Question 1

When output price rises, the long run increase in labor input will be larger than the short run increase in labor input.

Accepted Answer

False

Question 2

The more substitutable capital and labor are in production, the more likely it is that the cross-price demand curve for capital (relative to the wage) is upward sloping.

Accepted Answer

When capital and labor are highly substitutable in production, the elasticity of substitution between the two factors is high. In this case, a change in the relative price of capital to labor (i.e. the wage) would lead to a greater change in the quantity demanded of capital compared to the quantity demanded of labor. This results in an upward sloping cross-price demand curve for capital relative to the wage.

Question 3

The cross-price demand for capital (relative to the wage) may slope up or down.

Accepted Answer

The cross-price demand for capital (relative to the wage) can slope up or down depending on the elasticity of substitution between capital and labor. If the two inputs are highly substitutable, then an increase in the wage will lead to a decrease in the demand for capital, resulting in a downward sloping cross-price elasticity of demand. However, if the inputs are not very substitutable, an increase in the wage may lead to an increase in the demand for capital as firms seek to substitute capital for labor, resulting in an upward sloping cross-price elasticity of demand.

Question 4

Long run average cost curves are downward sloping for increasing returns to scale production technologies.

Accepted Answer

In the context of increasing returns to scale, long-run average cost curves slope downward because as production scales up, the average cost of producing each unit decreases. This is due to efficiencies gained from spreading fixed costs over a larger number of units and potentially benefiting from more efficient production techniques or volume discounts on inputs.

Question 5

(Long run) average cost curves are U-shaped when the production technology has decreasing returns to scale and the firm faces recurring fixed costs.

Accepted Answer

The U-shape of the long run average cost curve is due to the interplay of economies of scale and diseconomies of scale. Initially, as a firm expands its production, it benefits from economies of scale, which are reflected in decreasing average costs. However, beyond a certain level, the firm starts experiencing diseconomies of scale, which are caused by decreasing returns to scale and recurring fixed costs. These diseconomies make the long run average cost curve rise again, leading to the U-shape.

Question 6

Short run average expenditure curves are tangent at their lowest point to the long run average cost curve.

Accepted Answer

The answer of Short run average expenditure curves are tangent...

Question 7

If the cross-price demand curve for capital (relative to the wage) is vertical, the short run response by a firm to an increase in the wage is the same as its long run response.

Accepted Answer

A vertical cross-price demand curve for capital means that the quantity demanded of capital does not change in response to a change in the wage. This implies that the firm's input mix (i.e. the ratio of capital to labor) remains the same in the short and long run, and thus its response to an increase in the wage is the same in both time periods.

Question 8

The fixed expense on a fixed level of capital in the short run becomes a fixed cost for the firm in the long run.

Accepted Answer

In the long run, all costs are variable because firms have the flexibility to adjust all inputs and scale of operation, including levels of capital. Fixed expenses in the short run do not remain fixed in the long run as firms can change their capital structure and investment levels.

Question 9

If the rental rate increases, we know that output and labor input will fall in the long run.

Accepted Answer

The relationship between rental rate increases and output and labor input in the long run is not deterministic. An increase in the rental rate could lead to a substitution effect towards more labor-intensive production methods if labor is a substitute for capital, potentially increasing labor input. The effect on output depends on the production function and the elasticity of substitution between inputs.

Question 10

The greater the degree of substitutability between capital and labor, the greater will be the downward shift in the cost curve when wage falls.

Accepted Answer

This statement is true. When there is a higher degree of substitutability between capital and labor, firms can easily adjust their production process to use more capital instead of labor when the wage rate falls. This results in a greater reduction in the cost of production and a downward shift in the cost curve.

Question 11

If the rental rate increases, we know for sure that the firm will produce less and will (in the long run) use less capital.

Accepted Answer

An increase in rental rate will increase the cost of capital for the firm, making it less profitable to continue producing at the same level. As a result, the firm is likely to reduce production and use less capital in the long run to maintain profitability.

Question 12

If labor and capital are perfect complements in production, short run supply curves are vertical.

Accepted Answer

When labor and capital are perfect complements, they must be used in a constant ratio to each other in order to maximize production efficiency. This means that the input ratio is fixed and cannot be adjusted in the short run, resulting in a vertical short run supply curve.

Question 13

Long run marginal cost curves are increasing for decreasing returns to scale production technologies.

Accepted Answer

Long run marginal cost represents the cost of producing an additional unit in the long run when all inputs are variable. When production technologies exhibit decreasing returns to scale, it means that as production increases, the cost of producing an additional unit also increases. This leads to an upward sloping long run marginal cost curve.

Question 14

(Long run) average cost curves are U-shaped when the production technology has increasing returns to scale and the firm faces recurring fixed costs.

Accepted Answer

The answer of (Long run) average cost curves are U-shaped...

Question 15

Except for the output level for which short-run fixed capital is long run cost-minimizing, short-run average expenses incurred by the firm are higher than long run average costs.

Accepted Answer

In the short run, a firm has fixed costs that cannot be adjusted such as rent and salaries, leading to higher short-run average expenses. In the long run, a firm can adjust all costs, including fixed costs, to minimize average costs. Therefore, short-run fixed capital may be cost-minimizing, but short-run average expenses are generally higher than long-run average costs.

Question 16

Short run economic costs must be lower than long run economic costs because long run economic costs include the cost of inputs that are fixed in the short run (and thus are not part of short run cost).

Accepted Answer

In the short run, some costs are fixed and cannot be changed, leading to potentially inefficient production levels. In the long run, all costs are variable, allowing firms to adjust all inputs and potentially achieve lower average costs through economies of scale or more efficient production techniques.

Question 17

Conditional input demand curves always slope down, but unconditional input demand curves can slope up.

Accepted Answer

Unconditional input demand curves can slope up because they represent the relationship between the quantity demanded of an input and its price, holding all other factors constant. In contrast, conditional input demand curves hold the output or production level constant, and therefore always slope down as the firm will demand less of an input if its price increases.

Question 18

Suppose the AC curve is U-shaped.Then an increase in a recurring fixed cost will cause the AC curve to shift up, with its lowest point shifting to the right.

Accepted Answer

In a U-shaped AC curve, the lowest point represents the point of minimum average cost. If there is an increase in recurring fixed cost, it will increase the average cost at all levels of output, shifting the entire AC curve upwards. This means that the lowest point will also shift to the right, indicating a higher minimum average cost level.

Question 19

If the wage falls, we know for sure that the firm will produce more in the long run but we cannot be sure whether it will use more or less capital.

Accepted Answer

When the wage falls, labour becomes cheaper and this makes it more attractive for firms to hire more workers. This would lead to an increase in production in the long run. However, whether the firm will use more or less capital is uncertain as it depends on the relative cost of labour and capital. If the fall in wage is significant enough, the firm may switch from using capital to using more labour, resulting in less use of capital. On the other hand, if labour still remains relatively expensive, the firm may choose to invest in more capital to substitute for the relatively expensive labour. Therefore, we cannot be sure whether the firm will use more or less capital when the wage falls.

Question 20

If the production technology has increasing returns to scale, short run marginal cost curves must be downward sloping.

Accepted Answer

If the production technology has increasing returns to scale, it means that as the scale of production increases, output increases at a greater proportion than the increase in inputs. In the short run, however, there are fixed inputs that cannot be adjusted. Thus, the increase in output due to increased variable inputs may eventually lead to decreasing marginal returns, and hence upward sloping short run marginal cost curves.

Quiz 13: Production Decisions in the Short and Long Run