, decreasing or flat

Question 57

When total product is at its highest before a decline, the marginal product of labor is

A) equal to average product of labor.
B) equal to above product of labor.
C) equal to one.
D) equal to zero.

Question 58

The firm hires 5 additional employees which produce 500 additional parts. If the revenue increases by 100,000, what is the marginal revenue product of labor?

A) $5,000
B) $10,000
C) $15,000
D) $20,000

Question 59

The firm hires 10 additional employees which produce 500 additional parts. If the revenue increases by 150,000, what is the marginal revenue product of labor?

A) $5,000
B) $10,000
C) $15,000
D) $20,000

Question 60

The firm hires 10 new employees and the total costs increase by 25,000 per time period. What is the marginal resource cost of labor?

A) $250
B) $2,500
C) $25,000
D) $250,000

Question 61

The firm hires 100 new employees and the total costs increase by 25,000 per time period. What is the marginal resource cost of labor?

A) $250
B) $2,500
C) $25,000
D) $250,000

Question 62

The production function is an equation, table, or graph that shows the maximum output that can be produced from different combinations of inputs.

Question 63

Fixed inputs are those that can never be changed.

Question 64

All inputs are variable in the long run.

Question 65

All inputs are fixed in the short run.

Question 66

Output elasticity is equal to the marginal product of an input divided by the average product of the input.

Question 67

The law of diminishing returns is a long-run concept.

Question 68

The average product and the marginal product of the variable input are equal at the level of output that corresponds to the inflection point on the short-run production function.

Question 69

When an input's average product exceeds its marginal product, average product is increasing.

Question 70

The law of diminishing returns holds that the marginal product of a variable input will eventually decline if output is increased while at least one input is fixed.

Question 71

Stage II of production begins at a level of output where the average product of the variable input is at a maximum and ends where the marginal product of the variable input is equal to zero.

Question 72

In general, a firm should continue to hire additional units of an input so long as the marginal revenue product of the input is greater than the marginal resource cost of the input.

Question 73

The marginal resource cost of an input is identical to the firm's demand curve for that input.

Question 74

The marginal rate of technical substitution measures the number of units of one input that can be dispensed with while holding output constant when one additional unit of the other input is added.

Question 75

If a firm is minimizing the total cost of producing a given level of output, then it must also be maximizing the level of output produced at a given level of total cost.

Question 76

One advantage of the use of the Cobb-Douglas production function for empirical estimation is that it can be expressed as a linear function.

Question 77

If the sum of the output elasticities for a production function is greater than one, then the production function exhibits decreasing returns to scale.

Question 78

The law of comparative advantage postulates that even if a nation is less efficient or has an absolute disadvantage with respect to another in production of all commodities, there is still a basis for mutually beneficial trade.

Question 79

Product differentiation exists when an industry produces goods that are not identical.

Question 80

Intra-industry trade allows each country to specialize in some variation of a product.