Question 1

For a firm with only two inputs, capital and labour, the condition MPK/MPL = PK/PL guarantees that the firm is
A) minimizing its costs but is not necessarily maximizing its profits.
B) technically efficient but not economically efficient.
C) economically efficient but not technically efficient.
D) at its profit- maximizing output but is not necessarily minimizing its costs.
E) at its profit- maximizing and cost- minimizing level of output.

Accepted Answer

The condition MPK/MPL = PK/PL ensures that the firm is minimizing its costs by equating the marginal rate of technical substitution to the ratio of input prices, but it does not necessarily mean the firm is maximizing its profits.

Question 2

Suppose that capital costs $8 per unit and labour costs $4 per unit. For a profit- maximizing firm operating at its optimal factor mix, if the marginal product of capital is 60, the marginal product of labour must be _ .
A) 30
B) 10
C) 120
D) 90
E) 20

Accepted Answer

The marginal product of labour must be 30 because the marginal product of capital is 60 and the ratio of capital cost to labour cost is 2:1.

Question 3

When a firm seeks to minimize costs of producing a given level of output, it does NOT need to know
A) the available alternative methods of production.
B) how its costs change as its production methods change.
C) the cost of the factors of production it uses.
D) its production function.
E) the level of output that maximizes its profits.

Accepted Answer

When a firm seeks to minimize costs of producing a given level of output, it only needs to know its production function and the cost of the factors of production it uses. It does not need to know the available alternative methods of production or how its costs change as its production methods change. Additionally, the level of output that maximizes profits may not necessarily be the same as the level of output that minimizes costs.

Question 4

Canada has a much lower population density than does Japan. Therefore, the price of land (relative to the price of labour) is lower in Canada than in Japan. Consider a Canadian firm and a Japanese firm, both producing rice, both having access to the same technologies, and both striving to minimize costs. Now suppose that the relative price of land rises in Canada but remains the same in Japan. The effect will be to
A) decrease the land/labour ratio for the Canadian firm.
B) increase the land/labour ratio for both the Canadian and the Japanese firms.
C) increase the land/labour ratio for the Canadian firm.
D) not change the land/labour ratio for either firm.
E) decrease the land/labour ratio for both the Canadian and the Japanese firms.

Accepted Answer

When the relative price of land rises in Canada, the Canadian firm will substitute labour for land to minimize costs, thus decreasing the land/labour ratio.

Question 5

"The bigger the volume, the lower the cost, and we pass these savings on to you" is a familiar advertising slogan. It implies essentially that the
A) firm expects to experience increasing returns over the relevant level of output.
B) average fixed cost will decline or remain constant over the long run.
C) firm is altruistic.
D) total cost of the firm will remain constant as output expands.
E) consumer is able to pay less today because the total cost of the firm is expected to decline tomorrow.

Accepted Answer

The slogan implies that as the firm produces more (bigger volume), it experiences increasing returns, which lowers the cost per unit, allowing the firm to pass on these savings to consumers.

Question 6

Suppose a firm employs two inputs, X and Y, and that at their current levels of use MPX/PX >
MPY/PY. To minimize the cost of production, the firm should hire
A) more input Y only if its price falls.
B) more input Y and less input X.
C) more input X only if its price decreases.
D) more input X only if its price increases.
E) more input X and less input Y.

Accepted Answer

As MPX/PX > MPY/PY, it implies that the marginal product per dollar spent on X is higher than that on Y. Therefore, to minimize the cost of production and maximize efficiency, the firm should hire more of input X, which provides higher marginal product per dollar spent, and less of input Y. Consequently, the answer is E, more input X and less input Y.

Question 7

In the long run, the law of diminishing marginal returns
A) is not relevant because there are no fixed factors of production.
B) does not hold because technology is a variable.
C) does hold, regardless of production process.
D) sometimes holds, depending on the production process.
E) is exactly the same as in the short run.

Accepted Answer

In the long run, all factors of production are variable, so the concept of fixed factors, which is central to the law of diminishing marginal returns, is not relevant.

Question 8

Which of the following is unlikely to be a source of increasing productivity?
A) better raw materials even if there are no changes in factor quantities or proportions
B) increases in technological know- how
C) better organization of production
D) substitution toward labour and away from capital (with constant technology)
E) better- trained labour

Accepted Answer

Substitution towards labor and away from capital (with constant technology) is unlikely to be a source of increasing productivity as it would result in a decrease in capital intensity and lower productivity.

