Question 1

Suppose a firm's current total cost of production is $50,000 per week,the wage rate is $1,000 per week and the cost of capital is $2,500.Which of the following gives the general equation for the firm's isocost lines for total cost C?

Accepted Answer

The general equation for the firm's isocost line is given by:

C = wL + rK

where w is the wage rate, L is the quantity of labor, r is the cost of capital, and K is the quantity of capital.

Substituting the given values, we get:

C = $1,000L + $2,500K

Rearranging, we get:

K = (C/2,500) - (L/2)

Thus, the correct answer is D, which gives this equation in a slightly different form:

K = (C/2,500) - 0.4L

Question 2

Refer to Figure 8.1.Which graph best represents a total cost function?

Accepted Answer

A

Question 3

If Q represents a firm's level of output,W represents the wage paid to labor (L)and R is the cost of capital (K),then which of the following represents the firm's cost function?

Accepted Answer

A

Question 4

The slope of an isocost line is equal to:

Accepted Answer

The slope of an isocost line, which represents all combinations of labor and capital that can be purchased for a given total cost, is equal to the negative ratio of the wage rate to the rental rate of capital. This is because an isocost line is derived from the equation C = wL + rK, where C is total cost, w is the wage rate, L is the amount of labor, r is the rental rate of capital, and K is the amount of capital. Rearranging this equation to solve for K in terms of L and then taking the derivative of K with respect to L gives the slope as -(w/r).

Question 5

Refer to Figure 8.1.Which graph best represents a variable cost function?

Accepted Answer

A variable cost function increases as the level of output increases. Graph B shows a positive slope, indicating an increase in cost as production increases. The other graphs do not show a clear increase or decrease in cost as production increases.

Question 6

Isocost lines associated with ______ total cost lie ______ the origin.

Accepted Answer

Isocost lines associated with higher total costs lie farther from the origin because they represent combinations of inputs that cost more, thus requiring a greater distance from the origin to maintain the same level of cost.

Question 7

The cost associated with foregoing the opportunity to employ a resource in its best alternative use is called:

Accepted Answer

The definition given in the question perfectly aligns with the concept of opportunity cost. It refers to the cost of not choosing the best alternative use of a resource. Sunk costs, avoidable costs, and user cost of capital relate to different concepts and do not fit the description provided in the question.

Question 8

If the least-cost input combination doesn't include all inputs,it's called:

Accepted Answer

A boundary solution occurs when the least-cost combination of inputs for producing a given output does not utilize all available inputs, meaning some inputs are used to their limits while others may not be used at all. This contrasts with an interior solution, where all inputs are used in some proportion.

Question 9

The strategy whereby a firm makes most of its own inputs is called:

Accepted Answer

Vertical integration is when a company owns and controls its own suppliers or distributors. By integrating vertically, firms can reduce transaction costs and have more control over their supply chain, resulting in greater efficiency and potentially lower costs. Additionally, vertical integration can help firms secure access to essential inputs and improve product quality.

Question 10

A ______ cost is ______ if the firm doesn't incur the cost if it produces no output.

Accepted Answer

A fixed cost is a cost that does not vary with changes in the level of output or sales. A sunk cost is a cost that has already been incurred and cannot be recovered, regardless of future actions. Explicit costs are actual cash payments made for inputs. Variable costs are costs that vary with the level of output or sales. Therefore, the best choice is D, fixed cost and avoidable, as it accurately describes a cost that can be avoided if the firm does not produce any output.

Question 11

An input combination is an interior choice if and only if:

Accepted Answer

An interior choice uses at least a little bit of every input, meaning no input is zero, which is a characteristic of interior solutions in optimization problems.

Question 12

Suppose the marginal rate of technical substitution for labor with capital is 5,the marginal product of labor is 8,and the marginal product of capital is 4.Assuming the law of diminishing marginal product applies to both labor and capital,this firm:

Accepted Answer

The firm can reduce its costs by using fewer workers and more capital because the marginal rate of technical substitution (MRTS) is greater than the ratio of the marginal product of labor to the marginal product of capital (MPL/MPK).

MRTS measures the rate at which the firm can substitute one input for another while keeping the level of output constant. In this case, the MRTS is 5, meaning that the firm can reduce labor by 5 units and increase capital by 1 unit while keeping output constant.

Since MPL/MPK is 2 (8/4), and MRTS is 5, it is more efficient for the firm to use more capital and less labor. This is because each unit of capital can substitute for more than 2 units of labor, so the firm can produce the same level of output with fewer workers and more capital.

Therefore, the firm should reduce costs by using fewer workers and more capital.

Question 13

If Q represents a firm's level of output,W represents the wage paid to labor (L)and R is the cost of capital (K),then which of the following represents the firm's isocost line?

