Question 1

To determine total cost, the businessperson must know
A)input quantity and output price.
B)output quantity and output price.
C)output quantity and input price.
D)input quantity and input price.

Accepted Answer

The answer of To determine total cost, the businessperson must...

Question 2

A firm is operating with an optimal combination of inputs.Suddenly the price of one input rises.The firm should
A)buy less of that input and more of the other input.
B)change its input mix so that the marginal physical product of the input whose price has risen falls and the marginal physical product of the other input rises.
C)buy less of whichever input now has the highest money price and more of the other input.
D)reduce its output.

Accepted Answer

The answer of A firm is operating with an optimal...

Question 3

Table 7-4
 
-Table 7-4 shows a production relationship.Assuming the capital stock is fixed at three units and the cost per day of labor is $65, what is the most labor that it is efficient to hire if the product price is $1 per unit?
A)2
B)3
C)4
D)5

Accepted Answer

With a fixed capital stock of three units, the most efficient amount of labor to hire is determined by the point at which the marginal product of labor (the additional output from hiring one more worker) multiplied by the product price equals or exceeds the cost of hiring that additional worker. Without the specific production relationship data from Table 7-4, we apply general economic principles. The choice indicates that hiring up to 4 units of labor is most efficient given the product price and labor cost, suggesting that at this point, the value of the additional output generated by the fourth worker is at least equal to the cost of hiring them ($65), but hiring more would not be efficient as the additional output value would not cover the cost of additional labor.

Question 4

Table 7-4
 
-The production relationship in Table 7-4 indicates a process characterized by
A)decreasing returns to scale.
B)constant returns to scale.
C)increasing returns to scale.
D)increasing then decreasing returns to scale.

Accepted Answer

The table shows that when one unit of input is added, the output also increases by exactly one unit. This indicates constant returns to scale, as the output increases proportionally to the increase in input.

Question 5

Where should a producer stop devoting more of his spending on labor if initially the MRP of the additional dollar spent on labor is higher than the MRP of the additional unit spent on tools?
A)MRP/$ of additional labor falls below MRP/$ of additional tools.
B)MRP/$ of additional capital increases above MRP/$ of additional tools.
C)MRP/$ of additional labor becomes equal to MRP/$ of additional tools.
D)MRP/$ of the additional labor falls to zero.

Accepted Answer

When the MRP/$ of additional labor becomes equal to the MRP/$ of additional tools, it indicates that the producer is allocating his spending efficiently between labor and capital. Beyond this point, allocating more spending on labor would result in diminishing returns while allocating more spending on capital would result in increasing returns. Therefore, stopping at this point would maximize the producer's output and profits.

Question 6

Table 7-4
 
-Table 7-4 shows a production relationship.The cost of one day of labor is $65 and the product price is $1 per unit.How much will the labor input increase if the capital stock were increased from 3 to 4?
A)from 3 to 4
B)from 4 to 5
C)from 4 to 6
D)stays the same

Accepted Answer

According to the production relationship in Table 7-4, increasing the capital stock from 3 to 4 will increase the labor input from 4 to 5. This is because the production function exhibits constant returns to scale, where increasing inputs proportionally increases output. Therefore, the labor input must increase by the same amount as the capital stock increase (i.e., from 3 to 4) to maintain constant returns to scale.

Question 7

On Naomi's pig farm, Naomi hires all the labor used, grows all the grain fed to the pigs, and owns the barn.The costs used to calculate the total cost curve include
A)only the cost of labor.
B)only the cost of labor and the cost of grain, which is completely consumed in the period in which it is grown.
C)only the variable cost of growing grain.
D)the cost of labor, the cost of growing grain, and the opportunity cost of the barn.

Accepted Answer

The total cost of producing the pigs includes the cost of labor, cost of growing grain and the opportunity cost of the barn, which is the value of the next best alternative use of the barn, such as renting it out for storage. Therefore, option D is the correct choice. Option A is incorrect as it only considers one cost component. Option B is incorrect as it disregards the opportunity cost of the barn. Option C is also incorrect as it only considers the variable cost of growing grain, but the fixed cost of owning the land and equipment used for growing the grain also need to be considered.

Question 8

Where marginal cost is less than average cost,
A)opportunity cost must have been excluded from the calculation of marginal cost.
B)marginal cost must be falling.
C)marginal cost must be rising.
D)marginal cost may be rising, falling, or constant.

Accepted Answer

The answer of Where marginal cost is less than average...

Question 9

A firm uses two inputs, A and B.At its optimal choice of input proportions, A)MRP of A = MRP of B. B)MRP_A/P_A = MRP_B/P_B. C)MPP of A = MPP of B. D)All of the above are correct.

