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

A

Question 2

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 continue to add either capital or labor until their marginal product is equal to their respective wage or rental rate. When the marginal product of capital per dollar spent on capital is greater than the marginal product of labor per dollar spent on labor, it indicates that capital is providing more productivity per dollar spent, making it more efficient and profitable for the firm to increase its use of capital and decrease its use of labor.

Question 3

Isoquants are usually drawn convex when viewed from the origin,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 when viewed from the origin is a graphical representation of the law of diminishing returns. As more and more of one input is added to a fixed amount of another input, the marginal product of that input will eventually decrease. This leads to a convex shape of the isoquant. Therefore, the assumption of both factors being subject to the law of diminishing returns is the best explanation for the convex shape of isoquants.

Question 4

Assume a firm is using 6 units of capital and 6 units of labour to produce 6 baskets. Now it doublesboth 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

When the inputs are doubled and output increases more than proportional to the increase in inputs, the firm is experiencing increasing returns to scale. In this case, doubling both inputs resulted in an output increase from 6 to 16 baskets, which is more than proportional increase. Therefore, the answer is D) increasing returns to scale.

Question 5

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.  TABLE 8-2
-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 6

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 answer of Assume a firm is using 10 units...

Question 7

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

Accepted Answer

The correct choice is A because without access to Figure 8-5, it is impossible to determine which option is correct.

Question 8

The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets
per month.  TABLE 8-1
-Refer to Table 8-1. If the price of both labour and capital is $10, which production techniqueminimizes 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 9

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

The condition MPX/PX > MPY/PY implies that the marginal product per dollar spent on input X is higher than the marginal product per dollar spent on input Y. To minimize the cost of production, the firm should hire more of the input that provides a higher marginal product per dollar, which is input X in this case. Therefore, the firm should hire more input X and less input Y.

Question 10

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 change in the technique for producing an existing product is known as process innovation. Process innovation involves improving the way things are done, and is different from product innovation which involves creating entirely new products.

Question 11

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 occur when a firm's output increases by a greater proportion than its inputs, resulting in lower average costs of production. This is shown graphically by a downward-sloping long-run average cost curve.

Question 12

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 samein 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

The answer of Canada has a much lower population density...

Question 13

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

The answer of In the long run, the law of...

Question 14

If a firm is using labour and capital such that the MP of labour is two times the MP of capital, andthe price of labour is four times the price of capital, the firm should in order to minimizeits 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 answer of If a firm is using labour and...

Question 15

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 onSRATC2) 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 and incur higher fixed costs. However, if the product price rises enough to cover the higher fixed costs and generate additional profits, then it would make sense for the firm to consider this move. Moving to a larger plant size can sometimes result in economies of scale, which can lower the firm's average costs and increase profitability. Therefore, option B is the best choice.

Question 16

The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets
per month.  TABLE 8-1
-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 toward labor and away from capital (with constant technology) is unlikely to be a source of increasing productivity because it implies a decrease in capital intensity, which is typically associated with lower productivity levels. The other choices (better raw materials, increases in technological know-how, better organization of production, and better-trained labor) are all potential sources of increasing productivity.

Question 17

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
-Suppose that capital costs $50 per unit and labour costs $20 per unit. If the marginal product of capital is 100 and the marginal product of labour is 30, a cost-minimizing firm should
A) employ more capital and less labour.
B) employ less of both capital and labour.
C) employ more of both capital and labour.
D) not change its current factor use.
E) employ less capital and more labour.

Accepted Answer

To determine the optimal factor use, consider the ratio of marginal products to factor prices (MPL/W and MPK/R).

MPL/W = 30/20 = 1.5 
MPK/R = 100/50 = 2

As MPK/R > MPL/W, the firm should employ more capital and less labour to minimize costs and maximize profits. Therefore, the correct answer is A).

Question 18

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
-"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 the firm expects to experience increasing returns to scale as output expands, allowing them to lower their costs and pass on the savings to customers. This is consistent with the concept of economies of scale, which is reflected in the downward-sloping portion of the long-run average total cost curve in the figure.

Question 19

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
-The slope of a firm's isocost line is equal to the ratio of
A) the factor prices.
B) the marginal rate of substitution between factors.
C) product prices.
D) the marginal products of its factors.
E) total variable cost to total cost.

Accepted Answer

The slope of an isocost line is equal to the ratio of factor prices. This is because the slope indicates the rate at which the firm can trade one factor for another while keeping its costs constant. Therefore, the ratio of factor prices directly affects the slope of the isocost line.

Question 20

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

Accepted Answer

The answer of Suppose that capital costs $8 per unit...

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

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

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

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

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 the isocost lines facing a firm producing golf tees. FIGURE 8-5 -Refer to Figure 8-5.

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

Increasing returns to scale for a firm is shown graphically by

In the long run, the law of diminishing marginal returns

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

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 onSRATC2) to point F (output level Q5 on SRATC3) ?

The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets per month. TABLE 8-1 -Which of the following is unlikely to be a source of increasing productivity?

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 -"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

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 -The slope of a firm's isocost line is equal to the ratio of

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