Deck 20: Production Cost Theory and Decisions of the Firm

Question 1

Identify the incorrect answer.If the price of each of the two factors used in production is a constant, then the least-cost principle is satisfied when the:

A)marginal product per dollar received from the last dollar of expenditure is the same for every productive factor.
B)slope of the equal-product curve is equal to the slope of the equal-cost line.
C)marginal product per dollar of each factor is equal to the inverse of the marginal cost.
D)ratio of the marginal products of the two factors equals the ratio of their prices.
E)equal-product curve cuts across an equal-cost line from above.

Answer 1

equal-product curve cuts across an equal-cost line from above.

Question 2

Use the following to answer questions :
Figure 7A-2
In Figure 7A-2, what are the prices of land and labor along equal-cost line AB?

A)1,4
B)2,4
C)2,2
D)4,2
E)None of the above.

Answer 2

2,4

Question 3

The least-cost combination of inputs for a specified output:

A)can be read directly from the production-function schedule.
B)will be independent of variations in the price of the factors used.
C)is indeterminate, as is shown by the production-function schedule, which indicates a number of ways of producing any given output.
D)is determined by using the prices of the factors to compute the cost of the different input combinations that will produce the specified output.
E)will shift when the prices of the factors change, so that the factor whose price has gone up will be used more to maintain quality.

Answer 3

is determined by using the prices of the factors to compute the cost of the different input combinations that will produce the specified output.

Question 4

If 1 unit of land and labor are used to make bread (costing a total of $10), while 1 unit of land and 2 units of labor are used to make wine (costing a total of $12), then:

A)the price of labor is $2 and the price of land is $8.
B)the price of land is $2 and the price of labor is $8.
C)the price of each final good is $11.
D)labor will continue to move into wine production until the price of wine declines to $10.
E)no correct numerical answer is stated above.

Question 5

If the firm illustrated in the figure below chooses to expand production from E at minimum cost with constant input prices, it will move to:

A)F.
B)H.
C)G.
D)I.
E)J.

Question 6

Use the following to answer questions :
Table 7A-1
In Table 7A-1, what is the least cost input combination when the price of land = $4 and the price of labor = $2?

A)A
B)B
C)C
D)D
E)E

Question 7

A textile firm operates a plant in the north (where labor is expensive relative to capital)as well as a plant in the south (where capital is expensive relative to labor).In the figure below, the northern plant will most likely minimize costs by combining labor and capital in the amounts indicated by which of the following points?

A)A
B)B
C)C
D)D
E)E

Question 8

Use the following to answer questions :
Figure 7A-2
In Figure 7A-2 the shift in the total cost curve from AB to AC was caused by:

A)an increase in land prices to $4.
B)a decrease in land prices to $1.
C)an increase in wages to $2.
D)a decrease in wages to $2.
E)none of the above.

Question 9

Use the following to answer questions :
Figure 7A-1
Suppose the producer in Figure 7A-1 wants to increase production of good y from 100 to 200 in the short run.Assume MP_L/MP_K and input prices remain constant.If point A represents the best possible combination of inputs for 100 units of output, which point represents the best input combination in the short run for 200 units of output?

A)Point A
B)Point B
C)Point C
D)Point D
E)Point E

Question 10

Use the following to answer questions :
Table 7A-1
If point D is the least-cost factor combination for Q = 100 when the price of labor = $5 and the price of land = $4 for Table 7A-1, what is the (marginal productivity of labor)/(marginal productivity of capital)?

A)1
B)1.25
C)1.5
D)2
E)It cannot be determined from the information given.

Question 11

The equal-product curve is a locus of points showing constant total cost of producing different outputs with varying combinations of inputs.

Question 12

Use the following to answer questions :
Figure 7A-1
Suppose a producer wants to increase production of good y from 100 to 200.Assume MP_L/MP_K and input prices remain constant.If point A in Figure 7A-1 represents the best possible combination of inputs for production of 100, which point represents the new best possible combination?

A)Point B
B)Point C
C)Point D
D)All of the above.
E)None of the above.

Question 13

If 1 unit each of land and labor are used to make product A (costing a total of $10), and 1 unit of land and 3 units of labor are used to make product B (costing a total of $22), then the price of:

A)land is $6 and the price of labor is $4.
B)labor is $6 and the price of land is $4.
C)land is $8 and the price of labor is $2.
D)each input is $4.
E)labor is 3 times the price of land, but the exact amount cannot be determined from the above.

Question 14

The optimum input combination for a firm, given a particular output, is the point at which the equal-product curve for that output is tangent to the lowest-attainable equal-cost line.

Question 15

Use the following to answer questions :
Table 7A-1
For Table 7A-1, if the price of labor changes to $4 and the price of land changes to $3, what is the new least-cost factor combination?

A)A
B)B
C)C
D)D
E)E

Question 16

Use the following to answer questions :
Figure 7A-2
In Figure 7A-2, assuming that the price of inputs are equal and that doubling all inputs doubles output, what is the lowest possible cost to produce Q = 150?

A)$12
B)$16
C)$18
D)$24
E)None of the above.

Question 17

Use the following to answer questions :
Table 7A-1
For Table 7A-1, if the price of labor = $3 and the price of land = $4, what is the least-cost factor combination of production?

A)A
B)B
C)C
D)D
E)Both B and C, which are the same.

Question 18

If a firm is initially producing at point E in the figure below and the rental price of land increases, then the firm, if it maintains output at the same level, will:

A)move towards F.
B)move towards H.
C)move towards G.
D)move towards I.
E)stay at E.

Question 19

Use the following to answer questions :
Figure 7A-2
At Q = 100 in Figure 7A-2, to be producing at least cost, the ratio of (marginal productivity of land)/(marginal productivity of labor)must be:

A)1.
B)1.5.
C)1.67.
D)2.
E)It cannot be determined from the information given.

Question 20

Least-cost relationships tell the firm how much output it should finally produce.

Question 21

If the price of one factor increases, then the firm will find a new least-cost factor combination by shifting its lowest equal-cost line along its same equal-product curve.

Question 22

A labor-saving technological improvement will cause firms to move along the production function to more capital-intensive methods.

Question 23

The equal-product curve is a locus of points of constant output which may be produced with varying combinations of inputs.

Question 24

Any of the following changes may cause the marginal product of labor to shift: an increase in the amount of land used jointly with the labor, a decrease in the amount of capital used jointly, and a change in technology.

Question 25

Production theory is like consumer theory in that in the former the consumer equates the marginal utilities from each good, while in the latter the firm equates the marginal products from each factor.

Question 26

An increase in the price of any given good will necessarily cause a change in the profit-maximizing employment mix for its production.

Question 27

The tangency of an equal-product curve and an equal-cost line determines many points of a firm's total least-cost curve.

Question 28

It is possible to derive the marginal product curves of both labor and capital from a single production function, specifying the outputs for various combinations of these inputs.

Question 29

By supplying the firm with a production-function schedule, an engineer is indicating the various combinations of possible inputs which will produce a series of different possible outputs.

Question 30

The slope of an equal-cost line is everywhere equal to the ratio of the marginal products of its factors of production.