Deck 9: Production and Cost in the Long Run

Question 1

refer to the following figure:
The price of capital is $50 per unit.

-The minimum cost of producing 800 units of output is

A) $ 6,000.
B) $ 7,500.
C) $ 8,000.
D) $10,000.

Answer 1

$ 7,500.

Question 2

refer to the following figure:
The price of capital is $50 per unit.

-What is the minimum cost of producing 400 units of output?

A) $3,000
B) $4,000
C) $5,000
D) $6,000
E) none of the above

Answer 2

$5,000

Question 3

refer to the following figure:
The price of capital is $50 per unit.

-What is the minimum cost of producing 1,200 units of output?

A) $7,000
B) $8,000
C) $9,000
D) $10,000
E) $11,000

Answer 3

$10,000

Question 4

Suppose that when a firm increases its usage of all inputs by 100%, output increases by less than 100%. The firm's production function exhibits

A) decreasing returns to scale.
B) diminishing marginal returns.
C) decreasing marginal rate of technical substitution.
D) both a and b
E) both a and c

Question 5

refer to the following:

The price of labor is $3 per unit.

-What is the price per unit of capital?

A) $1.50
B) $2.00
C) $2.10
D) $5.00

Question 6

refer to the following:

The price of labor is $3 per unit.

-What is the marginal rate of technical substitution at point B?

A) 0.6
B) 0.75
C) 1
D) 1.7

Question 7

refer to the following:
The price of capital (r) is $20.

-What is the lowest possible cost of producing 5,000 units of output?

A) $1,800
B) $2,400
C) $2,600
D) $1,400
E) $3,000

Question 8

refer to the following:
The price of capital (r) is $20.

-At the optimal combination of inputs for producing 14,000 units of output, what is the marginal rate of technical substitution (-)K/)L)?

A) 2.5
B) 0.67
C) 1.5
D) 0.80
E) impossible to tell from the graph

Question 9

Which of the following is (are) characteristics of an isocost curve? The slope shows the rate at which the firm can substitute labor for capital while holding
Total cost constant.

A) The slope shows the rate at which the firm can substitute labor for capital while holding
B) total cost constant.
C) The slope shows the rate at which the firm can substitute labor for capital in the market.
D) If the price of capital is unchanged and the price of labor increases, the intercept of the isocost curve on the horizontal axis will decrease.
E) both a and c
F) all of the above

Question 10

refer to the following:


-As you move from input combinationAto input combination C,

A) output is unchanged.
B) cost is unchanged.
C) the marginal rate of technical substitution increases.
D)Both a and b
E)All of the above

Question 11

refer to the following:


-What is the marginal rate of technical substitution at point D ?

A) less than 1.5
B) less than 2.5
C) greater than 1.5
D) greater than 2.5

Question 12

refer to the following:

The price of capital is $100 per unit; the price of labor is $25 per unit.

-When output is 30 units, what is TOTAL cost?

A) $1,000
B) $2,000
C) $10,000
D) $20,000
E) none of the above

Question 13

The following graph shows 2 isocost curves for a firm. The price of capital is $200.


-The total cost associated with isocost I is $_________, and the price of labor is $_________.

Question 14

The following graph shows 2 isocost curves for a firm. The price of capital is $200.


-The equation for isocost I is _____________________. With isocost I the firm must give up ______ units of capital to purchase one more unit of labor in the market.

Question 15

The following graph shows 2 isocost curves for a firm. The price of capital is $200.


-The total cost associated with isocost II is $_________, and the price of labor is $_________.

Question 16

The following graph shows 2 isocost curves for a firm. The price of capital is $200.


-The equation for isocost II is _____________________. With isocost II the firm must give up ______ units of capital to purchase one more unit of labor in the market.

Question 17

In the following figure, isoquant I is one of a firm's isoquants:

-The marginal rate of technical substitution between points A and C is _________.

Question 18

In the following figure, isoquant I is one of a firm's isoquants:

-The marginal rate of technical substitution between points C and B is _________.

Question 19

In the following figure, isoquant I is one of a firm's isoquants:

-The marginal rate of technical substitution at point C is _________.

