Question 1

The law of diminishing returns is a result of the fact that more and more units of a variable input are being added to a fixed input. Because of the limitations imposed by the fixed input, at some point the productivity of additional units of the variable input must decline.

Accepted Answer

The law of diminishing returns describes the phenomenon of decreasing marginal productivity as more units of a variable input are added to a fixed input. This is due to the fact that the fixed input cannot be increased indefinitely, and so eventually the additional units of the variable input become less effective.

Question 2

A firm's production function is the relationship between the factors of production and the resulting outputs of the production process.

Accepted Answer

This statement is true. The production function is a fundamental concept in economics that shows how inputs such as labor, capital, and raw materials are combined to produce goods and services. It is often represented mathematically or graphically to help firms make decisions about how much to produce and which inputs to use.

Question 3

One of the interesting findings of a survey of firm managers by Blinder et al. is that:
A) the vast majority of firms pay considerable attention to marginal costs in making decisions about how much output to produce.
B) the majority of respondents suggested that fixed costs are a relatively unimportant consideration when making output decisions.
C) approximately 75 percent of respondents indicated that their marginal costs of production are rising over the relevant range of output.
D) a significant percentage of respondents to the survey did not appear to understand the concept of marginal cost.

Accepted Answer

The survey by Blinder et al. found that a significant percentage of firm managers did not fully grasp the concept of marginal cost, indicating a gap between economic theory and business practice.

Question 4

For a particular farmer and a single growing season, the amount of seed that is planted would be considered a variable input.

Accepted Answer

Variable inputs are inputs whose quantity can be adjusted during the production period, such as the amount of seed planted, while fixed inputs remain constant, such as the size of land. Therefore, the amount of seed planted is a variable input.

Question 5

Much of the empirical evidence on the behavior of costs for real-world firms suggests that:
A) average costs functions are U-shaped as suggested by economic theory.
B) for most firms, marginal costs are declining in the range in which the firms operate.
C) for many firms, marginal and average variable costs are constant over wide ranges of output.
D) there is no relationship between the marginal and average variable costs of production.

Accepted Answer

Empirical evidence often shows that for many firms, both marginal and average variable costs tend to remain constant over a wide range of output levels, rather than strictly following the traditional U-shaped cost curves suggested by economic theory. This reflects the real-world flexibility and efficiency of production processes up to a certain capacity.

Question 6

A firm's decision to expand the size of its production facility would be considered a short-run decision so long as the expansion can be completed in less than a year.

Accepted Answer

The distinction between short-run and long-run in economics is not based on specific time frames such as a year, but rather on the flexibility of input adjustments. Short-run decisions involve at least one fixed input, while long-run decisions allow all inputs to be variable. Expanding a production facility involves changing the scale of operations and altering fixed inputs, thus it is considered a long-run decision regardless of the time it takes to complete.

Question 7

By definition, in the typical firm's short-run production function all inputs are fixed in amount.

Accepted Answer

In the short-run production function, at least one input is fixed in amount while others can be varied.

Question 8

When a firm is considering whether to buy a new piece of equipment with retained earnings, the amount of interest that could be earned on that money is an explicit cost and should be treated as such.

Accepted Answer

The amount of interest that could be earned on the money if it were not spent on the new equipment is considered an opportunity cost, which is an implicit cost, not an explicit cost. Explicit costs involve direct monetary outlay.

Question 9

If, for a particular short-run production, we observe that marginal product is decreasing we can conclude that average product is decreasing as well.

Accepted Answer

It is possible for average product to be increasing even if marginal product is decreasing, as long as marginal product is still above average product. However, if marginal product falls below average product, then average product will also start decreasing.

Question 10

The marginal product of a variable input is calculated by dividing total product by the change in the variable input.

Accepted Answer

The marginal product of a variable input is calculated by dividing the change in total product by the change in the variable input.

Question 11

The "long run" is defined as a period of time long enough for the quantities of all of the inputs to production to vary.

Accepted Answer

In the long run, all inputs to production can be varied, including capital, labor, and technology. This allows for greater flexibility in adjusting production levels and costs compared to the short run, where at least one input is fixed.

Question 12

According to the text, much of the increase in productivity that has occurred more recently in the fast food industry was the result of improvements in capital and technology.

Accepted Answer

The text states that "The fast food industry has seen significant increases in productivity over the past few decades, much of which can be attributed to improvements in capital and technology."

Question 13

All else constant, an improvement in technology would cause a firm's total, average and marginal product functions to increase graphically, shift up).

Accepted Answer

An improvement in technology would make a firm more productive, causing an increase in total, average, and marginal product. This is graphically represented by a shift upward of the total, average, and marginal product curves.

Question 14

At the point where a firm incurs diminishing marginal returns, total product will begin to decline.

Accepted Answer

At the point of diminishing marginal returns, total product will continue to increase, but at a decreasing rate. Total product will only begin to decline once the firm reaches negative marginal returns.

Question 15

The full opportunity costs of production are calculated as the sum of both explicit and implicit costs.

Accepted Answer

This is true. Explicit costs are the direct expenses a firm incurs, such as the cost of materials, wages, and rent. Implicit costs are the opportunity costs of using resources that the firm already owns, such as the cost of using the owner's time or the return the firm could earn by investing its own funds in a different venture.

Question 16

The term "variable input" is used to refer to inputs that vary in terms of quality and, therefore, productivity.

Accepted Answer

The term "variable input" refers to inputs whose quantity can be changed in the short run to adjust the level of production, not specifically to variations in quality or productivity.

Question 17

For a typical short-run production function, so long as marginal product is increasing, average product will be increasing as well.

Accepted Answer

This statement is true because as marginal product increases, it is contributing more to the overall output, which raises the average product. However, once marginal product starts to decrease, it will bring the average product down with it.

Question 18

The typical short-run production function is incapable of distinguishing among the different types of labor that might be hired by the firm.

Accepted Answer

The answer of The typical short-run production function is incapable...

Question 19

Because it is a machine, a personal computer should be treated as a fixed input in the typical firm's short-run production function.

Accepted Answer

In the short-run production function, a personal computer can be considered a variable input because firms can easily adjust the number of computers based on their production needs. Fixed inputs are those that cannot be easily changed in the short run, such as buildings or land.

Question 20

Once a firm incurs diminishing marginal returns, total product will begin to decline as more of the variable input is employed.

Accepted Answer

Diminishing marginal returns occur when the marginal product of the variable input starts to decrease, but total product continues to increase, just at a decreasing rate. Total product only begins to decline when negative marginal returns occur.

Quiz 5: Production and Cost Analysis in the Short Run