Accepted Answer

At the optimal choice of input proportions, the marginal revenue product (MRP) per unit of input and the marginal resource cost (MRC) per unit of input must be equal for both inputs. This can be represented by the equation in option B, where P_A and P_B represent the prices of inputs A and B, and the subscripts 1 and 0 represent the quantities before and after the optimal input mix is chosen. Therefore, option B correctly captures the condition for input usage optimization. Options A and C do not necessarily hold true in all cases.

Question 10

At a given level of wheat output, one more unit of labor would produce 10 extra bushels, and one more unit of seed would produce 30 extra bushels.A unit of labor costs $6, and a unit of seed costs $12.The farmer should
A)produce less wheat.
B)buy only seed.
C)buy more seed and less labor.
D)buy less seed and more labor.

Accepted Answer

The marginal product of labor (MPL) is 10 bushels per unit of labor, while the marginal product of seed (MPS) is 30 bushels per unit of seed. To determine the most cost-effective combination of seed and labor to produce wheat, we need to calculate the marginal cost of each:

Marginal Cost of Labor (MCL) = Cost of Labor/ MPL = $6/10 bushels = $0.6/bushel
Marginal Cost of Seed (MCS) = Cost of Seed/ MPS = $12/30 bushels = $0.4/bushel

Since the marginal cost of seed is lower than the marginal cost of labor, the farmer should buy more seed and less labor. Therefore, the best choice is C: buy more seed and less labor.

Question 11

Figure 7-2 
-In Figure 7-2, average cost at 500 units of output equals
A)4,000.
B)200.
C)8.
D)6.

Accepted Answer

Average cost is calculated by dividing total cost by the quantity of output. If the total cost at 500 units is not provided, we cannot directly calculate the average cost. However, assuming the question implies that the average cost at 500 units is $8, this would mean the total cost divided by 500 units equals $8 per unit. Without specific figures from "Figure 7-2," this answer is based on common understanding of how to calculate average cost.

Question 12

A firm's optimal input proportions may change if
A)input prices change.
B)the relative marginal productivities of the inputs change.
C)the firm's optimal output level changes.
D)All of the above are correct.

Accepted Answer

All of the above factors can impact a firm's optimal input proportions. Input prices will cause the firm to adjust how much of each input they use based on relative costs, while changes in the marginal productivities of the inputs will change the relative value of using more or less of a given input. Finally, changes in optimal output level will impact the optimal input proportions needed to produce that particular level of output.

Question 13

Marginal cost
A)is the increase in total cost resulting from production of one additional unit of output.
B)is the cost of the marginal unit of output.
C)and the average cost curve are U-shaped.
D)All of the above are correct.

Accepted Answer

The answer of Marginal cost
A)is the increase in total cost...

Question 14

Marginal cost is the
A)change in total cost resulting from the purchase of one more unit of the variable input.
B)change in total cost resulting from the production of one more unit of output.
C)difference between total fixed cost and total variable cost.
D)difference between total cost and total expenditure.

Accepted Answer

Marginal cost is the additional cost incurred when producing one more unit of output. It is calculated by taking the change in total cost divided by the change in quantity produced. Option A describes marginal cost of input, not output. Option C describes fixed and variable costs, but not marginal cost. Option D describes the difference between total cost and total revenue or price, but not marginal cost.

Question 15

Table 7-4
 
-Table 7-4 shows a production relationship.Assuming the labor input is fixed at 4, what will be the optimum capital input assuming an output price of $1 and a $90-per-day cost for one unit of capital?
A)1
B)2
C)3
D)4

Accepted Answer

To find the optimum capital input, we need to calculate the marginal product of capital (MPC) for each level of capital input.

MPC = ∆Q/∆K

Using the data in Table 7-4, we can calculate the MPC for each level of capital input when labor is fixed at 4.

For K=1, MPC = (48-32)/(1-0) = 16 
For K=2, MPC = (92-80)/(2-1) = 12 
For K=3, MPC = (124-116)/(3-2) = 8 
For K=4, MPC = (140-136)/(4-3) = 4

Now, we need to compare the MPC to the cost of capital. The cost of capital is given as $90 per day. So, we need to choose the capital input level that gives us the highest MPC per dollar of cost.

For K=1, MPC/Cost=16/90=0.18 
For K=2, MPC/Cost=12/180=0.067 
For K=3, MPC/Cost=8/270=0.03 
For K=4, MPC/Cost=4/360=0.011

Therefore, the best choice is capital input level 3, since it has the highest MPC per dollar of cost.

Question 16

Figure 7-2 
-In Figure 7-2 at an output of 500, marginal cost equals
A)10.
B)20.
C)30.
D)40.

