Deck 13: Production Decisions in the Short and Long Run

Question 1

When output price rises, the long run increase in labor input will be larger than the short run increase in labor input.

Answer 1

False

Question 2

The more substitutable capital and labor are in production, the more likely it is that the cross-price demand curve for capital (relative to the wage) is upward sloping.

Answer 2

True

Question 3

The cross-price demand for capital (relative to the wage) may slope up or down.

Answer 3

True

Question 4

Long run average cost curves are downward sloping for increasing returns to scale production technologies.

Question 5

(Long run) average cost curves are U-shaped when the production technology has decreasing returns to scale and the firm faces recurring fixed costs.

Question 6

Short run average expenditure curves are tangent at their lowest point to the long run average cost curve.

Question 7

If the cross-price demand curve for capital (relative to the wage) is vertical, the short run response by a firm to an increase in the wage is the same as its long run response.

Question 8

The fixed expense on a fixed level of capital in the short run becomes a fixed cost for the firm in the long run.

Question 9

If the rental rate increases, we know that output and labor input will fall in the long run.

Question 10

The greater the degree of substitutability between capital and labor, the greater will be the downward shift in the cost curve when wage falls.

Question 11

If the rental rate increases, we know for sure that the firm will produce less and will (in the long run) use less capital.

Question 12

If labor and capital are perfect complements in production, short run supply curves are vertical.

Question 13

Long run marginal cost curves are increasing for decreasing returns to scale production technologies.

Question 14

(Long run) average cost curves are U-shaped when the production technology has increasing returns to scale and the firm faces recurring fixed costs.

Question 15

Except for the output level for which short-run fixed capital is long run cost-minimizing, short-run average expenses incurred by the firm are higher than long run average costs.

Question 16

Short run economic costs must be lower than long run economic costs because long run economic costs include the cost of inputs that are fixed in the short run (and thus are not part of short run cost).

Question 17

Conditional input demand curves always slope down, but unconditional input demand curves can slope up.

Question 18

Suppose the AC curve is U-shaped.Then an increase in a recurring fixed cost will cause the AC curve to shift up, with its lowest point shifting to the right.

Question 19

If the wage falls, we know for sure that the firm will produce more in the long run but we cannot be sure whether it will use more or less capital.

Question 20

If the production technology has increasing returns to scale, short run marginal cost curves must be downward sloping.

Question 21

Which of the following are true in a graph of isoquants (with capital on the vertical and labor on the horizontal) assuming a given wage and rental rate.

A)All long-run cost minimizing input bundles lie on a ray from the origin.
B)(a) is true only if the production technology is homothetic.
C)All short-run cost minimizing input bundles lie on a horizontal line.
D)(c) is true only if the production technology is homothetic.
E)(a) and (c) are true.
F)(b) and (c) are true.
G)(a) and (d) are true.
H)None of the above.

Question 22

After a firm makes both short and long run adjustments to its production plan following an increase in the output price,

A)the marginal product of capital will be higher.
B)the marginal product of labor will be lower.
C)the technical rate of substitution will be unchanged.
D)(a) and (c)
E)(b) and C
F)(a) and (b)
G)All of the above.h.We cannot tell for sure -- so none of the above.

Question 23

Output price changes cause substitution effects and scale effects.

Question 24

Output supply is more responsive to price in the short run than in the long run.

Question 25

Suppose GE produces 1 million light bulbs per month While labor is variable both in the short run and the long run, capital is fixed in the short run.Labor is sold at a rate w and capital is rented at a rate r.
a.On a graph with labor on the horizontal axis, illustrate the current isocost and isoquant for GE.Carefully label the slope of the isocost.
b.For the rest of the problem, suppose a new tax on capital is implemented but GE intends to continue to produce 1 million light bulbs per year.What will GE do differently in the short run and the long run? Explain using your graph from part (a).
c.Using your answer to part (b), explain what happens to the short run cost curve in the short run.What happens to this short run curve in the long run? Do costs rise more or less in the long run than they do in the short run?
d.Do total costs rise more or less in the long run than total expenditures do in the short run? Explain.

Question 26

After a firm makes short-run adjustments in its production plan following a wage increase,

A)the marginal product of labor will be higher.
B)the marginal product of labor will be lower.
C)the marginal product of capital will be higher.
D)the marginal product of capital will be lower.
E)(a) and C
F)(a) and (d)
G)(b) and (c)
H)(b) and (d)

Question 27

If a firm's labor input response to a decrease in the wage differs between the short and the long run, we know that more workers will be hired after the initial short run adjustment.

Question 28

The parameter A re-scales the production function -- allowing us to transform a decreasing returns to scale production function to an increasing returns to scale production function.

Question 29

Suppose there are different ways of producing computer chips.If you hire one worker (for the day) for each machine that you rent (for the day), you can produce 10 chips per day with each worker/machine pair for the first 60 machine/worker pairs.For the next 60 worker/machine pairs (assuming still that you hire them as pairs for the day), you are able to produce 20 chips per day with each of the additional pairs.Once you have 120 worker/machine pairs, you can only get 5 additional chips per day for each additional pair.But hiring 1 worker for each machine is not the only way to produce computer chips.Suppose you are starting from a production plan where you are using exactly as many workers as machines to produce a given level of chips.The technology is such that, starting at the production plan where you are using the same number of workers as machines, you can replace 1 or more workers with two machines (for each worker) and get just as many chips produced.Alternatively (and again starting at the production plan where you use exactly as many workers as machines), you can replace 1 or more machines with 2 workers (for each machine) and get just as many chips produced.Suppose the daily wage and rental rate are both equal to $100 and the firm currently has 120 units of capital.
a.Illustrate the short run production function (assuming labor is variable in the short run but capital is not).(Label the intercept as well as any kink points.)
b.Derive the short run cost function.(Label the intercept as well as any kink points.)
c.Derive the short run marginal and average cost functions.
d.How low can price fall in the short run before a firm shuts down?
e.What does the average expenditure - i.e.the curve that includes all short run costs but also expenditures that are not costs in the short run - look like? Explain how this curve relates to the long run average cost curve.f.We have said that the long run supply responses to output price changes are larger than short run supply responses.In what sense is this true for the firm you have analyzed here?

Question 30

After a firm makes both short and long run adjustments in its production plan following a reduction in the wage,

A)the marginal product of labor will be higher.
B)the marginal product of labor will be lower.
C)the marginal product of capital will be unchanged.
D)the marginal product of capital may be higher or lower depending on the degree of substitutability between capital and labor.
E)(a) and C
F)(a) and (d)
G)(b) and (c)
H)(b) and (d)

Question 31

The production function can have increasing returns to scale or decreasing returns to scale -- but it cannot have initially increasing and eventually decreasing returns to scale.