Question 1

A firm is operating such that the marginal product of labor is 48 and the marginal product of capital is 12. The firm is minimizing its costs only if
A) the wage is one fourth the rental rate.
B) the rental rate is one fourth the wage.
C) since capital is more productive than labor, the firm must be minimizing cost.
D) Given this information the firm can't be minimizing cost under any circumstances.

Accepted Answer

To minimize costs, the firm must equate the ratio of the marginal product of labor to the wage with the ratio of the marginal product of capital to the rental rate. Therefore, MPL/ w = MPK/ r. Solving for the rental rate, r = (MPK/MPL)w. Given the marginal product of labor is 48 and the marginal product of capital is 12, we get r = (12/48)w = w/4, which means the rental rate is one fourth the wage. Thus, the correct answer is B.

Question 2

Assume the prices of labor and capital remain the same, but the average educational level of workers decreases and therefore labor productivity decreases. This would lead a firm to
A) use a more capital-intensive production technology.
B) use a more labor-intensive technology.
C) not change its production technology, but produce fewer units of output.
D) use only capital to produce the product.

Accepted Answer

A decrease in labor productivity makes labor relatively less efficient compared to capital, prompting firms to adopt more capital-intensive production technologies to maintain or enhance productivity.

Question 3

Assume the total product of two workers is 110 and the total product of three workers is 120. The three worker's average product is ________ while the third worker's marginal product is ________.
A) 40; 10
B) 40; 20
C) 50; 10
D) 120; 110

Accepted Answer

The average product for three workers is the total product divided by the number of workers, which is 120/3 = 40. The marginal product of the third worker is the increase in total product from adding the third worker, which is 120 - 110 = 10.

Question 4

If Overstock.com earns a rate of return exactly equal to what is necessary for it to continue operations, then its
A) total revenue exceeds its economic costs.
B) economic costs exceed its total revenue.
C) normal profit is zero.
D) economic profit is zero.

Accepted Answer

If Overstock.com earns a rate of return exactly equal to what is necessary for it to continue operations, then its economic profit is zero. This is because economic profit takes into account both explicit (accounting) costs and implicit (opportunity) costs, and if the company is only earning enough to cover its costs, then its opportunity costs are equal to its accounting costs. Therefore, there is no excess profit to be considered as economic profit.

Question 5

Assume that capital and labor are complementary inputs. If the firm decreases the amount of capital it employs, this would
A) cause the firm to move down along the MP schedule for labor.
B) cause the firm to move up along its MP schedule for labor.
C) shift the firmʹs MP schedule for labor to the left.
D) shift the firmʹs MP schedule for labor to the right.

Accepted Answer

When capital and labor are complementary inputs, reducing the amount of capital employed would decrease the productivity of labor, effectively shifting the marginal product (MP) schedule for labor to the left, not moving along it.

Question 6

When a firm maximizes total product in the short run, average product is
A) zero.
B) negative.
C) positive.
D) Any of the above can be correct.

Accepted Answer

In the short run, increasing total product means that the firm is increasing its output. As total product increases, it means that the firm is getting more efficient in using its inputs. This indicates that average product is positive, since the output is increasing while the input remains constant. Therefore, the correct answer is C).

Question 7

You own a business that distributes restaurant menus to houses and apartments. You have an incentive to substitute labor for capital if the
A) price of capital decreases.
B) price of labor decreases.
C) price of labor increases.
D) marginal product of labor decreases.

Accepted Answer

The answer of You own a business that distributes restaurant...

Question 8

At the point where total product is ________, marginal product is zero, but average product is still positive.
A) maximized
B) minimized
C) zero
D) negative

Accepted Answer

When total product is maximized, it means that adding more units of the variable input (e.g., labor) does not increase the total output, which is why the marginal product (the change in total output from adding one more unit of input) is zero at this point. However, the average product (total output divided by the number of units of input) can still be positive, as there is still output being produced.

Question 9

A firm produces 15 units of output from the last dollar it spends on labor and 10 units from the last dollar spent on capital. The firm should
A) employ more labor and less capital.
B) employ more capital and less labor.
C) employ more capital and labor.
D) employ less capital and labor.

Accepted Answer

Since the firm produces more output from the last dollar spent on labor than capital, it should shift towards employing more labor and less capital in order to maximize its output per dollar spent.

Question 10

If a company is earning a rate of return less than the return necessary for the business to continue operations in the long run, then
A) total revenue exceeds total costs.
B) total costs are less than a normal rate of return.
C) the firm's normal rate of return is zero.
D) the firm is suffering an economic loss.

Accepted Answer

If a company is earning a rate of return less than the return necessary for the business to continue operations in the long run, it means that the company is not generating enough revenue to cover its costs and earn a profit. In other words, the company is suffering an economic loss.

Question 11

The formula Δq/ΔL represents
A) total product.
B) the average product of labor.
C) the capital-to-labor ratio.
D) the marginal product of labor.

Accepted Answer

Δq/ΔL represents the change in output (Δq) when there is a change in the amount of labor (ΔL) used in the production process. This is the definition of the marginal product of labor, which measures the additional output produced by adding one unit of labor while holding other factors constant.

Question 12

The specific technology chosen by a profit-maximizing clothing manufacturer depends on
A) input prices.
B) output prices.
C) demand for the output.
D) supply of the output.

Accepted Answer

The answer of The specific technology chosen by a profit-maximizing...

