Question 1

Explain how "learning by doing" and transportation costs each affect the long-run average cost curve.

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Question 2

Explain why X-inefficiency is likely to be more prevalent in an industry in which firms have market power.

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Question 3

Regarding the production of health care, more recent studies suggest that economies of scale exist up to a hospital size of approximately 200 beds.

Accepted Answer

More recent studies have suggested that there are economies of scale up to a hospital size of approximately 200 beds in the production of health care.

Question 4

Assume a new technology is developed that increases the productivity of capital and creates additional economies of scale. How would this affect the firm's minimum efficient scale of operation. Illustrate this effect graphically.

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Question 5

Economists describe short-run decisions as "constrained" decisions, while long-run decisions are described as "planning" decisions. Referring to a firm's short-run average cost function and long-run average cost function, explain this distinction.

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Question 6

As the price of labor increases relative to the price of capital, the firm will move to a more labor-intensive production method to minimize costs.

Accepted Answer

As the price of labor increases relative to the price of capital, the firm will move to a more capital-intensive production method to minimize costs. This is because the cost of using labor is now relatively more expensive compared to the cost of using capital.

Question 7

Empirical evidence suggests that economies of scale, advertising and image differentiation, and risk spreading all help account for the large-scale production that exists in many sectors of the economy.

Accepted Answer

Empirical evidence supports the idea that economies of scale, advertising and image differentiation, and risk spreading contribute to large-scale production in many sectors of the economy.

Question 8

If the inputs to a production process are perfect substitutes and the marginal rate of technical substitution is equal to the ratio of the prices of the two inputs, the firm can choose from a virtually infinite array of combinations of the two inputs to minimize the costs of producing a given level of output.

Accepted Answer

When the inputs are perfect substitutes, the firm can substitute one input for another at a constant rate. This means that the marginal rate of technical substitution is constant and equal to the ratio of the prices of the two inputs. In this case, the firm can choose from a virtually infinite array of input combinations to minimize costs, as long as they produce the desired output level. Thus, the statement is true.

Question 9

Use the firm's long-run cost-minimizing decision rule to explain the differences in the relative use of capital and labor in agriculture in the United States and the Peoples Republic of China.

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Question 10

Over the past 30-40 years, technological change has led to a significant amount of consolidation in the U.S. brewing industry.

Accepted Answer

Technological advancements have increased economies of scale, leading to mergers and acquisitions, resulting in fewer, larger brewing companies dominating the market.

Question 11

What are the two primary factors that influence a firm manager's choice between a labor-intensive and a capital-intensive method of production? How does each factor influence the manager's choice.

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Question 12

Historically, empirical evidence showed that it was more cost effective to have a single generator of electricity serve a particular region's electricity needs than to have several smaller units compete against each other. More recently, technological advances have occurred in the generation of electricity that allow much smaller generating units to produce electricity for the same average cost as much larger units. Explain how this change would be reflected in the firm's long-run average cost curve and minimum efficient scale.

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Question 13

An isoquant identifies all of the combinations of two inputs that result in the same total costs of production.

Accepted Answer

An isoquant identifies all of the combinations of two inputs that result in the same level of output, not the same total costs of production.

Question 14

Briefly summarize the empirical literature on the long-run costs typically incurred by firms in a variety of industries. In particular, is there reason to believe that firms' long-run cost curves assume the typical
U-shape? Why or why not?

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Question 15

Assume a firm is producing 1000 units of a good by using two inputs, capital and labor, whose per unit prices are $50 and $20. Assume also that the marginal physical product of the last unit of capital is 25 and the marginal physical product of the last unit of labor is 15. In order to minimize its costs of production, the firm should adjust its combination of inputs by employing more labor and less capital.

Accepted Answer

The firm should allocate its inputs in a way that their marginal products per dollar spent are equal. Since the price per unit of labor is lower than the price per unit of capital, the firm should use more labor and less capital. This is consistent with the fact that the marginal product of the last unit of labor is higher than the marginal product of the last unit of capital.

Question 16

Most of the empirical research on long-run costs suggests that the long-run average cost curve for most firms has a very pronounced U-shape.

Accepted Answer

Most empirical research suggests that the long-run average cost curve for many firms is relatively flat at the bottom, rather than having a pronounced U-shape. This implies that economies and diseconomies of scale are not as pronounced as the U-shape suggests, and firms can adjust their scale of operation without significantly affecting average costs.

Question 17

Explain how labor resistance and political and legislative influences reduce the ability of firms to minimize their costs of production. What do the two have in common in this regard?

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Question 18

Assume that firms A and B have the same minimum efficient scale of operation and, at current production levels, both firms are incurring the same average costs of production. However, firm A's output is 5 times larger than firm B's output. How is this possible?

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Question 19

An improvement in technology would cause each of the isoquants in a firm's isoquant map to shift out away from the origin.

Accepted Answer

An improvement in technology makes it possible to produce the same amount of output with fewer inputs or more output with the same amount of inputs, effectively making the isoquants closer to the origin, not farther away.

Question 20

If the inputs to a production process are perfect complements, the firm can choose from a virtually infinite array of combinations of the two inputs to minimize the costs of producing a given level of output.

Accepted Answer

In the case of perfect complements, the firm is constrained to use the inputs in a fixed ratio to produce a given level of output, limiting the combinations of inputs to one specific ratio that minimizes costs.

Quiz 6: Production and Cost Analysis in the Long Run