Question 1

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. Suppose this firm is producing output level Q3 with plant size 2. Now suppose this firm changes to plant size 3 and is producing output level Q5. We can say that

Accepted Answer

The answer of The figure below shows a family of...

Question 2

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 their costs. The Canadian firm will use the two inputs, land and labour, in such a way that its land/labour ratio is

Accepted Answer

Because land is relatively cheaper in Canada than in Japan, Canadian firms will tend to use more land and less labour in production than Japanese firms. This will result in a higher land/labour ratio for the Canadian firm compared to the Japanese firm. Therefore, the answer is E) higher than that of the Japanese firm.

Question 3

Although capital is a variable factor in the long run, once chosen it becomes a fixed factor for a long time. A profit- maximizing firm must therefore select a method of production that is

Accepted Answer

The firm must choose a method of production that is currently economically efficient, as well as sufficiently flexible to adapt to changing factor prices over time. This allows the firm to maximize profits in the long run as it can adjust its inputs in response to changes in factor prices without incurring high costs of switching to a completely different production method. Labour-intensive methods may not be the most efficient option in the long run, and technological advancement beyond what is currently used may not be necessary or feasible for the firm's operations. Adapting to a wide range of output over time is also important, but not as crucial as having the flexibility to adjust to changing factor prices.

Question 4

Which of the following paired concepts are equivalent to each other?

Accepted Answer

Decreasing costs and economies of scale are equivalent to each other. As production increases, the cost of producing each unit decreases due to the spread of fixed costs over a larger output. This is referred to as economies of scale. Therefore, decreasing costs and economies of scale are the same concept.

Question 5

In defining a firm's long- run average cost curve,

Accepted Answer

In defining a firm's long-run average cost curve, factor prices are held constant while the firm varies the quantity of factors of production to find the most cost-effective combination for different levels of output.

Question 6

FIGURE 8- 2
-Refer to Figure 8- 2. Decreasing returns to scale occur over the output range

Accepted Answer

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

Question 7

FIGURE 8- 4
-Refer to Figure 8- 4. The firm is initially producing 2000 units and minimizing its production cost at point D. Suppose the prices of capital and labour each rise by 10 percent. If the firm wishes to continue producing the same level of output it will

Accepted Answer

If the prices of both capital and labor increase by the same percentage, the firm's cost-minimizing combination of inputs remains unchanged, so it will remain at point D.

Question 8

The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.  FIGURE 8- 6
-Refer to Figure 8- 6. Suppose there is a change in relative factor prices and the cost- minimizing method of producing 2000 golf tees is now at point D. If the total cost of producing 2000 golf tees is still $60, it must be the case that

Accepted Answer

If the cost-minimizing method shifts to point D while maintaining the same total cost, it suggests that the price of labor fell and the price of capital rose, leading to a substitution of labor for capital.

Question 9

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 capital costs $80 per unit and labour costs $24 per unit. Which production method minimizes the cost of producing 1000 toys per day.

Accepted Answer

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

Question 10

Suppose that capital costs $10 per unit and labour costs $5 per unit. For a profit- maximizing firm operating at its optimal factor mix, if the marginal product of capital is 50, the marginal product of labour must be .

Accepted Answer

In order for the firm to maximize profits, it must allocate its expenditures on capital and labour so that the marginal product per dollar spent on each input is equal. The marginal product per dollar spent on capital is 50/10 = 5, and the marginal product per dollar spent on labour is MPₓ/₄ = MPₓ/5 = MPₖ/10 = 1. Therefore, if the marginal product of capital is 50, the marginal product of labour must be 25. Thus, the answer is C.

Question 11

With respect to innovation, which of the following statements is true?

Accepted Answer

Innovation is often a result of interactions within the economic system, such as competition and market forces. It is not a constant and can be influenced by various factors, including government policies, research and development, and consumer demand. Therefore, innovation is endogenous to the economic system. The other statements are false. The utilization rate and durability of plant and equipment can be affected by innovation, the main incentive to innovation is typically profits or potential profits, and government policy can play a significant role in promoting or hindering innovation.

Question 12

Assume a firm is using 10 units of capital and 10 units of labour to produce 10 widgets per hour. By doubling both inputs the result is a doubling of output. This firm is experiencing

Accepted Answer

The fact that doubling both inputs leads to a doubling of output indicates that the production function exhibits constant returns to scale (CRS), meaning that increasing inputs proportionally will result in a proportional increase in output. Neither economies nor diseconomies of scale are present in this scenario because the CRS production function does not exhibit either increasing or decreasing returns as output chaFirm grows.

Question 13

The long- run average cost curve is an envelope curve, with each point associated with a short- run average cost curve

Accepted Answer

The long-run average cost curve is an envelope curve that is tangent to each point on a corresponding short-run average cost curve. This is because in the long-run, firms have the flexibility to adjust their inputs and production processes to minimize their costs. As a result, the short-run average cost curve will always lie above the long-run average cost curve, and the point of tangency represents the minimum cost for that particular level of output.

Question 14

Which of the following statements concerning long- run and short- run cost curves is correct?

Accepted Answer

In the long run, firms can adjust all inputs, and the long-run average cost curve is derived from the lowest points of the short-run average cost curves. The minimum point of the long-run average cost curve corresponds to the minimum point on one of the short-run average cost curves, where the firm is operating at its most efficient scale.

Question 15

Consider a firm that uses only labour and capital as inputs. At the present use of labour and capital, the MP of labour is four times the MP of capital, and the price of labour is twice the price of capital. In order to minimize its costs, the firm should

Accepted Answer

The firm should decrease capital and increase labour because the marginal product per dollar spent on labour is higher than that on capital, indicating that the firm can reduce costs by using more labour and less capital.

Question 16

An isoquant shows

Accepted Answer

An isoquant represents all the combinations of inputs that yield the same level of output, indicating technically efficient combinations for a given output level.

Question 17

The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.  FIGURE 8- 6
-Refer to Figure 8- 6. The cost- minimizing factor combination for producing 2000 golf tees is

Accepted Answer

The answer of The figure below shows the isocost lines...

Question 18

A downward- sloping LRAC curve will shift downward because of

Accepted Answer

A decrease in factor prices reduces the cost of production, leading to a downward shift in the long-run average cost (LRAC) curve.

Question 19

A firm's least- cost position for producing a given output level occurs at that point where

Accepted Answer

The least-cost position for producing a given output level occurs where the isocost line and isoquant are tangent to each other. This is because at this point, the firm is using the optimal combination of inputs to produce the output at the minimum possible cost. Any other point on the isocost line will either be inefficient or more expensive.

Question 20

Consider a firm that uses only labour and capital. At the present use of labour and capital, the MP of labour is twice the MP of capital, and the price of labour is four times the price of capital. In order to minimize its costs, the firm should

Accepted Answer

The firm should adjust its input mix to equalize the marginal product per dollar spent on each input. Since the MP of labor is twice that of capital, but labor is four times as expensive, the firm should use more capital and less labor to minimize costs.

Quiz 8: Producers in the Long Run