Question 13

To minimize costs, a firm should use more capital and less labor if the product derived from the last dollar spent on labor is ________ the product derived from the last dollar spent on capital.
A) less than
B) greater than
C) equal to
D) either greater than or less than

Accepted Answer

When the product derived from the last dollar spent on labor is less than the product derived from the last dollar spent on capital, it means that the marginal product of labor is less than the marginal product of capital. In this case, it is more efficient for the firm to use less labor and more capital to produce the same output. This helps in minimizing costs and maximizing profits.

Question 14

To minimize costs, a firm should use more labor and less capital if the product derived from the last dollar spent on labor is ________ the product derived from the last dollar spent on capital.
A) less than
B) greater than
C) equal to
D) either greater than or less than

Accepted Answer

To minimize costs, a firm should allocate its resources so that the marginal product per dollar spent is equal across all inputs. If the marginal product per dollar spent on labor is greater than that on capital, it indicates that labor is currently a more efficient use of funds, so the firm should use more labor and less capital until the marginal products per dollar are equalized.

Question 15

If marginal product is less than average product, then
A) average product must be increasing.
B) marginal product must be decreasing.
C) marginal product must be increasing.
D) marginal product could either be increasing or decreasing.

Accepted Answer

If marginal product is less than average product, then the average product must be decreasing as long as marginal product is positive. This is because average product is calculated by dividing total product by the amount of inputs used, so if marginal product is less than average product, adding more input will decrease the overall output per unit of input. Marginal product could either be increasing or decreasing, but it is not relevant to the relationship between marginal product and average product.

Question 16

You are certain that the restaurant industry's normal rate of return is 12%. You would expect a(n) ________ normal rate of return for a soft drink manufacturing industry that people consider much less risky than the restaurant industry.
A) 12%
B) less than 12%
C) above 12%
D) risk free (the rate on government bonds)

Accepted Answer

The soft drink manufacturing industry is considered less risky than the restaurant industry. Generally, lower risk investments offer lower potential returns. Therefore, if the restaurant industry's normal rate of return is 12%, a less risky industry like soft drink manufacturing would likely offer a rate of return less than 12%.

Question 17

If we assume that labor is the only variable input, the slope of the short-run ________ curve measures the marginal product of labor.
A) average product
B) marginal product
C) total product
D) total cost

Accepted Answer

The slope of the short-run total product curve measures the marginal product of labor, as it represents the change in total output resulting from a one-unit change in labor, holding all other inputs constant.

Question 18

The equation (MP_L/P_L) = (MP_K/P_K)represents A) profit maximization. B) cost minimization. C) the short-run production function. D) diminishing marginal returns.

Accepted Answer

The answer of The equation (MP_L/P_L) = (MP_K/P_K)represents A) profit...

Question 19

Firms have an incentive to substitute capital for labor as the
A) price of labor decreases.
B) price of capital increases.
C) price of labor increases.
D) marginal product of labor increases.

Accepted Answer

Firms are more likely to substitute capital for labor when the price of labor increases because it becomes more cost-effective to use machinery or technology instead of human workers.

Question 20

Assume the total product of two workers is 200 and the total product of three workers is 300. The three workers' average product is ________ while the third worker's marginal product is ________.
A) 80; 40
B) 40; 80
C) 100; 100
D) 300; 200

Accepted Answer

The average product for three workers is the total product divided by the number of workers, which is 300/3 = 100. The marginal product of the third worker is the change in total product when the third worker is added, which is 300 - 200 = 100.

Quiz 7: The Production Process: the Behavior of Profit-Maximizing Firms

A firm is operating such that the marginal product of labor is 48 and the marginal product of capital is 12. The firm is minimizing its costs only if

Assume the prices of labor and capital remain the same, but the average educational level of workers decreases and therefore labor productivity decreases. This would lead a firm to

Assume the total product of two workers is 110 and the total product of three workers is 120. The three worker's average product is while the third worker's marginal product is .

If Overstock.com earns a rate of return exactly equal to what is necessary for it to continue operations, then its

Assume that capital and labor are complementary inputs. If the firm decreases the amount of capital it employs, this would

When a firm maximizes total product in the short run, average product is

You own a business that distributes restaurant menus to houses and apartments. You have an incentive to substitute labor for capital if the

At the point where total product is ________, marginal product is zero, but average product is still positive.

A firm produces 15 units of output from the last dollar it spends on labor and 10 units from the last dollar spent on capital. The firm should

If a company is earning a rate of return less than the return necessary for the business to continue operations in the long run, then

The formula Δq/ΔL represents

The specific technology chosen by a profit-maximizing clothing manufacturer depends on

To minimize costs, a firm should use more capital and less labor if the product derived from the last dollar spent on labor is ________ the product derived from the last dollar spent on capital.

To minimize costs, a firm should use more labor and less capital if the product derived from the last dollar spent on labor is ________ the product derived from the last dollar spent on capital.

If marginal product is less than average product, then

You are certain that the restaurant industry's normal rate of return is 12%. You would expect a(n) ________ normal rate of return for a soft drink manufacturing industry that people consider much less risky than the restaurant industry.

If we assume that labor is the only variable input, the slope of the short-run ________ curve measures the marginal product of labor.

The equation (MP_L/P_L) = (MP_K/P_K) represents

Firms have an incentive to substitute capital for labor as the

Assume the total product of two workers is 200 and the total product of three workers is 300. The three workers' average product is while the third worker's marginal product is .