Question 20

Use the following figure that shows a firm's isoquant for producing 3,000 units of output and four isocost curves. Labor and capital each cost $100 per unit.


-At point A, the MRTS is ____________ (less than, greater than, equal to) the input price ratio, w/r. The total cost of producing 3,000 units of output with input combination A is $____________.

Question 21

Use the following figure that shows a firm's isoquant for producing 3,000 units of output and four isocost curves. Labor and capital each cost $100 per unit.


-By moving from A to B, the firm _______________ (increases, decreases) labor usage and _______________ (increases, decreases) capital usage. At point B the MRTS is _______________ (greater than, less than, equal to) the input price ratio, w/r. The movement from A to B _______________ (increased, decreased) total cost by $_________.

Question 22

Use the following figure that shows a firm's isoquant for producing 3,000 units of output and four isocost curves. Labor and capital each cost $100 per unit.


-At point C the firm __________________ the cost of producing 3,000 units of output. The MRTS is _______________ (greater than, less than, equal to) the input price ratio, w/r.

Question 23

Use the following figure that shows a firm's isoquant for producing 3,000 units of output and four isocost curves. Labor and capital each cost $100 per unit.


-The optimal input combination is _________ units of labor and _________ units of capital. At this combination, total cost of producing 3,000 units is $____________.

Question 24

Answer the following:
-At point E, the MP per dollar spent on ____________ is less than the MP per dollar spent on ____________. The total cost of producing 3,000 units of output with input combination E is $_________.

Question 25

Answer the following:
-The movement from E to F reduces the MP per dollar spent on ____________ and increases the MP per dollar spent on ____________. This movement __________________ (increased, decreased) total cost by $____________.

Question 26

Answer the following:
-At input combination C the MP per dollar spent on labor is __________________ (greater than, less than, equal to) the MP per dollar spent on capital.

Question 27

Answer the following:
-Input combination D costs $____________. The firm would not use this combination to produce 3,000 units of output because _______________.

Question 28

A firm is using 20 units of labor and 30 units of capital to produce 4,000 units of output. At this combination the marginal product of labor is 50 and the marginal product of capital is 40. The price of labor is $30 and the price of capital is $20.
-The MP per dollar of labor is _________ and the MP per dollar of capital is _________.

Question 29

A firm is using 20 units of labor and 30 units of capital to produce 4,000 units of output. At this combination the marginal product of labor is 50 and the marginal product of capital is 40. The price of labor is $30 and the price of capital is $20.
-The firm can increase capital by one unit and decrease labor by _________ units while keeping cost constant. This will ____________ output by _________.

Question 30

A firm is using 20 units of labor and 30 units of capital to produce 4,000 units of output. At this combination the marginal product of labor is 50 and the marginal product of capital is 40. The price of labor is $30 and the price of capital is $20.
-To maximize output at the given cost the firm will increase ____________ and decrease ____________ until the MRTS equals _________.

Question 31

A firm is producing 1,000 units of output with 40 units of labor and 30 units of capital. The marginal product of the last units of labor and capital are, respectively, MP_L = 60 and MP_K = 120. The prices of labor and capital are, respectively, w = 30 and r = 40.
-At the combination of inputs the MRTS is __________________ (greater than, less than, equal to) the input price ratio, w/r.

Question 32

A firm is producing 1,000 units of output with 40 units of labor and 30 units of capital. The marginal product of the last units of labor and capital are, respectively, MP_L = 60 and MP_K = 120. The prices of labor and capital are, respectively, w = 30 and r = 40.
-The firm can increase ____________ by one unit while reducing ____________ by _________ unit(s), and keep output constant. This will reduce cost by $____________.

Question 33

A firm is producing 1,000 units of output with 40 units of labor and 30 units of capital. The marginal product of the last units of labor and capital are, respectively, MP_L = 60 and MP_K = 120. The prices of labor and capital are, respectively, w = 30 and r = 40.
-To minimize the cost of producing 1,000 units of output the firm will increase ____________ and decrease ____________ until _________ equals _________ or, in other words, _________ equals _________.

