Question 1

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. Each of the three SRATC curves shows
A) the output that is possible when all factors of production are fixed.
B) the lowest cost attainable, given that the plant size is the largest it can possibly be.
C) the lowest cost attainable, holding the plant size constant.
D) optimal plant sizes in the long run.
E) technically inefficient methods of production, given that they lie above the LRAC.

Accepted Answer

The SRATC curves show the lowest cost attainable while holding plant size constant. This means that for each respective plant size (represented by the subscript), the curve shows the minimum cost that can be achieved at each level of output. The LRAC (long run average cost) curve would show the optimal plant sizes in the long run, but that curve is not shown in this figure. Option A is incorrect because the SRATC curves assume that at least one factor of production is variable. Option B is incorrect because the curves do not necessarily represent the lowest cost attainable overall, just the lowest cost given a specific plant size. Option E is incorrect because the curves are not necessarily technically inefficient, they just represent higher costs than the LRAC curve.

Question 2

In the long run, a profit- maximizing firm producing a given level of output chooses the production method that
A) maximizes the marginal product of labour.
B) produces that output at the lowest possible cost.
C) maximizes the marginal product of all factors.
D) leads to a flat total cost curve.
E) minimizes labour input.

Accepted Answer

A profit-maximizing firm aims to minimize its costs in order to maximize profits. Therefore, it will choose the production method that produces the given level of output at the lowest possible cost, which is option B. Maximizing the marginal product of labour or all factors may not necessarily lead to the lowest cost of production. Similarly, a flat total cost curve or minimizing labour input may not be the most efficient or cost-effective production method.

Question 3

The slope of an isoquant measures
A) the capital/labour ratio.
B) the marginal rate of (technical) substitution between factors.
C) the marginal cost of a given level of output.
D) the ratio of prices of inputs.
E) the ratio of prices of goods.

Accepted Answer

The slope of an isoquant measures the rate at which one factor can be substituted for another while keeping the level of output constant. This is known as the marginal rate of technical substitution (MRTS).

Question 4

By expressing the cost- minimizing condition as MPK/MPL = PK/PL, we are able to see
A) that the capital- labour ratio is fixed.
B) that the firm is producing at a lower cost if the left- hand side of the equation is greater than the right- hand side.
C) that the ratio of factor prices is constant over time.
D) how the firm determines its profit- maximizing output.
E) how the firm can adjust the marginal products of the factors of production to the prices of the factors given by the market.

Accepted Answer

The cost-minimizing condition of MPK/MPL=PK/PL shows how the firm can adjust the marginal products of the factors of production to the prices of the factors given by the market. By equating the ratio of marginal products to the ratio of factor prices, the firm can minimize its cost of production. The other options are not directly related to this equation.

Question 5

If there is an improvement in the firm's technology,
A) there will be no change in the cost curves in the long run.
B) the firm will move to a lower point on both its long- run and short- run average cost curves.
C) the firm will move to a lower point on its long- run average cost curve only.
D) there will be a downward shift in the long- run average cost curve but not in the short- run average cost curve.
E) both the long- run and short- run average cost curves will shift downward.

Accepted Answer

An improvement in technology typically reduces production costs, causing both the long-run and short-run average cost curves to shift downward.

Question 6

Which of the following conditions indicate cost minimization, assuming two inputs, labour (L) and capital (K)?
A) PK · MPK = PL · MPL
B) MPK/PK = MPL/PL
C) MPK/PL = MPL/PK
D) MPL = MPK
E) PK = PL

Accepted Answer

The condition for cost minimization is when the ratio of the marginal product to the price of each input is equal, i.e., MPK/PK = MPL/PL. This ensures that the firm is getting the same marginal benefit per unit cost from each input.

Question 7

Suppose that capital costs $10 per unit and labour costs $4 per unit. If the marginal product of capital is 50 and the marginal product of labour is 50, the firm should in order to minimize its costs of producing its output.
A) employ less capital and labour
B) employ less capital and more labour
C) employ more capital and less labour
D) employ more capital and labour
E) not change its current factor use

Accepted Answer

The answer of Suppose that capital costs $10 per unit...

