Question 1

The period of time over which the firm can vary its technology of production is the

Accepted Answer

A)   very-short run.
B)   short run.
C)   long run.
D)   very-long run.
E)   none of the above; technology cannot be varied. D

Question 2

What information is provided by average, marginal, and total product curves?

Accepted Answer

A)   They demonstrate that each of these measures of output increase as more inputs are applied.
B)   They demonstrate that, in the short run, all inputs are variable.
C)   They relate the prices of inputs factors of production)  to the prices of products.
D)   They relate the price of output to the quantity supplied.
E)   They express relationships between physical inputs and physical outputs. E

Question 3

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100.  TABLE 7-4
-Refer to Table 7-4. The average total cost of producing 75 units of output is

Accepted Answer

A)   $1.
B)   $2.
C)   $0.80.
D)   $0.67.
E)   $1.33. B

Question 4

Suppose a production function for a firm takes the following algebraic form: Q = 0.25)K × 1.5)L2, where Q is the output of garage doors produced per month. Now suppose the firm is operating with 10 units of capital K
= 10) and 8 units of labour L = 8). What is the output of garage doors per month?

Accepted Answer

A)   24
B)   240
C)   300
D)   2400
E)   3000

Question 5

The law of diminishing returns states that if increasing quantities of a variable factor are applied to a given quantity of fixed factors, then

Accepted Answer

A)   the MP and the AP of the variable factor will eventually decrease.
B)   the MP will eventually decrease with constant AP.
C)   the AP will eventually decrease with constant MP.
D)   the AP will eventually decrease, but only if TP is held constant.
E)   TP will eventually begin to fall.

Question 6

Consider a firm in the short run. When the total-product curve is increasing at an increasing rate

Accepted Answer

A)   average product is zero.
B)   marginal product is positive but declining.
C)   the marginal-product curve lies below the average-product curve.
D)   marginal product is positive and increasing.
E)   average product is falling.

Question 7

Which of the following statements about the relationship between marginal product and average product is correct?

Accepted Answer

A)   When average product exceeds marginal product, marginal product must be rising.
B)   When marginal product is falling, average product is falling.
C)   When marginal product exceeds average product, average product must be rising.
D)   Average product equals marginal product at marginal productʹs lowest point.
E)   Average product equals marginal product when marginal product is at its maximum.

Question 8

We can predict that resources will move into an industry whenever

Accepted Answer

A)   accounting profits for firms in that industry are greater than zero.
B)   accounting profits for firms in that industry are zero.
C)   economic profits for firms in that industry are zero.
D)   economic profits for firms in that industry are greater than zero.
E)   economic losses for firms in that industry are minimized.

Question 9

Consider a basket-producing firm with fixed capital. If the firm can produce 36 baskets per day with 3 workers and then increases productivity to 44 baskets per day with 4 workers, then which of the following statements is true?

Accepted Answer

A)   The marginal product of the fourth worker is 11.
B)   The firm has passed the point of diminishing average productivity.
C)   The marginal product is above the average product.
D)   The firm has not yet reached the point of diminishing marginal productivity.
E)   With 4 workers, the firmʹs average product of labour is 13.

Question 10

Suppose a firm with the usual U-shaped cost curves is producing a level of output such that its short-run costs are as follows:
ATC = $0.37 per unit AVC = $0.32 per unit AFC = $0.05 per unit MC = $0.43 per unit
Given these short-run costs, as the firm increases its output, which of the following statements is true?

Accepted Answer

A)   Marginal product of the variable factor must be decreasing.
B)   Marginal product of the variable factor must be increasing.
C)   The point of diminishing average product of the variable factor has not yet been reached.
D)   Average product of the variable factor must be increasing.
E)   Marginal product of the variable factor is at its minimum point.

Question 11

The choices listed below involve costs to the firm. For which is the implicit cost potentially different than its explicit cost?

Accepted Answer

A)   The use of firm-owned assets.
B)   The services of hired workers.
C)   The use of rented land.
D)   The interest paid on borrowed money.
E)   The purchase of raw materials used in production.