Question 9

The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets per month. $$\begin{array}{l}
\begin{array} { | l | c | c | c | c | } 
\hline \text { Technique } & \text { A } & \text { B } & \text { C } & \text { D } \
\hline \text { Labour } & 25 & 35 & 50 & 30 \
\hline \text { Capital } & 50 & 35 & 25 & 60 \
\hline
\end{array}\
\text { TABLE 8- } 1
\end{array}$$
-Refer to Table 8- 1. If the price of both labour and capital is $10, which production technique minimizes the costs of producing 1000 units of output?
A) A
B) B
C) C
D) D
E) Any of the techniques have the same cost.

Accepted Answer

The answer of The table below shows the number of...

Question 10

If a firm is using labour and capital such that the MP of labour is two times the MP of capital, and the price of labour is four times the price of capital, the firm should in order to minimize its costs of producing its output.
A) decrease both capital and labour
B) decrease capital and increase labour
C) not alter its present factor mix
D) increase both labour and capital
E) increase capital and decrease labour

Accepted Answer

The firm should increase capital and decrease labour because the marginal product per dollar spent on capital is higher than that on labour, given that the MP of labour is twice that of capital but its price is four times higher.

Question 11

Isoquants are usually drawn convex when viewed from the origin, reflecting the standard assumption
A) that both factors are subject to the law of diminishing returns.
B) that the variable factor is subject to the law of diminishing returns.
C) that both factors are subject to increasing returns.
D) negative marginal productivity of all factors.
E) the positive marginal productivity of all factors.

Accepted Answer

The convex shape of isoquants reflects the assumption that both factors are subject to the law of diminishing returns. As more and more of one factor is used with a fixed amount of the other factor, the marginal productivity of the variable factor eventually decreases, leading to a convex isoquant shape.

Question 12

Assume a firm is using 10 units of labour and 10 units of capital and is producing 10 units of output per hour. Now both inputs are doubled, resulting in output rising to 18 units per hour. The firm is experiencing
A) decreasing costs.
B) decreasing returns to scale.
C) increasing returns to scale.
D) economies of scale.
E) constant returns to scale.

Accepted Answer

The firm is experiencing decreasing returns to scale because doubling the inputs (labour and capital) results in less than double the output (18 units instead of 20 units).

Question 13

The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.  FIGURE 8- 3
-Refer to Figure 8- 3. Should this firm ever consider moving from point E (output level Q3 on SRATC2) to point F (output level Q5 on SRATC3)?
A) Yes, because the firm can take advantage of economies of scale.
B) Yes, if the product price rises enough to lead the firm to expand to plant size 3.
C) No, because they are already producing at their lowest possible cost at point E.
D) No, because producing at point F implies a higher cost per unit of output.
E) Yes, because SRATC3 is the optimal plant size for this firm.

Accepted Answer

Moving from point E to point F would require the firm to expand to plant size 3, which may only be economically feasible if the product price rises enough to justify the increased production costs. Therefore, the best answer is B. Choices A, C, D, and E are incorrect because they do not accurately reflect the potential costs and benefits of moving from point E to point F.

Question 14

FIGURE 8- 2
-Refer to Figure 8- 2. In the long run, the lowest- cost level of output achievable by this firm is
A) Q1.
B) Q2.
C) Q3.
D) not shown in the diagram

Accepted Answer

The answer of  FIGURE 8- 2
-Refer to Figure 8-...

Question 15

Increasing returns to scale for a firm is shown graphically by
A) a horizontal long- run average cost curve.
B) a downward- sloping long- run average cost curve.
C) an upward- sloping long- run average cost curve.
D) a vertical long- run average cost curve.
E) none of the above; returns to scale have nothing to do with the shape of the long- run average cost curve.

Accepted Answer

Increasing returns to scale are associated with a downward-sloping long-run average cost curve. As a firm increases its scale of production and expands its output, it benefits from lower costs per unit of production due to economies of scale. This leads to a downward-sloping long-run average cost curve.

Question 16

The figure below shows the isocost lines facing a firm producing golf tees.  FIGURE 8- 5
-Refer to Figure 8- 5. This firm can be a "cost minimizer" by producing on isocost line
A) -- not determinable from the information provided.
B) 4 only.
C) 1 only.
D) 2 only.
E) 3 only.

Accepted Answer

The information provided does not specify the cost structure or the production function of the firm, so it is not possible to determine which isocost line would allow the firm to minimize costs.

Question 17

A profit- maximizing firm will increase its use of capital and decrease its use of labour when the
A) average product of capital is higher than the average product of labour.
B) total product of capital is higher than the total product of labour.
C) marginal product of capital, per dollar spent on capital, is less than the marginal product of labour, per dollar spent on labour.
D) marginal product of capital, per dollar spent on capital, is greater than the marginal product of labour, per dollar spent on labour.
E) marginal product of capital is higher than the marginal product of labour.

