Deck 4: Cost

Question 1

If Q represents a firm's level of output, W represents the wage paid to labour (L) and R is the cost of capital (K), then which of the following represents the firm's isocost line?

A) C(Q) = FC + VC(Q)
B) C(Q) = FC(Q) + VC(Q)
C) C(Q) = WL + RK
D) C(Q) = (W + R)Q

Answer 1

C(Q) = WL + RK

Question 2

If the least-cost input combination doesn't include all inputs, it's called

A) A boundary solution
B) An incomplete solution
C) An interior solution
D) An efficient solution

Answer 2

A boundary solution

Question 3

-Refer to Table above. Assume the wage rate is $10 and the firm has $1,000 in unavoidable fixed cost. What is the marginal cost of producing 83 units of output?

A) $0.50
B) $0.56
C) $1.00
D) $1.43

Answer 3

$0.56

Question 4

-Refer to Figure above. What is the average cost of producing 290 units of output?

A) $9
B) $2500
C) $8.62
D) $7.77

Question 5

If labour is measured along the horizontal axis and capital is measured along the vertical axis, an increase in the wage rate will cause the isocost line to

A) Rotate to the left along the labour axis, causing the firm to use less labour and more capital
B) Rotate to the right along the labour axis, causing the firm to use less labour and more capital
C) Rotate to the left along the labour axis, causing the firm to use less capital and more labour
D) Rotate to the right along the labour axis, causing the firm to use less capital and more labour

Question 6

-Refer to Figure above, which shows just three of a firm's various possible short-run average cost curves. Suppose the firm is currently producing 160 units at and average cost of $90 per unit. Which of the following statements is true?

A) The firm could reduce its average cost by employing more capital
B) The firm could reduce its average cost by employing less capital
C) The firm is producing its output at the lowest possible long-run average cost
D) The firm would increase its average cost if it used more capital

Question 7

Which of the following statements is true?

A) Competitive firms will respond less to changes in output prices over the long run than they will over the short run because short-run marginal cost is lower than long-run marginal cost
B) Competitive firms will respond more to changes in output prices over the long run than they will over the short run because long-run marginal cost is lower than short-run marginal cost
C) Competitive firms will respond less to changes in output prices over the long run than they will over the short run because long-run marginal cost is lower than short-run marginal cost
D) Competitive firms will respond more to changes in output prices over the long run than they will over the short run because short-run marginal cost is lower than long-run marginal cost

Question 8

Suppose a firm has a production function given by Q = 2?2L?K.If the rental rate of capital is $100 per unit, the wage rate is $1,400 per week and the firm initially has 25 units of capital, what is the firm's short-run cost function?

A) C(Q) = 2500 + 7Q²
B) C(L) = 2500 + 1400L
C) C(Q) = 0.25 + 7Q²
D) C(L) = 0.25 + 1400L

Question 9

A firm that is experiencing economies of scale has ______ returns to scale technology and a ______average cost curve.

A) Increasing; positively-sloped
B) Increasing; negatively-sloped
C) Decreasing; positively-sloped
D) Decreasing; negatively-sloped

Question 10

As a firm with decreasing returns to scale technology increases its output,

A) It will experience diseconomies of scale and its average cost of production will rise
B) It will experience diseconomies of scale and its average cost of production will fall
C) It will experience economies of scale and its average cost of production will rise
D) It will experience economies of scale and its average cost of production will fall

Question 11

-Refer to Figure above. Which graph illustrates a firm that experiences economies of scale?

A) A
B) B
C) C
D) Both graphs A and C

Question 12

Suppose a firm's short-run production function is given by Q = 3 sqrt(L), where L represents the number of hours of labour employed. The firm has a sunk cost of $500 and the wage rate is $18 per hour. What is the firm's short-run cost function?
Solve the production function for L:

Question 13

Suppose a firm's technology is represented by the Cobb-Douglas production function F(L,K) = 5LK. The wage rate is $50 and the rental rate of capital is $10. What is the least-cost combination to produce 100 units of output?