Question 12

FIGURE 7-1
-Refer to Figure 7-1. If the firm hires the 15th unit of labour,

Accepted Answer

A)   the extra output will be zero.
B)   average product will rise.
C)   marginal product will be unchanged.
D)   the firm will reach its capacity.
E)   output will increase by 2 units of output.

Question 13

Suppose a firm with the usual U-shaped cost curves is producing a level of output such that its short run costs are as follows:
ATC = $0.37 per unit AVC = $0.32 per unit AFC = $0.05 per unit MC = $0.43 per unit
Given these short run costs, which of the following statements is true?

Accepted Answer

A)   The firm is operating with excess capacity.
B)   The firm is operating at capacity.
C)   The firm is operating above capacity.
D)   The firm has no capacity constraints.
E)   The firm is producing a level of output where capacity is increasing.

Question 14

The diagram below shows some short-run cost curves for a firm.
  FIGURE 7-2
-Refer to Figure 7-2. Which of the following choices correctly identifies the cost curves in part ii) of the figure?

Accepted Answer

A)   Curve 4 is the marginal cost curve. Curve 5 is the average fixed cost curve. Curve 6 is the average variable cost curve. Curve 7 is the average total cost curve.
B)   Curve 4 is the average total cost curve. Curve 5 is the marginal cost curve. Curve 6 is the average variable cost curve. Curve 7 is the average fixed cost curve.
C)   Curve 4 is the average fixed cost curve. Curve 5 is the average total cost curve. Curve 6 is the marginal cost curve. Curve 7 is the average variable cost curve.
D)   Curve 4 is the marginal cost curve. Curve 5 is the average total cost curve. Curve 6 is the average variable cost curve. Curve 7 is the average fixed cost curve.
E)   Curve 4 is the marginal cost curve. Curve 5 is the average variable cost curve. Curve 6 is the average fixed cost curve.Curve 7 is the average total cost curve.

Question 15

The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume that the wage per unit of labour is $10 and the cost of the capital is $50.  TABLE 7-3
-Refer to Table 7-3. What is the marginal product of the 4th unit of labour hired by the firm?

Accepted Answer

A)   42
B)   60
C)   132
D)   900
E)   1320

Question 16

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100.  TABLE 7-4
-Refer to Table 7-4. Average fixed costs for 305 units of output is approximately

Accepted Answer

A)   33 cents.
B)   41 cents.
C)   45 cents.
D)   74 cents.
E)   $3.05.

Question 17

Undistributed profits of a firm are

Accepted Answer

A)   earnings that are used to pay dividends to shareholders.
B)   earnings that are used to cover the costs of production.
C)   earnings that are used to cover interest expenses of the firm.
D)   profits that are paid out to owners of the firm.
E)   profits that are available to be reinvested in the firmʹs operations.

Question 18

FIGURE 7-1
-Refer to Figure 7-1. The marginal product of labour curve intersects the average product of labour curve when

Accepted Answer

A)   the firm is at its capacity.
B)   the firm achieves increasing returns.
C)   average product is at its maximum.
D)   diminishing returns sets in.
E)   total product is at its maximum.

Question 19

Consider a firm in the short run. If the AP curve is rising, then the MP curve

Accepted Answer

A)   must lie above the average-product curve over this range and must also be rising.
B)   must lie above the average-product curve over this range.
C)   can be either above or below the average-product curve, although it must be rising over the entire range.
D)   must lie below the average-product curve over this range.
E)   must be falling.

Question 20

Consider the production costs for a firm, one of which is the cost of depreciation. Depreciation costs are

Accepted Answer

A)   payments to outside suppliers.
B)   the cost of money borrowed to buy a durable asset.
C)   an estimate of the loss of value of the firmʹs physical capital.
D)   a measure of the depreciation of financial assets of the firm.
E)   irrelevant to an accounting of the firmʹs total costs.

Exam 7: Producers in the Short Run