Deck 4: Production Economics,applications of Cost Theory and Cost Analysis

Question 1

Evidence from empirical studies of short-run cost-output relationships lends support to the:

A) existence of a non-linear cubic total cost function
B) hypothesis that marginal costs first decrease, then gradually increase over the normal operating range of the firm
C) hypothesis that total costs increase quadratically over the ranges of output examined
D) hypothesis that total costs increase linearly over the range of output examined
E) none of the above

Answer 1

hypothesis that total costs increase linearly over the range of output examined

Question 2

In determining the shape of the cost-output relationship only ____ depreciation is relevant.

A) direct
B) indirect
C) usage
D) time
E) scheduled

Answer 2

usage

Question 3

For each of the following cost-output relationships, describe the shape (U-shape, decreasing, increasing, constant) of the average total cost and marginal cost functions (C = total cost, Q = output):
(a)C = 42,500,000 + 2550Q
(b)C = 8.48 + 0.65Q + .00220Q²

Answer 3

(a) (b)

Question 4

Offshore Petroleum's fixed costs are $2,500,000 and its debt repayment requirements are $1,000,000. Selling price per barrel of oil is $18 and variable costs per barrel are $10.
(a)Determine the breakeven output (in dollars).
(b)Determine the number of barrels of oil that offshore must produce and sell in order to earn a target (operating) profit of $1,500,000.
(c)Determine the degree of operating leverage at an output of 400,000 barrels.
(d)Assuming that sales of oil are normally distributed with a mean of 362,500 barrels and a standard deviation of 100,000 barrels, determine the probability that Offshore will incur an operating loss.
NOTE: Part (d) requires the use of statistical tables.

Question 5

Which of the following statements concerning the long-run average cost curve of economic theory is true?

A) It is L-shaped
B) It is $\cap$ -shaped
C) It is $\cup$ -shaped
D) It is $\land$ -shaped
E) It is M-shaped

Question 6

____ include the opportunity costs of time and capital that the entrepreneur has invested in the firm.

A) Implicit costs
B) Explicit costs
C) a and b
D) None of the above

Question 7

A firm has determined that its variable costs are given by the following relationship: VC = .05Q³ -5Q² + 500Q where Q is the quantity of output produced.
(a)Determine the output level where average variable costs are minimized.
(b)Determine the output level where marginal costs are minimized.

Question 8

In the Cobb-Douglas production function (Q = $\alpha$ L ^{$\beta$ 1} K ^{$\beta$ 2} ):

A) the marginal product of labor (L) is equal to $\beta$ 1
B) the average product of labor (L) is equal to $\beta$ 2
C) if the amount of labor input (L) is increased by 1 percent, the output will increase by $\beta$ 1 percent
D) a and b
E) a and c

Question 9

A certain production process employs two inputs-labor (L) and raw materials (R). Output (Q) is a function of these two inputs and is given by the following relationship:Q = 6L² R² -.10L³ R³Assume that raw materials (input R) are fixed at 10 units.
(a)Determine the total product function (TP_L) for input L.
(b)Determine the marginal product function for input L.
(c)Determine the average product function for input L.
(d)Find the number of units of input L that maximizes the total product function.
(e)Find the number of units of input L that maximizes the marginal product function.
(f)Find the number of units of input L that maximizes the average product function.
(g)Determine the boundaries for the three stages of production.

Question 10

An industry can be characterized by the following production function:Q = 2.5L^.60 C^.40
(a)What is the algebraic expression for the marginal productivity of labor?
(b)What is the algebraic expression for the average productivity of labor?
(c)How would you characterize the returns-to-scale in the industry?