Question 1

Explain the similarities and differences between consumer choice theory and producer theory. More specifically, explain how a budget line and indifference curve are related to an isocost line and isoquant, and explain the importance of the tangency point.

Accepted Answer

In consumer choice theory, consumer choice between two items to buy is based on the assumption that the consumer maximizes utility subject to a budget constraint represented by the budget line. The demand curve for a good is derived from the consumer's preferences represented by indifference curves.
In producer theory, instead of a choice between two items to buy, a firm chooses between labor and capital inputs. Also, instead of using budget lines and indifference curves, the firm's choice is based on isoquants, which show all the possible combinations of labor and capital that result in the same quantities of production, and on isocost lines, which show the combinations of capital and labor that have the same total costs. In this sense, the isoquant is analogous to the indifference curve, and the isocost line is analogous to the budget line.
The tangency point represents the optimal condition. In consumer choice theory, the tangency point represents utility maximization given the budget constraint; in producer theory, the tangency point represents cost minimization given a level of output.

Question 2

Exhibit 8A-1 
-Refer to Exhibit 8A-1. A cost-minimizing firm would prefer producing at point C to producing at

Accepted Answer

A)  point D because point C represents a lower cost. 
B)  point A because point C represents the same output at a lower cost. 
C)  point B because point C represents the same output at a higher cost. 
D)  point B because point C represents higher output at the same cost. 
E)  point B because point C represents higher output with a lower cost. B

Question 3

In a given isocost line, any combination of different inputs results in the same total cost.

Accepted Answer

A) True 
 B)False  True

Question 4

A firm can minimize the total costs of producing a given output level at the point of tangency between an isoquant and the isocost line.

Accepted Answer

A) True 
 B)False

Question 5

Sketch a typical isocost line and isoquant where a firm is minimizing total cost for a given quantity of output. Suppose the price of labor rises and the price of capital doesn't change. What does the firm do to maintain the original level of output? How does its input use change?

Accepted Answer

The answer of Sketch a typical isocost line and isoquant...

Question 6

Exhibit 8A-1 
-Refer to Exhibit 8A-1. At point C, output is

Accepted Answer

A)  higher than at point A but lower than at point B. 
B)  lower than at point A but higher than at point B. 
C)  the same as at points A and B, but the cost is lower than at point A. 
D)  the same as at points A and B, but the cost is higher than at point A. 
E)  the same as at points A and B, and the costs for the three points are the same as well.

Question 7

The slope of an isocost line depends on the ratio of

Accepted Answer

A)  the output prices. 
B)  the input prices. 
C)  an output price over an input price. 
D)  an input price over an output price. 
E)  total profits over total costs.

Question 8

An isoquant indicates different combinations of outputs that can be used to yield the same amount of profits.

Accepted Answer

A) True 
 B)False

Question 9

An isocost line has a

Accepted Answer

A)  positive slope because the two inputs can replace each other in production. 
B)  negative slope because the two inputs can replace each other in production. 
C)  negative slope because the two inputs are complementary to each other in production. 
D)  positive slope because the two inputs are complementary to each other in production. 
E)  slope equal to zero because the two inputs are basically identical.

Question 10

Suppose the wage rate is $20 and the price of capital is $100. Graph the isocost line for a firm with a total cost of $400. What happens to the isocost line if the price of capital goes up to $200? Graph this isocost line, assuming that the firm maintains a total cost of $400. What happens to production in this case?

Accepted Answer

The answer of Suppose the wage rate is $20 and...

Question 11

An isoquant is a line that

Accepted Answer

A)  illustrates firm demand for an input. 
B)  shows different combinations of two goods that yield the same utility. 
C)  shows different combinations of two inputs that yield the same output. 
D)  shows a firm's preferences. 
E)  shows different combinations of two inputs that cost the same.

Question 12

We are looking at a graph with capital on the vertical axis and labor on the horizontal axis. If the price of labor increases, then the

Accepted Answer

A)  isocost line becomes steeper. 
B)  isoquants become steeper. 
C)  isoquants become flatter. 
D)  isocost line becomes flatter. 
E)  isocost line and isoquants become flatter.

Question 13

The slope of an isocost line is constant.

Accepted Answer

A) True 
 B)False

Question 14

The slope of an isoquant depends on the ratio of

Accepted Answer

A)  the output prices. 
B)  the input prices. 
C)  the marginal products of inputs. 
D)  an input price over an output price. 
E)  total profits over total costs.

Question 15

If a profit-maximizing firm is producing at the tangency between an isoquant and an isocost line, then a movement along the current isocost line

Accepted Answer

A)  decreases total cost. 
B)  increases total cost. 
C)  decreases output. 
D)  increases output. 
E)  keeps output constant.

Question 16

A firm that maximizes output for a specific total cost is producing at the point where the isocost line is above the highest isoquant.

Accepted Answer

A) True 
 B)False

Question 17

The combination of two inputs that results in a given quantity of output at least cost occurs where

Accepted Answer

A)  an isocost line is tangent to the relevant isoquant. 
B)  average total cost is at its minimum. 
C)  long-run average total cost is at its minimum. 
D)  an isoquant reaches its minimum. 
E)  an isoquant is at its steepest.

Question 18

The slope of an isoquant is called the

Accepted Answer

A)  rate of change. 
B)  input price ratio. 
C)  rate of technical substitution. 
D)  substitution ratio. 
E)  price-cost margin.

Question 19

A line that illustrates all the different combinations of two inputs that result in the same total cost is called a(n)

Accepted Answer

A)  average total cost curve. 
B)  isocost line. 
C)  total cost line. 
D)  budget line. 
E)  isoquant.

Exam 19: Producer Theory With Isoquants

Explain the similarities and differences between consumer choice theory and producer theory. More specifically, explain how a budget line and indifference curve are related to an isocost line and isoquant, and explain the importance of the tangency point.

Exhibit 8A-1 -Refer to Exhibit 8A-1. A cost-minimizing firm would prefer producing at point C to producing at

In a given isocost line, any combination of different inputs results in the same total cost.

A firm can minimize the total costs of producing a given output level at the point of tangency between an isoquant and the isocost line.

Sketch a typical isocost line and isoquant where a firm is minimizing total cost for a given quantity of output. Suppose the price of labor rises and the price of capital doesn't change. What does the firm do to maintain the original level of output? How does its input use change?

Exhibit 8A-1 -Refer to Exhibit 8A-1. At point C, output is

The slope of an isocost line depends on the ratio of

An isoquant indicates different combinations of outputs that can be used to yield the same amount of profits.

An isocost line has a

An isoquant is a line that

We are looking at a graph with capital on the vertical axis and labor on the horizontal axis. If the price of labor increases, then the

The slope of an isocost line is constant.

The slope of an isoquant depends on the ratio of

If a profit-maximizing firm is producing at the tangency between an isoquant and an isocost line, then a movement along the current isocost line

A firm that maximizes output for a specific total cost is producing at the point where the isocost line is above the highest isoquant.

The combination of two inputs that results in a given quantity of output at least cost occurs where

The slope of an isoquant is called the

A line that illustrates all the different combinations of two inputs that result in the same total cost is called a(n)