Question 1

Suppose a firm finds that an additional dollar spent on labor increases output more than does an additional dollar spent on machines. Under these conditions, the firm:

Accepted Answer

If an additional dollar spent on labor increases output more than an additional dollar spent on machines, then the firm is experiencing diminishing returns to capital and increasing returns to labor. To increase economic efficiency, the firm should substitute labor for machines as it will produce more output per dollar spent.

Question 2

Refer to the graph shown. If labor costs $10 per unit and machines cost $15 per unit, the economically efficient cost of producing 500 units of output is:

Accepted Answer

The answer of Refer to the graph shown. If labor...

Question 3

Refer to the graph shown. A firm can produce the same amount of output at points:

Accepted Answer

The answer of Refer to the graph shown. A firm...

Question 4

The standard long-run model assumes that:

Accepted Answer

The standard long-run model assumes that technology is fixed, meaning that there are no technological advances or changes in production processes over time. This allows for the analysis of the long-run equilibrium in a given market, assuming firms have fully adjusted to their production processes and inputs.

Question 5

The marginal rate of substitution of an isoquant curve is the rate at which:

Accepted Answer

The marginal rate of substitution of an isoquant curve measures the rate at which inputs must be substituted for one another to keep the level of output constant. It shows the tradeoff between the two inputs and how much of one input can be replaced by the other without affecting the level of output. Therefore, option C is the correct answer.

Question 6

Refer to the graph shown. If labor costs $10 per unit and machines cost $15 per unit, the economically efficient cost of producing 1,000 units of output is:

Accepted Answer

The answer of Refer to the graph shown. If labor...

Question 7

If a firm is operating at the point of tangency between an isoquant and an isocost line, its production is:

Accepted Answer

Operating at the point of tangency between an isoquant and an isocost line means that the firm is using the optimal combination of inputs to produce a given level of output at the lowest cost possible. This implies that the firm is both technically and economically efficient. Therefore, option C is the correct answer.

Question 8

If a machine cost $50,000 initially and is expected to last for 20 years but is worth $60,000 after one year because it is in short supply, an economist most likely would say that:

Accepted Answer

The economist would recognize the increase in the machine's value from $50,000 to $60,000 as an implicit revenue of $10,000 for the firm in the first year, rather than a cost. This is because the machine's value increased due to its scarcity, not because of operational expenses.

Question 9

Suppose the average total cost of producing semiconductors in a factory of a particular size declines over time as more semiconductors are produced. This drop in average total cost might best be explained by:

Accepted Answer

This phenomenon is best explained by "learning by doing," where the average total cost decreases as the production process becomes more efficient through experience and improvements in skills over time.

Question 10

Suppose a factory that produces toasters experiences a decline in its average total cost with no change in its output level. This decline might be explained by:

Accepted Answer

The answer of Suppose a factory that produces toasters experiences...

Question 11

If a machine cost $50,000 initially and is expected to last for 20 years but is worth $60,000 after one year because it is in short supply, an accountant most likely would say that:

Accepted Answer

The initial cost of the machine is $50,000, and it is expected to last for 20 years. The cost per year is calculated by dividing the initial cost by the number of years, which is $50,000 / 20 years = $2,500 per year. This calculation does not consider the machine's increased value after one year.

Question 12

As you move down an isoquant:

Accepted Answer

As you move along an isoquant, the level of output remains constant, indicating that production remains technically efficient. The mix of inputs changes to maintain the same level of output, but the efficiency in terms of producing that output does not change. Choices A, C, and D are incorrect because moving down an isoquant involves substituting one input for another while keeping output constant, not necessarily using more of all inputs, and does not imply constant economic efficiency or a constant marginal rate of substitution.

Question 13

An isoquant is a curve that represents combinations of:

Accepted Answer

An isoquant represents combinations of factors of production (like labor and capital) that result in the production of equal amounts of output, illustrating the trade-offs between inputs while keeping output constant.

Question 14

An isocost line is a line that represents combinations of:

Accepted Answer

An isocost line represents all the combinations of factors of production that have the same total cost. Therefore, the correct answer is B. The other options are incorrect because an isoquant represents all the combinations of inputs that can produce a given level of output (option A), an isocline represents the combinations of inputs that yield the same marginal product (option C), and an isopoly cost line represents the total cost of a given output level (option D).

Question 15

A new fertilizer has been discovered that significantly increases the corn crop yield per acre. As a result, the farmers':

Accepted Answer

The discovery of the new fertilizer would lead to higher yields per acre, which would lower the cost of producing each unit of output. This would shift the average total cost curve downward, indicating that for any given level of output, the cost of producing it would be lower than before. This would result in a lower price per unit of output and higher profits for farmers. The shape and position of the cost curves would remain the same.

Question 16

If technological innovation occurs when a firm is experiencing diseconomies of scale:

Accepted Answer

Diseconomies of scale occur when a firm experiences an increase in long-run average total costs as output expands. However, if a firm invests in technological innovation, it can shift the long-run average total cost curve down, allowing for more efficient production and lower costs at higher levels of output. This means that while the long-run average total cost curve will still rise as output expands, it will do so at a slower rate than without the technological innovation.

Question 17

Refer to the graph shown. The cost of 5 units of labor and 6 2/3 units of machines is the same as the cost of:

Accepted Answer

The answer of Refer to the graph shown. The cost...

Question 18

Technological change:

Accepted Answer

Technological change refers to the process of introducing new and improved methods of production. These new methods may include the use of better machinery, automation, and other innovation that leads to increased efficiency and productivity while lower cost. The reduction in average total cost is only possible when there is a change in production techniques. Therefore, option B is the correct one.

Question 19

Isoquants slope downward because:

Accepted Answer

Isoquants represent combinations of inputs that yield a given level of output. Since output is held constant as we move along an isoquant, if we reduce the quantity of one input, we need to increase the quantity of another input to maintain the same level of output. Therefore, isoquants slope downward.

Question 20

If labor costs $10 per unit and machines rent for $20 apiece, the slope of an isocost line might imply a substitution of:

Accepted Answer

The slope of an isocost line represents the rate at which one input (e.g., labor) can be substituted for another (e.g., machinery) without changing the total cost. Given labor costs $10 per unit and machines rent for $20 apiece, the slope implies that one unit of machinery can be substituted for two units of labor ($20/$10 = 2), maintaining the same total cost.

Quiz 12: Production and Cost Analysis II