Question 1

A firm's long- run average cost curve

Accepted Answer

The long-run average cost curve represents the lowest attainable cost level for any given level of output, taking into consideration all production technologies and factor prices. It is the boundary between attainable and unattainable cost levels in the long run.

Question 2

The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.
  FIGURE 8- 6
-Refer to Figure 8- 6.At each of points A,C,E and G on the isoquant map we know that

Accepted Answer

At each point on an isoquant map, the slope of the isocost line tangent to that point gives us the ratio of the prices of capital and labour. Meanwhile, the slope of the isoquant at that point gives us the ratio of the marginal products of capital and labour. Therefore, at points A, C, E and G, where the isoquant is tangent to an isocost line, the ratio of the marginal products of capital and labour is equal to the ratio of the prices of capital and labour (option E). This is the condition for the firm to be cost-minimizing for a given level of output.

Question 3

FIGURE 8- 2 
-Refer to Figure 8- 2.Decreasing returns to scale occur over the output range

Accepted Answer

Decreasing returns to scale occur when an increase in inputs results in a less than proportional increase in output. This typically happens beyond a certain level of output, which in this case is beyond Q3.

Question 4

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

Accepted Answer

Doubling both inputs and resulting in the production of 16 baskets shows that the firm is experiencing increasing returns to scale. This means that the firm is able to achieve more output per unit of input as it increases its level of production.

Question 5

Suppose Farmer Smith hires 4 workers and leases 2 tractors and 15 hectares of farmland for one growing season,and produces 120 000 bushels of crop.The next year he hires 8 workers and leases 4 tractors and 30 hectares of farmland,and produces 210 000 bushels of crop.This firm (the farmer)is exhibiting returns to scale.

Accepted Answer

Returns to scale refers to the relationship between inputs and outputs when all inputs are increased proportionally. If output increases at a greater rate than inputs, there are increasing returns to scale. If output increases at the same rate as inputs, there are constant returns to scale. If output increases at a lower rate than inputs, there are decreasing returns to scale.

In this scenario, Farmer Smith increased inputs (workers, tractors, and land) by a factor of 2 but only increased output by a factor of (210,000 / 120,000 =) 1.75. This means that output did not increase at the same rate as inputs, indicating decreasing returns to scale. Therefore, the best choice is (E) decreasing.

Question 6

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 same in Japan.The effect on the use of inputs will be to

Accepted Answer

When the relative price of land rises in Canada, the Canadian firm will substitute away from the now more expensive land towards relatively cheaper labor, thus decreasing the land/labor ratio. The Japanese firm is unaffected as the price of land in Japan remains the same.

Question 7

A cost- minimizing firm will increase its use of labour and decrease its use of capital when the

Accepted Answer

The marginal product of capital, per dollar spent on capital, is less than the marginal product of labour, per dollar spent on labour. This means that the firm can get more output per dollar spent on labour than it can per dollar spent on capital. Therefore, the firm will increase its use of labour and decrease its use of capital.

Question 8

What is meant by the term "increasing returns to scale"?

Accepted Answer

Increasing returns to scale means that as the scale of production increases (i.e. all inputs are increased proportionately), output rises proportionately more than inputs. This leads to lower per unit costs in the long run due to advantages such as greater specialization, bulk buying of inputs, and better use of capital equipment. As a result, the long-run average cost curve shifts downward.

Question 9

Consider the short- run and long- run cost curves for a firm.If there is a fall in all factor prices faced by the firm,

Accepted Answer

A fall in all factor prices faced by a firm will lead to lower costs both in the short run and in the long run, as all inputs will become cheaper. This will result in a downward shift of both the short-run and the long-run average cost curves. In the long run, the firm will have more flexibility to adjust its inputs and scale of production, so the cost savings will be even greater. Therefore, the correct answer is C.

Question 10

Although capital is a variable factor in the long run,once chosen it becomes a fixed factor for a long time.A profit- maximizing firm must therefore select a method of production that is

Accepted Answer

The profit-maximizing firm must choose a method of production that is economically efficient at current factor prices, but also flexible enough to adapt to changing factor prices over time. This allows the firm to adjust to changes in market conditions and maintain profitability in the long run.

Question 11

Suppose that capital costs $6 per unit and labour costs $3 per unit.If the marginal product of capital is 12 and the marginal product of labour is 6,the cost- minimizing firm should

Accepted Answer

The answer of Suppose that capital costs $6 per unit...

