Question 1

A firm's least-cost position for producing a given output level occurs at that point where
A) the isocost line intersects the highest isoquant.
B) the isocost and isoquant intersect the vertical axis.
C) the isocost and isoquant intersect the horizontal axis.
D) the isocost line and the isoquant are tangent to each other.
E) the isoquant is closest to the origin.

Accepted Answer

The least-cost position for producing a given output level occurs where the isocost line and the isoquant are tangent to each other. This is because at this point, the firm is using the optimal combination of inputs (i.e. the slope of the isoquant, which represents the marginal rate of technical substitution, is equal to the slope of the isocost line, which represents the marginal rate of substitution between inputs). Any point to the left of this point would mean using more of one input and less of another, increasing cost. Any point to the right of this point would mean using less of one input and more of another, also increasing cost.

Question 2

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

The answer of If there is an improvement in the...

Question 3

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.  TABLE 8-2
-Refer to Table 8-2. Suppose capital costs $80 per unit and labour costs $24 per unit. Which production method minimizes the cost of producing 1000 toys per day.
A) method B
B) method C
C) method D
D) method E
E) method F

Accepted Answer

To determine the cost-minimizing production method, we need to compare the marginal cost of each method. The marginal cost of each method is calculated as the cost of one additional unit of output, which is equal to the cost of one more unit of capital (K) and one more unit of labour (L), given their respective marginal products.

For method B, the marginal cost is:

MC = (1/MPK) x $80 + (1/MPL) x $24
MC = (1/20) x $80 + (1/100) x $24
MC = $4 + $0.24
MC = $4.24

For the other methods, the calculations result in:

Method C: MC = $4.50
Method D: MC = $4.90
Method E: MC = $5.00
Method F: MC = $5.20

Therefore, method B has the lowest marginal cost and is the cost-minimizing production method.

Question 4

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 5

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 6

In the long run, a profit-maximizing firm producing a given level of output chooses the productionmethod 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 produce the given level of output at the lowest possible cost. Therefore, it will choose the production method that produces that output at the lowest possible cost, which is the option B. The firm will compare the costs of different production methods and select the one with the lowest total cost. This means that the firm will choose the combination of inputs that results in the lowest average cost of production per unit of output.

Question 7

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

The answer of Of the following, which is the least...

Question 8

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

The answer of Movement from one point to another along...

Question 9

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.
A) 6 units of capital and 15 units of labour.
B) 12 units of capital and 30 units of labour.
C) 10 units of capital and 25 units of labour.
D) 4 units of capital and 10 units of labour.
E) 8 units of capital and 20 units of labour.

Accepted Answer

The answer of The figure below shows the isocost lines...

Question 10

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. This means that as a firm increases its output, it experiences lower average costs per unit produced.

Question 11

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 answer of Which of the following conditions indicate cost...

Question 12

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 for a given level of output, holding the plant size constant. The different subscripts (1, 2, and 3) indicate different plant sizes, but within each subscript, the curve shows the lowest cost for that particular size of plant. Therefore, choice C is the correct answer. Choices A, B, D, and E are all incorrect, as they do not accurately describe the purpose or meaning of the SRATC curves.

Question 13

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 marginal rate of (technical) substitution between factors, which means the rate at which one factor can be substituted for another while maintaining the same level of output.

Question 14

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

Maximizing profits in the long run involves minimizing costs while producing the desired level of output. Therefore, the firm should choose the production method that minimizes costs and produces the desired level of output. Charging the lowest price possible or the highest price possible may not necessarily lead to long-term profit maximization. Maximizing the marginal product of all factors of production may lead to an increase in production costs, which can reduce profits.

Question 15

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 represent different combinations of inputs that have the same total cost, so their slope must remain constant (i.e. constant factor prices). If factor prices were increasing or decreasing, the slope would change, which is not the case with isocost lines. The fact that factor prices have negative values is irrelevant to the shape of isocost lines. Finally, a change in relative factor prices would cause a shift in the position of the isocost lines, but not their slope.

Question 16

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. As this firm is increasing its production of golf tees, it is experiencingreturns to scale.
A) not determinable from the information provided
B) constant
C) decreasing
D) diminishing
E) increasing

Accepted Answer

As the firm is increasing its production of golf tees and experiencing increasing returns to scale, it means that the output is increasing at a faster rate than the inputs.

Question 17

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 18

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 can lead to technological advancements and innovations that can change a firm's production function in the very long run. This can lead to new processes, better equipment, and improved methods of producing goods and services, resulting in increased productivity and efficiency. This change can ultimately impact the firm's production function, allowing it to produce more output with the same amount of inputs or fewer inputs. The other answer choices, such as increasing returns to scale, size of the plant, diminishing returns, and rising costs of factors of production can also impact a firm's production function in the long run, but they are not solely related to very-long-run considerations.

Question 19

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. Suppose this firm is producing 3000 golf tees and is at point F on the isoquant map. Which of the following is true?
A) MPL/MPK is greater than 5/2.
B) MPK/MPL is equal to 5/2.
C) MPK/MPL is equal to PK/PL.
D) MPK/MPL is equal to 2/5.
E) MPK/MPL is greater than 5/2.

Accepted Answer

The answer of The figure below shows the isocost lines...

Question 20

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

The answer of Any point representing a cost and output...

Quiz 8: Producers in the Long Run

A firm's least-cost position for producing a given output level occurs at that point where

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

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

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.

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

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

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

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.

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

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

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

The slope of an isoquant measures

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

Isocost lines are downward sloping straight lines, reflecting

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. As this firm is increasing its production of golf tees, it is experiencingreturns to scale.

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

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. Suppose this firm is producing 3000 golf tees and is at point F on the isoquant map. Which of the following is true?

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