Question 8

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. If this firm is producing at point B, then
A) this firm is producing a level of output that is technically inefficient in the long run.
B) this firm could produce the same level of output at a lower cost with plant size 2.
C) it should employ more of its variable factors of production.
D) this firm is experiencing decreasing returns to scale.
E) plant size 1 is optimal.

Accepted Answer

Point B lies on the SRATC1 curve, which means the firm is currently operating with a smaller plant size. However, it could produce the same level of output at a lower cost with plant size 2, which has a lower SRATC2 curve. Therefore, the firm could improve its long-run efficiency by expanding its plant size.

Question 9

Suppose a firm employs two kinds of inputs, capital at $100 per unit, and labour at $25 per unit. If the marginal product of capital is 50, then the firm should in order to minimize its production costs.
A) not change its current factor use
B) employ more labour and more capital
C) employ more labour and less capital
D) employ more capital and less labour
E) There is insufficient information to make a recommendation.

Accepted Answer

The answer of Suppose a firm employs two kinds of...

Question 10

A firm trying to maximize its profits in the long run should
A) charge the lowest price possible given the minimum possible cost.
B) select the most technically efficient method of production regardless of the level of production.
C) maximize the marginal product of all factors of production.
D) charge the highest price.
E) minimize the cost of producing the level of production it chooses.

Accepted Answer

By minimizing the cost of production while still producing the desired level of output, the firm can maximize its profits in the long run. This means the firm should strive for cost efficiency in its production methods and input use, while still maintaining quality and meeting customer demand.

Question 11

FIGURE 8- 4
-Refer to Figure 8- 4. The firm is initially minimizing the cost of producing 1000 units of output. Suppose the factor prices then change such that the price of capital (K) rises and the price of labour
(L) falls. If the firm decides to keep its output unchanged, it will move toward the point
A) A.
B) B.
C) C.
D) D.
E) unknown as there is insufficient information to know

Accepted Answer

When the price of capital rises and the price of labour falls, the firm will want to use relatively more labour and relatively less capital to produce the same output. Point C represents this new combination of inputs at the same level of output, which minimizes cost under the new prices. Therefore, the firm will move towards point C to minimize costs.

Question 12

Isocost lines are downward sloping straight lines, reflecting
A) increasing factor prices.
B) that each factor price has a negative value.
C) constant factor prices.
D) a change in relative factor prices.
E) decreasing factor prices.

Accepted Answer

Isocost lines assume constant factor prices, meaning that the cost of each input does not change as the level of inputs change.

Question 13

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. The difference between the SRATC curves and the LRAC curve is that
A) the LRAC is an envelope curve, joining the minimum points on all SRATC curves.
B) for the SRATC curves, one or more of the factors of production is fixed, whereas for the LRAC curve, all factors of production are variable.
C) the SRATC curves show the lowest attainable cost of production at each level of output when all factors are variable in the short run, whereas the LRAC curve shows the same in the long run.
D) the SRATC curves show diseconomies of scales, whereas the LRAC curve shows economies of scale.
E) the SRATC curves show the optimal plant size when all factors of production are variable, whereas the LRAC shows the lowest cost attainable associated with each LRAC curve.

Accepted Answer

The answer of The figure below shows a family of...

Question 14

Any point representing a cost and output combination that is below the long- run average cost curve
A) is attainable if the firm minimizes its costs according to the "principle of substitution".
B) is attainable only when all factors are variable.
C) represents unattainable cost levels.
D) may represent actual cost and production levels in the short run.
E) represents less efficient cost levels than points on the long- run average cost curve.

Accepted Answer

Points below the long-run average cost curve represent unattainable cost levels because the curve shows the lowest possible cost at which a firm can produce any given level of output when all inputs are variable.

Question 15

A very- long- run consideration that could change a firm's production function is
A) size of the plant.
B) an improvement in education that increases the quality of the economy's labour force.
C) increasing returns to scale of operation.
D) diminishing returns.
E) rising cost of the factors of production.