Question 12

One hundred years ago,in North America and Europe it was commonplace for middle class households to employ housemaids.As you know,this is quite rare today.Most such households now have dishwashers,washing machines and dryers.What is an explanation of this change?

Accepted Answer

As technology and machinery improved over time, capital became increasingly inexpensive while the cost of labor increased. It became more cost-effective for households to invest in capital (dishwashers, washing machines, dryers) rather than paying for the increasingly expensive labor of a housemaid. Therefore, households substituted away from an increasingly expensive factor (labor) and toward an increasingly inexpensive factor (capital).

Question 13

With respect to innovation,which of the following statements is true?

Accepted Answer

Innovation is often a result of the economic system itself, as companies are incentivized to innovate in order to remain competitive and increase profits. This is known as endogenous innovation, as opposed to exogenous innovation which occurs independently of economic factors. Government policies can also play a role in promoting innovation through research and development incentives and intellectual property protection. The utilization rate and durability of plant and equipment may be affected by innovation, as new technology can render old equipment obsolete or reduce the need for certain processes. Overall, choice (E) is the most accurate statement.

Question 14

Which of the following is unlikely to be a source of increasing productivity?

Accepted Answer

Substitution toward labor and away from capital with constant technology is unlikely to increase productivity. This is because labor is generally less productive than capital, so substituting more labor for capital would lead to a decrease in productivity.

Question 15

The principle of substitution plays a central role in resource allocation because it demonstrates that

Accepted Answer

The principle of substitution is based on the idea that when the price of one factor of production increases relative to others, firms will find it profitable to substitute the relatively cheaper factors for the expensive one. As a result, the relative factor prices reflect the relative scarcities of factors in the economy, and firms will make abundant use of relatively abundant factors. This principle plays a central role in resource allocation because it helps to explain how market forces determine the allocation of resources in the most efficient way.

Question 16

Suppose RioTintoAlcan is considering the construction of a new aluminum smelter in Northern Quebec,the operation of which requires a great deal of electricity.Suppose also that the price of electricity is predicted to rise significantly in the near future.As a result,the firm decides to embark on new research and development which leads to the development of a new production technique that uses less electricity per tonne of aluminum produced.This is an example of

Accepted Answer

The scenario describes the firm's decision to invest in research and development in order to innovate and reduce its reliance on a specific factor of production (electricity), due to expected increases in its price. This is an example of innovation away from increases in factor prices, which is a long-run strategy for cost minimization and survival in the face of changing market conditions. Short-run cost minimization (A) and short-run profit maximization (B) are not relevant in this scenario, as the firm is investing in R&D rather than simply adjusting its current production process. Long-run economies of scale (D) and the marginal rate of substitution between factors (E) are also not applicable as no information is given about changes in the scale of production or the substitution of factors of production.

Question 17

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

Accepted Answer

The firm should increase capital and decrease labour because the marginal product per dollar spent on capital is higher than that on labour, given that the MP of labour is twice that of capital but labour is four times more expensive.

Question 18

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. $$\begin{array} { | c | c | c | } 
\hline \begin{array} { c } 
\text { Production } \
\text { Method }
\end{array} & \text { MPK } _ { K } & \text { MP}_{L } \
\hline \text { A } & 50 & 4 \
\hline \text { B } & 45 & 8 \
\hline \text { C } & 40 & 12 \
\hline \text { D } & 35 & 16 \
\hline \text { E } & 30 & 20 \
\hline \text { F } & 25 & 24 \
\hline \text { G } & 20 & 28 \
\hline
\end{array}$$ TABLE 8- 2
-Refer to Table 8- 2.Suppose capital costs $6 per unit and labour costs $4 per unit and the firm is employing production method A.How should this firm adjust its use of capital and labour to minimize costs?

Accepted Answer

The answer of The following table shows the marginal products...

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
-Refer to Figure 8- 3.Should this profit- maximizing firm ever consider moving from point E (output level Q3 on SRATC2)to point F (output level Q5 on SRATC3)?

Accepted Answer

If the product price rises enough, it may justify expanding to a larger plant size, even if it initially implies higher costs per unit.

Question 20

Consider the short- run and long- run cost curves for a firm.If factor prices decrease,

Accepted Answer

A decrease in factor prices would lead to a decrease in the firm's costs of production, which would result in lower average cost curves both in the short run and the long run. Therefore, both the short-run and long-run average cost curves will shift downward. Hence, option C is the correct choice.

Quiz 8: Producers in the Long Run