Question 34

The following graph shows one of a firm's isocost curves and isoquants.
‪
-Combination A is not an economically efficient method of producing 4,000 units of output because, at A, _________ exceeds _________ or, in other words, _________ exceeds _________. The firm should increase ___________ and decrease ___________.

Question 35

The following graph shows one of a firm's isocost curves and isoquants.
‪
-Combination B is not an economically efficient method of producing 4,000 units of output because, at B, _________ exceeds _________, or, in other words, _________ exceeds _________. The firm should increase ___________ and decrease ___________.

Question 36

The following graph shows one of a firm's isocost curves and isoquants.
‪
-At the economically efficient method of producing 4,000 units of output the MRTS will equal _________.

Question 37

Answer the following questions concerning an expansion path.
-At each point on an expansion path _________ equals _________ or, alternatively, _________ equals _________.

Question 38

Answer the following questions concerning an expansion path.
-An expansion path shows each combination of inputs that _________ of producing _________.

Question 39

Answer the following questions concerning an expansion path.
-An expansion path also shows each combination of inputs that maximizes ____________ at each _____________________.

Question 40

Using the above table, answer the following questions.
refer to the following table in which columns, 1, 2, and 3 are derived from a firm's long-run expansion path. The price of capital is $50 and the price of labor is $30.

Using the above table, answer the following questions.

-Economies of scale exist through ______ units of output because _________ is ____________.

Question 41

Using the above table, answer the following questions.
refer to the following table in which columns, 1, 2, and 3 are derived from a firm's long-run expansion path. The price of capital is $50 and the price of labor is $30.

Using the above table, answer the following questions.

-At 20 units of output LTC = $_________ and LAC = $______. Between zero and 20 units LMC = $______.

Question 42

Using the above table, answer the following questions.
refer to the following table in which columns, 1, 2, and 3 are derived from a firm's long-run expansion path. The price of capital is $50 and the price of labor is $30.

Using the above table, answer the following questions.

-At 40 units of output LTC = $______ and LAC = $______. Between 20 and 40 units LMC = $______.

Question 43

Using the above table, answer the following questions.
-Diseconomies of scale exist beyond ______ units of output because _________ is _________.

Question 44

Using the above table, answer the following questions.
-At 60 units of output LTC = $_________ and LAC = $_________. Between 40 and 60 units LMC = $_________.

Question 45

Using the above table, answer the following questions.
-At 80 units of output LTC = $_________ and LAC = $_________. Between 60 and 80 units LMC = $_________.

Question 46

The following graph shows a firm's long-run average and marginal cost curves.

-From zero to 600 units of output __________ exist. Beyond 600, ________________ exist. Suppose the firm decides to build a plant to produce 900 units of output at the least possible cost. After the plant is built the firm is in the short run with short-run average and marginal cost curves of ATC and MC. (ATC and MC are not shown in the figure.)

Question 47

The following graph shows a firm's long-run average and marginal cost curves.

-At 900 units of output ATC = $_________ and MC = $_________.

Question 48

The following graph shows a firm's long-run average and marginal cost curves.

-At any output less than 900, _________ is higher than _________. At any output greater than 900, _________ is higher than _________.

Question 49

A firm increases its usage of all inputs by 20%.
-If output increases by 20%, the firm is in a range of ______________________________.

Question 50

A firm increases its usage of all inputs by 20%.
-If output increases by less than 20%, the firm is in a range of ______________________.

Question 51

A firm increases its usage of all inputs by 20%.
-If output increases by more than 20%, the firm is in a range of _____________________.

Question 52

A firm is producing 1,000 units of output with 40 units of labor and 30 units of capital. The marginal product of the last units of labor and capital are, respectively, MP_L = 60 and MP_K = 120. The prices of labor and capital are, respectively, w = 30 and r = 40. To minimize the cost of producing 1,000 units of output the firm should increase____________ (labor, capital) and decrease ____________ (labor, capital) until _________ (w, r, L, K, MP_L, MP_L/w, MP_K, MP_K/r) equals _________ (w, r, L, K, MP_L, MP_L/w, MP_K, MP_K/r).