Accepted Answer

The isocost line represents all the combinations of labor (L) and capital (K) inputs that a firm can afford to hire given its total cost (C), which is equal to the wage paid to labor (W) multiplied by the amount of labor used (L) and the cost of capital (R) multiplied by the amount of capital used (K). Therefore, the equation C = WL + RK represents the firm's isocost line where C is the total cost, W is the wage rate, L is the amount of labor used, R is the cost of capital, and K is the amount of capital used.

Question 14

Suppose a firm's short-run production function is given by Q = F(L)= 4L.If the wage rate is $12 and the firm has sunk costs of $300,then the firm's cost function is:

Accepted Answer

The cost function includes both variable and fixed costs. The variable cost is the wage rate times labor, and fixed costs are the sunk costs. Since Q = 4L, L = Q/4. The variable cost is $12L = $12(Q/4) = $3Q. Adding the fixed cost of $300 gives C(Q) = $300 + $3Q.

Question 15

Suppose a firm's short-run production function is given by Q = F(L)= 4L.If the wage rate is $12 and the firm has sunk costs of $300,then the firm's variable cost function is:

Accepted Answer

The variable cost (VC) is determined by the wage rate and the amount of labor (L) used. Since Q = 4L, L = Q/4. The variable cost is the wage rate ($12) times L, so VC = 12 * (Q/4) = $3Q.

Question 16

______ is the cost of inputs whose use does not vary as the firm's output changes.

Accepted Answer

Fixed cost is the cost of inputs that do not vary with changes in the output of the firm. It is a set cost that the firm incurs regardless of the level of production. Sunk cost, on the other hand, is a cost that has been incurred and cannot be recovered, while total cost is the sum of fixed and variable costs. Explicit cost refers to the direct and observable expenses incurred by the firm.

Question 17

The cost of using capital is equal to the market rental price as long as:

Accepted Answer

The cost of using capital is equal to the market rental price only if there is a well-functioning rental market for capital. If the market is imperfect, then the cost of using capital may differ from the rental price. Therefore, option D is the best choice.

Question 18

A ______ cost is ______ if the firm incurs the cost even if it produces no output.

Accepted Answer

The answer of A ______ cost is ______ if the...

Question 19

A firm's ______ connects all the input combinations with the same price.

Accepted Answer

The isocost line represents all the combinations of inputs that can be purchased for the same total cost, given the prices of the inputs. It is analogous to a budget constraint in consumer theory, but applied to the firm's production decisions.

Question 20

Suppose a firm's total cost of production is $40,000 per week,the wage rate is $1,000 per week and the cost of capital is $2,000.Which of the following gives the equation for the firm's isocost line?

Accepted Answer

The isocost line equation is K = 20 - 0.5L, where K is the cost of capital and L is the labor cost. The total cost of production is $40,000 per week, the wage rate is $1,000 per week, and the cost of capital is $2,000. So, the equation for the isocost line is K = 20 - 0.5L.

Quiz 8: Cost

Suppose a firm's current total cost of production is $50,000 per week,the wage rate is $1,000 per week and the cost of capital is $2,500.Which of the following gives the general equation for the firm's isocost lines for total cost C?

Refer to Figure 8.1.Which graph best represents a total cost function?

If Q represents a firm's level of output,W represents the wage paid to labor (L) and R is the cost of capital (K) ,then which of the following represents the firm's cost function?

The slope of an isocost line is equal to:

Refer to Figure 8.1.Which graph best represents a variable cost function?

Isocost lines associated with total cost lie the origin.

The cost associated with foregoing the opportunity to employ a resource in its best alternative use is called:

If the least-cost input combination doesn't include all inputs,it's called:

The strategy whereby a firm makes most of its own inputs is called:

A cost is if the firm doesn't incur the cost if it produces no output.

An input combination is an interior choice if and only if:

Suppose the marginal rate of technical substitution for labor with capital is 5,the marginal product of labor is 8,and the marginal product of capital is 4.Assuming the law of diminishing marginal product applies to both labor and capital,this firm:

If Q represents a firm's level of output,W represents the wage paid to labor (L) and R is the cost of capital (K) ,then which of the following represents the firm's isocost line?

Suppose a firm's short-run production function is given by Q = F(L) = 4L.If the wage rate is $12 and the firm has sunk costs of $300,then the firm's cost function is:

Suppose a firm's short-run production function is given by Q = F(L) = 4L.If the wage rate is $12 and the firm has sunk costs of $300,then the firm's variable cost function is:

______ is the cost of inputs whose use does not vary as the firm's output changes.

The cost of using capital is equal to the market rental price as long as:

A cost is if the firm incurs the cost even if it produces no output.

A firm's ______ connects all the input combinations with the same price.

Suppose a firm's total cost of production is $40,000 per week,the wage rate is $1,000 per week and the cost of capital is $2,000.Which of the following gives the equation for the firm's isocost line?