Accepted Answer

A profit-maximizing firm will always choose the input combination that yields the highest marginal product of each dollar spent. Therefore, if the marginal product of capital, per dollar spent on capital, is greater than the marginal product of labour, per dollar spent on labour, then the firm will increase its use of capital and decrease its use of labour to achieve maximum profit.

Question 18

The following table shows the marginal products of capital (K) and labour (L) for various methods for Firm ABC to produce 1000 toys per day. $$\begin{array}{l}
\begin{array} { | l | l | l | } 
\hline \begin{array} { l } 
\text { Production } \
\text { Method }
\end{array} & \text { MPK } & \text { MPL } \
\hline \text { A } & 50 & 4 \
\hline \text { B } & 45 & 8 \
\hline \text { C } & 40 & 12 \
\hline \text { D } & 35 & 16 \
\hline \text { E } & 30 & 20 \
\hline \text { F } & 25 & 24 \
\hline \text { G } & 20 & 28 \
\hline
\end{array}\
\text { TABLE 8- } 2
\end{array}$$
-Refer to Table 8- 2. Suppose the firm is employing production method G. How should this firm adjust its use of capital and labour in order to minimize costs?
A) employ more capital and less labour
B) employ more capital and labour
C) employ less capital and more labour
D) employ less capital and labour
E) There is insufficient information to know.

Accepted Answer

The answer of The following table shows the marginal products...

Question 19

Assume a firm is using 6 units of capital and 6 units of labour to produce 6 baskets. Now it doubles both inputs resulting in a new total of 16 baskets being produced. This firm is experiencing
A) constant returns to scale.
B) increasing costs.
C) diseconomies of scale.
D) increasing returns to scale.
E) decreasing returns to scale.

Accepted Answer

Doubling both inputs led to an increase in output by more than double (from 6 to 16). This indicates increasing returns to scale, as the increase in inputs led to a more than proportional increase in output.

Question 20

A change in the technique for producing an existing product is known as
A) process innovation.
B) an increase in productivity.
C) invention.
D) investment.
E) product innovation.

Accepted Answer

A process innovation refers to a change in the way a product is produced or delivered, such as introducing a new equipment or modifying the assembly line. This can lead to increased efficiency, cost savings, and improved quality. The other choices do not specifically refer to changes in production techniques.

Quiz 8: Producers in the Long Run

For a firm with only two inputs, capital and labour, the condition MPK/MPL = PK/PL guarantees that the firm is

Suppose that capital costs $8 per unit and labour costs $4 per unit. For a profit- maximizing firm operating at its optimal factor mix, if the marginal product of capital is 60, the marginal product of labour must be _ .

When a firm seeks to minimize costs of producing a given level of output, it does NOT need to know

"The bigger the volume, the lower the cost, and we pass these savings on to you" is a familiar advertising slogan. It implies essentially that the

Suppose a firm employs two inputs, X and Y, and that at their current levels of use MPX/PX > MPY/PY. To minimize the cost of production, the firm should hire

In the long run, the law of diminishing marginal returns

Which of the following is unlikely to be a source of increasing productivity?

If a firm is using labour and capital such that the MP of labour is two times the MP of capital, and the price of labour is four times the price of capital, the firm should in order to minimize its costs of producing its output.

Isoquants are usually drawn convex when viewed from the origin, reflecting the standard assumption

Assume a firm is using 10 units of labour and 10 units of capital and is producing 10 units of output per hour. Now both inputs are doubled, resulting in output rising to 18 units per hour. The firm is experiencing

The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes. FIGURE 8- 3 -Refer to Figure 8- 3. Should this firm ever consider moving from point E (output level Q3 on SRATC2) to point F (output level Q5 on SRATC3) ?

FIGURE 8- 2 -Refer to Figure 8- 2. In the long run, the lowest- cost level of output achievable by this firm is

Increasing returns to scale for a firm is shown graphically by

The figure below shows the isocost lines facing a firm producing golf tees. FIGURE 8- 5 -Refer to Figure 8- 5. This firm can be a "cost minimizer" by producing on isocost line

A profit- maximizing firm will increase its use of capital and decrease its use of labour when the

Assume a firm is using 6 units of capital and 6 units of labour to produce 6 baskets. Now it doubles both inputs resulting in a new total of 16 baskets being produced. This firm is experiencing

A change in the technique for producing an existing product is known as