Question 1

Explain why X-inefficiency is likely to be more prevalent in an industry in which firms have market power.

Accepted Answer

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Question 2

Empirical evidence suggests that economies of scale,advertising and image differentiation,and risk spreading all help account for the large-scale production that exists in many sectors of the economy.

Accepted Answer

Empirical evidence supports that economies of scale, advertising and image differentiation, and risk spreading all contribute to the prevalence of large-scale production in many sectors of the economy.

Question 3

Briefly summarize the empirical literature on the long-run costs typically incurred by firms in a variety of industries.In particular,is there reason to believe that firms' long-run cost curves assume the typical U-shape? Why or why not?

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Question 4

An improvement in technology would cause each of the isoquants in a firm's isoquant map to shift out away from the origin.

Accepted Answer

An improvement in technology makes it possible to produce the same amount of output with fewer inputs or more output with the same amount of inputs, effectively making the isoquants closer to the origin, not farther away.

Question 5

Most of the empirical research on long-run costs suggests that the long-run average cost curve for most firms has a very pronounced U-shape.

Accepted Answer

Most empirical research suggests that the long-run average cost curve for many firms is relatively flat at the bottom, rather than having a pronounced U-shape. This implies that economies and diseconomies of scale are not as pronounced as the U-shape suggests, and firms can adjust their scale of operation without significantly affecting average costs.

Question 6

Explain how "learning by doing" and transportation costs each affect the long-run average cost curve.

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Question 7

Assume that firms A and B have the same minimum efficient scale of operation and,at current production levels,both firms are incurring the same average costs of production.However,firm A's output is 5 times larger than firm B's output.How is this possible?

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Question 8

What are the two primary factors that influence a firm manager's choice between a labor-intensive and a capital-intensive method of production? How does each factor influence the manager's choice.

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Question 9

Over the past several decades,technological change has led to a significant amount of consolidation in the U.S.brewing industry.

Accepted Answer

Technological advancements have allowed for more efficient production processes, enabling larger breweries to have a competitive advantage over smaller breweries. This has led to consolidation in the brewing industry, with a small number of large companies dominating the market.

Question 10

Historically,empirical evidence showed that it was more cost effective to have a single generator of electricity serve a particular region's electricity needs than to have several smaller units compete against each other.More recently,technological advances have occurred in the generation of electricity that allow much smaller generating units to produce electricity for the same average cost as much larger units.Explain how this change would be reflected in the firm's long-run average cost curve and minimum efficient scale.

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Question 11

If the inputs to a production process are perfect substitutes and the marginal rate of technical substitution is equal to the ratio of the prices of the two inputs,the firm can choose from a virtually infinite array of combinations of the two inputs to minimize the costs of producing a given level of output.

Accepted Answer

When the inputs are perfect substitutes, the firm can substitute one input for the other without any loss in output. Therefore, the firm can choose any combination of inputs that is the most cost-effective, i.e., the combination that minimizes the cost of producing a given level of output. This is possible because the marginal rate of technical substitution (MRTS) is equal to the ratio of the prices of the two inputs. Hence, the firm can substitute one input for the other until the two inputs are at the same price, and the MRTS equals the price ratio.

Question 12

Explain how labor resistance and political and legislative influences reduce the ability of firms to minimize their costs of production.What do the two have in common in this regard?

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Question 13

Assume a new technology is developed that increases the productivity of capital and creates additional economies of scale.How would this affect the firm's minimum efficient scale of operation.Illustrate this effect graphically.

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Question 14

Use the firm's long-run cost-minimizing decision rule to explain the differences in the relative use of capital and labor in agriculture in the United States and the Peoples Republic of China.

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Question 15

Economists describe short-run decisions as "constrained" decisions,while long-run decisions are described as "planning" decisions.Referring to a firm's short-run average cost function and long-run average cost function,explain this distinction.

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Question 16

As the price of labor increases relative to the price of capital,the firm will move to a more labor-intensive production method to minimize costs.

Accepted Answer

As the price of labor increases relative to the price of capital, the firm will move to a more capital-intensive production method to minimize costs. This is because the cost of using labor is now relatively more expensive compared to the cost of using capital.

Question 17

Assume a firm is producing 1000 units of a good by using two inputs,capital and labor,whose per unit prices are $50 and $20.Assume also that the marginal physical product of the last unit of capital is 25 and the marginal physical product of the last unit of labor is 15.In order to minimize its costs of production,the firm should adjust its combination of inputs by employing more labor and less capital.

Accepted Answer

The firm should use inputs in such a way that the marginal cost per unit of the last dollar spent on each input is equal. The marginal cost of capital is $2 per unit ($50/25) and the marginal cost of labor is $1.33 per unit ($20/15). Since the marginal cost of labor is lower, the firm should employ more labor and less capital to minimize its costs of production.

Question 18

Regarding the production of health care,more recent studies suggest that economies of scale exist up to a hospital size of approximately 200 beds.

Accepted Answer

According to recent studies, economies of scale exist up to a hospital size of approximately 200 beds.

Question 19

If the inputs to a production process are perfect complements,the firm can choose from a virtually infinite array of combinations of the two inputs to minimize the costs of producing a given level of output.

Accepted Answer

In the case of perfect complements, the firm is constrained to use the inputs in a fixed ratio to produce a given level of output, limiting the combinations of inputs to one specific ratio that minimizes costs.

Question 20

An isoquant identifies all of the combinations of two inputs that result in the same total costs of production.

Accepted Answer

An isoquant identifies all of the combinations of two inputs that result in the same level of output, not the same total costs of production.

Quiz 6: Production and Cost Analysis in the Long Run