Question 1

Which of the following is least likely to limit the ability of a firm to minimize production costs?

Accepted Answer

An increase in the amount of competition faced by a firm typically incentivizes the firm to minimize production costs in order to remain competitive, rather than limiting its ability to do so.

Question 2

Assume a firm uses two inputs,capital and labor.All else constant,an increase in the price of labor would create an incentive for the firm to:

Accepted Answer

When the price of labor increases, it becomes more expensive for the firm to use labor in its production process. To minimize costs, the firm has an incentive to substitute capital for labor, as capital becomes relatively cheaper compared to labor. This substitution allows the firm to maintain or possibly increase its production levels while managing costs more effectively.

Question 3

In which of the following market structures would X-inefficiency be most likely to exist?

Accepted Answer

X-inefficiency occurs when a firm does not operate efficiently, resulting in higher production costs than necessary. In a monopoly, there is a lack of competition, which can lead to a decrease in the incentive for the firm to minimize costs and in turn lead to X-inefficiency.

Question 4

An increase in the amount of competition with other firms that employ "best practices" would be likely to cause a particular firm's labor productivity to:

Accepted Answer

When there is an increase in competition with other firms that employ "best practices," it is likely to push a particular firm to adopt similar or better practices to remain competitive. This adoption of better practices can lead to an increase in labor productivity. Therefore, an increase in competition is likely to cause a particular firm's labor productivity to increase.

Question 5

The negatively-sloped part of the long-run average total cost curve is due to which of the following?

Accepted Answer

The negatively-sloped part of the long-run average total cost curve reflects economies of scale, where increasing production leads to lower average costs due to factors like increased specialization.

Question 6

All else constant,as the price of petroleum increases relative to the prices of other inputs to the production process,in their effort to minimize their total costs of production,we can expect to see firms employ:

Accepted Answer

When the price of petroleum increases relative to prices of other inputs, the total cost of production will increase. In order to minimize the costs of production, firms will try to substitute petroleum with other inputs to the production process. Thus, they will use less petroleum and more of other inputs, resulting in the choice C.

Question 7

According to the text there appear to be very limited opportunities for input substitution in the production of pipe organs.Which of the following is the most plausible explanation for this observation?

Accepted Answer

The text mentions that producing a pipe organ requires a large amount of highly trained labor, indicating that there is limited availability of skilled workers to substitute for other inputs. Therefore, option B is the most plausible explanation. The other options (A, C, and D) do not take into account the labor-intensive nature of pipe organ production, and therefore are less likely to explain the limited opportunities for input substitution.

Question 8

The fact that supermarkets,a land-intensive form of organization,have become the dominant form of grocery store in the United States suggests that:

Accepted Answer

The fact that supermarkets, which require a large amount of land, have become dominant in the grocery store industry suggests that land is a relatively inexpensive input. If land were expensive, we would expect to see alternative store formats that use less land and therefore incur lower costs. This is supported by the fact that smaller-scale grocery stores, such as convenience stores and farmer's markets, continue to exist, but are not dominant in the industry. Therefore, choice (C) is the best option.

Question 9

Which of the following would have the least amount of influence on a manager's choice of which inputs to employ in a production process?

Accepted Answer

The price of a competitor's output may impact a manager's decision on what price they can sell their output for, but it would have little to no influence on which inputs they choose to employ in the production process. Inputs are chosen based on their productivity and cost effectiveness, which are determined by factors such as technology, marginal productivity, and input prices.

Question 10

X-inefficiency refers to the situation in which:

Accepted Answer

X-inefficiency refers to the situation in which firms with market power (i.e., those with the ability to set prices higher than their marginal costs) have less incentive to minimize their costs of production than more competitive firms. As a result, X-inefficiency can lead to higher costs and lower productivity in the economy as a whole.

Question 11

Assume a firm is currently employing 20 units of capital and 100 units of labor in its production process.Assume also that the marginal product of the 20ᵗʰ unit of capital is 40 units of output,the marginal product of the 100ᵗʰ unit of labor is 10 units of output and the per unit prices of capital and labor are $20 and $10,respectively.In this case,in order to minimize its costs of production the firm should:

Accepted Answer

To minimize production costs, a firm should aim for an equal marginal product per dollar spent on all inputs. Here, the marginal product per dollar for capital is 40 units/$20 = 2 units per dollar, and for labor, it's 10 units/$10 = 1 unit per dollar. Therefore, the firm should hire more capital and less labor to equalize the marginal product per dollar spent on each.

Question 12

In which of the following situations would a firm be more likely to rely on a capital-intensive method of production?

Accepted Answer

When labor supply is limited relative to the available amount of capital, firms tend to rely on capital-intensive methods of production. In this situation, the cost of hiring additional labor would be high, and it would be more cost-effective to invest in capital equipment and machinery.

Question 13

Which of the following statements concerning the long-run average cost (LRAC)curve is correct?

Accepted Answer

The LRAC curve represents the least-cost combination of inputs for producing each level of output, reflecting economies of scale and the most efficient production point for any given quantity.

Question 14

Long-run average cost is defined as:

Accepted Answer

Long-run average cost refers to the lowest possible cost of producing a specified level of output when all inputs are variable. In the long run, a firm is able to vary all of its inputs, which means it can choose the most efficient combination of inputs to minimize its costs. Therefore, option A is the correct definition of long-run average cost. Option B only considers capital as a variable input, while option C refers to short-run costs. Option D refers to the situation where all inputs are fixed, which is not applicable in the long run.

Question 15

In which of the following examples cited in the text is there the least amount of evidence of the potential for input substitution?

Accepted Answer

Pipe organ production is a highly specialized and artisanal process, involving specific skills and materials that are not easily substituted, unlike the more standardized and flexible processes involved in automobile, French fry, and health care services production.

Question 16

In the case of a short-run production function:

Accepted Answer

In the short-run production function, at least one input (usually capital) is fixed while one or more inputs (usually labor) are variable. This means that the amount of labor employed can be changed but the quantity of fixed inputs cannot be altered in the short run. Hence, option C is correct. Options A and D are incorrect because all inputs cannot be variable or fixed simultaneously in the short run production function. Option B is incorrect because the quantity of labor employed can be varied in the short run.

Question 17

A production method that relies on large quantities of machines and equipment and smaller quantities of labor is referred to as a:

Accepted Answer

A production method that relies on large machines and equipment rather than labor is referred to as a capital-intensive method of production.

Question 18

Which of the following statements is correct?

Accepted Answer

Legislatively mandated input combinations can limit a firm's flexibility in choosing the most efficient input combinations for their production processes, potentially leading to higher costs of production. Therefore, option B is the most correct statement. Option D is incorrect because reliance on market forces is generally considered more efficient in determining the cost-minimizing combination of inputs. Options A and C are also incorrect as there is no consistent evidence to suggest that legislative input combinations have either greatly reduced or had no effect on production costs across industries.

Question 19

A labor-intensive method of production is one that:

Accepted Answer

A labor-intensive method of production requires a large quantity of labor and a smaller quantity of capital equipment. This means that the production process relies heavily on the input of human labor, often involving tasks that cannot be automated or require specialized skills. Examples of labor-intensive industries include agriculture, hospitality, and healthcare.

Question 20

The evidence on the potential for input substitution in the service sector suggests that:

Accepted Answer

The evidence suggests that there may be more opportunities for input substitution in the service sector than previously thought, especially in areas such as health care, financial services, and even the fine arts. This contradicts the traditional view that the potential for input substitution in the service sector is extremely limited. The amount of labor required for the production process is not a determining factor in the potential for input substitution.

Quiz 6: Production and Cost Analysis in the Long Run