Deck 9: Cost and Choice

Question 1

When an entrepreneur is able to vary some inputs, but has at least one input that cannot be varied, the producer will examine a

A) long-run cost function
B) short-run cost function
C) immediate-run cost function

Answer 1

short-run cost function

Question 2

Isocost curves are curves in which all combinations of inputs on the curve are equally expensive.

Answer 2

True

Question 3

The assumption is that the goal of an entrepreneur is to

A) drive costs down to zero
B) maximize revenue regardless of cost
C) maximize profit

Answer 3

maximize profit

Question 4

A homothetic production function has the property that, whenever we multiply inputs by a factor λ, the marginal rate of technical substitution between all inputs doubles.

Question 5

A production function in which inputs (capital and labor) must be used in a certain fixed proportion to produce output is known as the Leontief production function.

Question 6

Cost functions define a relationship between cost and output that describes the most ____________ way to produce any given output.

A) efficient
B) expensive
C) sophisticated

Question 7

When an entrepreneur is able to vary all inputs and can therefore seek the optimal combination of inputs from among all possible combinations, the producer will examine a

A) long-run cost function
B) short-run cost function
C) immediate-run cost function

Question 8

The output expansion path is the curve containing the tangency points between the isocost curves and the isoquants, presenting the set of input combinations that produces any given output level at the least cost.

Question 9

A cost function demonstrates the relationship between cost and quantity, which will tell how much it will cost to produce each quantity of a product.

Question 10

The mixture of inputs that produces a particular level of output at the lowest cost is called the optimal combination of inputs.

Question 11

Once a producer has chosen a quantity of output to produce, finding the optimal combination of inputs will depend upon the

A) price of the output
B) income of the vendors
C) cost of the inputs

Question 12

The formula for the elasticity of substitution is Ϭ = (Δk / k) / (Δw / w).Δ

Question 13

A particular type of production function that has the property that, whenever we multiply its inputs by a factor λ, we simply obtain the same output we started with multiplied by λᴷ where K is the degree of homogeneity is known as a homogeneous production function.

Question 14

The loci of efficient points for products are

A) cost curves
B) demand curves
C) marginal product curves

Question 15

Isocost curves farther away from the origin have __________ costs.

A) greater
B) lower
C) equivalent

Question 16

Refer to Exhibit 9-1. Which point represents the least-cost input combination?

A) (a)
B) (b)
C) (c)

Question 17

The negative of the relative costs of the inputs is represented by the _________ of an isocost curve.

A) slope
B) length
C) thickness

Question 18

In order to produce any given amount of output in the least-cost way, choose the combination of inputs that is located on the lowest ___________ curve ___________ to the ___________ associated with the desired level of output.

A) isocost, tangent, isoquant
B) isocost, perpendicular, isoquant
C) isoquant, tangent, isocost

Question 19

The effort to produce most cheaply involves finding the ________________ way to combine inputs in order to attain any given level of output.

A) least-cost
B) highest-cost
C) higest-revenue

Question 20

If input prices are fixed, isocost curves are convex curves.

Question 21

At the point of the optimal input combination, the marginal rate of technical substitution (MRTS) __________________ the ratio of the pricds of the inputs.

A) is less than
B) is greater than
C) equals

Question 22

With a Cobb-Douglas technology, when α+ β= 1, we have

A) constant returns to scale
B) increasing returns to scale
C) decreasing returns to scale

Question 23

The function that associates the cost of the least-cost input combination, when all input levels are variable, with each possible level of output is called the

A) long-run cost function
B) long-run production function
C) increasing returns to scale function

Question 24

Write as full a description of a cost function as possible.

Question 25

(a)

(b)

(c)

Refer to Exhibit 9-3. Which graphs shows a cost function for a Cobb-Douglas production function with increasing returns to scale?

A) (a)
B) (b)
C) (c)

Question 26

A cost function associated with the Leontief technology is a

A) straight line
B) concave curve
C) convex curve

Question 27

The equation y is the algebraic for which production function?

A) Leontief
B) Cobb-Douglas
C) short-run

Question 28

(a)

(b)

(c)

Refer to Exhibit 9-3. Which graphs shows a cost function for a Cobb-Douglas production function with decreasing returns to scale?

A) (a)
B) (b)
C) (c)

Question 29

What is the difference between finding the optimal combination of inputs in the short run versus in the long run?

Question 30

How does a producer choose the optimal combination of inputs in the short run?

Question 31

With a Cobb-Douglas technology, when α+ β> 1, we have

A) constant returns to scale
B) increasing returns to scale
C) decreasing returns to scale

Question 32

Describe the reasons for input substitution.

Question 33

If capital becomes very expensive and labor is cheap, a producer will want to use more units of labor and fewer units of capital if the technology permits this substitution. What measures how freely the producer can vary inputs as their relative prices change, but the amount of output produced remains constant?

A) homothetic production function
B) elasticity of substitution
C) income elasticity of demand

Question 34

(a)

(b)

(c)

Refer to Exhibit 9-3. Which graphs shows a cost function for a Cobb-Douglas production function with constant returns to scale?

A) (a)
B) (b)
C) (c)

Question 35

In the equation y , K represents

A) the quantity of capital
B) a constant that shows how productive the technology is
C) the quantity of labor

Question 36

Refer to Exhibit 9-2. If capital is fixed at , then this graph the optimal combination of inputs in the

A) short run
B) long run
C) immediate run

Question 37

With a Cobb-Douglas technology, when α+ β< 1, we have

A) constant returns to scale
B) increasing returns to scale
C) decreasing returns to scale

Question 38

The returns to scale of a Leontief production function are

A) increasing
B) decreasing
C) constant

Question 39

State the geometric and algebraic conditions for optimal input combinations.