Accepted Answer

An improvement in education that increases the quality of the economy's labour force is a very-long-run consideration that could change a firm's production function, as it could lead to an increase in productivity and a shift towards better technologies and methods of production. The other choices (size of the plant, increasing returns to scale of operation, diminishing returns, and rising cost of the factors of production) are factors that can affect a firm's production function, but they may not necessarily be considered very-long-run considerations or have as profound effects as improvements in education.

Question 16

FIGURE 8- 4
-Refer to Figure 8- 4. The firm is initially operating at point B. An improvement in technology would be represented by
A) a new production function.
B) a new isoquant map.
C) a shift to the curve indicated by Q = 2000.
D) a movement toward point D.
E) a movement toward the origin.

Accepted Answer

The answer of  FIGURE 8- 4
-Refer to Figure 8-...

Question 17

FIGURE 8- 4
-Refer to Figure 8- 4. The firm is initially minimizing the cost of producing 1000 units of output. Suppose the factor prices then change such that the price of capital (K) falls and the price of labour
(L) rises. If the firm decides to leave its output unchanged, it will now move toward the point
A) A.
B) B.
C) C.
D) D.
E) unknown as there is insufficient information to know

Accepted Answer

When the price of capital falls and the price of labor rises, the firm will substitute labor with capital to minimize costs, moving towards point A where more capital and less labor are used.

Question 18

Which of the following cost curves demonstrate increasing returns to scale?
A) returns to scale have nothing to do with the shape of the long- run average cost curve
B) a horizontal long- run average cost curve
C) a downward- sloping long- run average cost curve
D) an upward- sloping long- run average cost curve
E) a vertical long- run average cost curve

Accepted Answer

A downward-sloping long-run average cost curve indicates increasing returns to scale, as the firm experiences lower average costs as it increases production.

Question 19

Movement from one point to another along an isocost line implies a change in
A) expenditure.
B) output levels, holding factor combinations constant.
C) factor combinations, holding expenditure constant.
D) factor prices.
E) the level of output, independent of what happens to factor combinations.

Accepted Answer

Movement along an isocost line indicates a change in the combination of factors (inputs) used, while keeping the total expenditure constant.

Question 20

Of the following, which is the least likely to represent a firm's long- run decision?
A) By how much should output be expanded from existing plants?
B) Should the firm count on an expanding or contracting share of the market?
C) Should the firm choose a method of production that uses relatively more capital than labour?
D) What technique (technology) is the best to use under current factor pricing?
E) What should be the size and design of a firm's new plant?

Accepted Answer

In the long run, firms can adjust all inputs and make decisions about plant size and design, which makes option A, concerning output expansion from existing plants, more of a short-run decision.

Quiz 8: Producers in the Long Run

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. Each of the three SRATC curves shows

In the long run, a profit- maximizing firm producing a given level of output chooses the production method that

The slope of an isoquant measures

By expressing the cost- minimizing condition as MPK/MPL = PK/PL, we are able to see

If there is an improvement in the firm's technology,

Which of the following conditions indicate cost minimization, assuming two inputs, labour (L) and capital (K) ?

Suppose that capital costs $10 per unit and labour costs $4 per unit. If the marginal product of capital is 50 and the marginal product of labour is 50, the firm should in order to minimize its 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. If this firm is producing at point B, then

Suppose a firm employs two kinds of inputs, capital at $100 per unit, and labour at $25 per unit. If the marginal product of capital is 50, then the firm should in order to minimize its production costs.

A firm trying to maximize its profits in the long run should

Isocost lines are downward sloping straight lines, reflecting

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. The difference between the SRATC curves and the LRAC curve is that

Any point representing a cost and output combination that is below the long- run average cost curve

A very- long- run consideration that could change a firm's production function is

FIGURE 8- 4 -Refer to Figure 8- 4. The firm is initially operating at point B. An improvement in technology would be represented by

Which of the following cost curves demonstrate increasing returns to scale?

Movement from one point to another along an isocost line implies a change in

Of the following, which is the least likely to represent a firm's long- run decision?