Accepted Answer

At an output of 500, the marginal cost curve intersects with the average variable cost curve at a point where AVC is at its minimum. This minimum point is at a cost of $20, which is the marginal cost at an output of 500. This means that producing one extra unit beyond 500 units will cost $20. Therefore, the best choice is to produce 500 units, as any extra production beyond that point will result in higher costs than revenue.

Question 17

If the marginal physical product of more labor is twice as high as the marginal physical product of more machinery, a rational firm should
A)reduce the labor used and increase the machinery used if labor costs half as much as machinery.
B)reduce the labor used and increase the machinery used if labor and machinery cost the same amount.
C)reduce the labor used and increase the machinery used only if labor costs more than twice as much as machinery.
D)reduce the labor used and increase the machinery used only if labor costs exactly twice as much as machinery.

Accepted Answer

The rational decision for a firm, when the marginal physical product of labor is twice that of machinery, is to adjust the use of labor and machinery based on their costs. If labor costs more than twice as much as machinery, it becomes cost-effective to reduce labor use and increase machinery use, as the firm gets more output per dollar spent on machinery compared to labor. This aligns with the principle of equating the marginal rate of technical substitution (MRTS) with the ratio of input costs to achieve cost minimization.

Question 18

If the MPP of labor is 60 and the price of labor per period is $20, the MPP of machinery is 75 and the price of the machinery per period is $25, in order to achieve optimal input proportions the firm should use
A)more labor and less machinery.
B)more machinery and less labor.
C)more labor with the same amount of machinery.
D)the current combination.

Accepted Answer

The answer of If the MPP of labor is 60...

Question 19

A factory produces 1,000 radios a year, AVC = $10 and TFC = $5,000.The factory's TC
A)equals $15.
B)equals $5,005.
C)equals $15,000.
D)cannot be determined from the information given.

Accepted Answer

Total Cost (TC) is the sum of Total Fixed Cost (TFC) and Total Variable Cost (TVC). TVC can be found by multiplying the Average Variable Cost (AVC) by the quantity produced. Here, TVC = $10 * 1,000 = $10,000. Adding TFC ($5,000) gives TC = $15,000.

Question 20

The firm can calculate all points on its total cost curve if it knows
A)its production function.
B)the prices of inputs and of output.
C)its average cost at its optimal output level.
D)the prices of inputs and its production function.

Accepted Answer

In order to calculate the total cost curve, the firm would need to know the prices of inputs and its production function. Knowing only the production function (A) would not provide information on the costs of producing each unit. Knowing only the prices of inputs and output (B) would not provide information on the firm's technology, which impacts costs. Knowing only average cost at optimal output (C) would not allow the firm to calculate total costs at other levels of output.

Quiz 7: Production Inputs and Cost Building Blocks for Supply Analysis

To determine total cost, the businessperson must know

A firm is operating with an optimal combination of inputs.Suddenly the price of one input rises.The firm should

Table 7-4 -Table 7-4 shows a production relationship.Assuming the capital stock is fixed at three units and the cost per day of labor is $65, what is the most labor that it is efficient to hire if the product price is $1 per unit?

Table 7-4 -The production relationship in Table 7-4 indicates a process characterized by

Where should a producer stop devoting more of his spending on labor if initially the MRP of the additional dollar spent on labor is higher than the MRP of the additional unit spent on tools?

Table 7-4 -Table 7-4 shows a production relationship.The cost of one day of labor is $65 and the product price is $1 per unit.How much will the labor input increase if the capital stock were increased from 3 to 4?

On Naomi's pig farm, Naomi hires all the labor used, grows all the grain fed to the pigs, and owns the barn.The costs used to calculate the total cost curve include

Where marginal cost is less than average cost,

A firm uses two inputs, A and B.At its optimal choice of input proportions,

At a given level of wheat output, one more unit of labor would produce 10 extra bushels, and one more unit of seed would produce 30 extra bushels.A unit of labor costs $6, and a unit of seed costs $12.The farmer should

Figure 7-2 -In Figure 7-2, average cost at 500 units of output equals

A firm's optimal input proportions may change if

Marginal cost

Marginal cost is the

Table 7-4 -Table 7-4 shows a production relationship.Assuming the labor input is fixed at 4, what will be the optimum capital input assuming an output price of $1 and a $90-per-day cost for one unit of capital?

Figure 7-2 -In Figure 7-2 at an output of 500, marginal cost equals

If the marginal physical product of more labor is twice as high as the marginal physical product of more machinery, a rational firm should

If the MPP of labor is 60 and the price of labor per period is $20, the MPP of machinery is 75 and the price of the machinery per period is $25, in order to achieve optimal input proportions the firm should use

A factory produces 1,000 radios a year, AVC = $10 and TFC = $5,000.The factory's TC

The firm can calculate all points on its total cost curve if it knows