ECON Midterm 3

Assume that a firm's production process is subject to increasing returns to scale over a broad range of outputs. Long-run average costs over this output will tend to A) increase. B) decline. C) remain constant. D) fall to a minimum and then rise.

B) decline.

Which of the following is NOT an expression for the cost minimizing combination of inputs? A) MRTS = MPL /MPK B) MPL/w = MPK/r C) MRTS = w/r D) MPL/MPK = w/r E) none of the above

A) MRTS = MPL /MPK

Which of the following relationships is NOT valid? A) Rising marginal cost implies that average total cost is also rising. B) When marginal cost is below average total cost, the latter is falling. C) When marginal cost is above average variable cost, AVC is rising. D) none of the above

A) Rising marginal cost implies that average total cost is also rising.

In order for a taxicab to be operated in New York City, it must have a medallion on its hood. Medallions are expensive, but can be resold, and are therefore an example of A) a fixed cost. B) a variable cost. C) an implicit cost. D) an opportunity cost. E) a sunk cost.

A) a fixed cost.

In a short-run production process, the marginal cost is rising and the average total cost is falling as output is increased. Thus, marginal cost is A) below average total cost. B) above average total cost. C) between the average variable and average total cost curves. D) below average fixed cost.

A) below average total cost.

When an isocost line is just tangent to an isoquant, we know that A) output is being produced at minimum cost. B) output is not being produced at minimum cost. C) the two products are being produced at the least input cost to the firm. D) the two products are being produced at the highest input cost to the firm.

A) output is being produced at minimum cost.

Fixed costs are fixed with respect to changes in A) output. B) capital expenditure. C) wages. D) time.

A) output.

A firm's production function is given as: Q = 5LK, such that MPL=5K and MPK = 5L where Q = output, L = labor measured in person hours, and K = capital measured in machine hours. Labor cost, including fringe benefits, is $20 per hour, while the firm uses $80 per hour as an implicit machine rental charge per hour. Given the information above, determine Murray's optimal capital/labor ratio. A) L = (1/4)K B) K = (1/4)L C) K =4 L D) None of the above

B) K = (1/4)L

At the current level of output, long-run marginal cost is $50 and long-run average cost is $75. This implies that: A) there are neither economies nor diseconomies of scale. B) there are economies of scale. C) there are diseconomies of scale. D) the cost-output elasticity is greater than one.

B) there are economies of scale.

Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be A) 500. B) 25/500. C) -4/5. D) 25/20 or 1.25

C) -4/5.

A firm's expansion path is A) the firm's production function. B) a curve that makes the marginal product of the last unit of each input equal for each output. C) a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices. D) none of the above

C) a curve that shows the least-cost combination of inputs needed to produce each level of output

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm A) is producing its current output level at the minimum cost. B) could reduce the cost of producing its current output level by employing more capital and less labor. C) could reduce the cost of producing its current output level by employing more labor and less capital. D) could increase its output at no extra cost by employing more capital and less labor. E) Both B and D are true.

C) could reduce the cost of producing its current output level by employing more labor and less capital.

An isocost line reveals the A) costs of inputs needed to produce along an isoquant. B) costs of inputs needed to produce along an expansion path. C) input combinations that can be purchased with a given outlay of funds. D) output combinations that can be produced with a given outlay of funds.

C) input combinations that can be purchased with a given outlay of funds.

The difference between the economic and accounting costs of a firm are A) the accountant's fees. B) the corporate taxes on profits . C) the opportunity costs of the factors of production that the firm owns. D) the sunk costs incurred by the firm. E) the explicit costs of the firm.

C) the opportunity costs of the factors of production that the firm owns

Which of the following costs always declines as output increases? A) Average cost B) Marginal cost C) Fixed cost D) Average fixed cost E) Average variable cost

D) Average fixed cost

A firm's short-run average cost curve is U-shaped. Which of these conclusions can be reached regarding the firm's returns to scale? A) The firm experiences increasing returns to scale. B) The firm experiences increasing, constant, and decreasing returns in that order. C) The firm experiences first decreasing, then increasing returns to scale. D) The short-run average cost curve reveals nothing regarding returns to scale.

D) The short-run average cost curve reveals nothing regarding returns to scale.

At the optimum combination of two inputs, A) the slopes of the isoquant and isocost curves are equal. B) costs are minimized for the production of a given output. C) the marginal rate of technical substitution equals the ratio of input prices. D) all of the above E) A and C only

D) all of the above

For any given level of output: A) marginal cost must be greater than average cost. B) average variable cost must be greater than average fixed cost. C) average fixed cost must be greater than average variable cost. D) fixed cost must be greater than variable cost. E) None of the above is necessarily correct.

E) None of the above is necessarily correct.

Which of the following is true of cost curves? A) The ATC curve goes through the minimum of the MC curve. B) The AVC curve goes through the minimum of the MC curve. C) The MC curve goes through the minimum of the ATC curve, to the left of the minimum of the AVC curve. D) The MC curve goes through the minimum of the AVC curve, to the right of the minimum of the ATC curve. E) The MC curve goes through the minimum of both the AVC curve and the ATC curve.

E) The MC curve goes through the minimum of both the AVC curve and the ATC curve.

Which always increase(s) as output increases? A) Marginal Cost only B) Fixed Cost only C) Total Cost only D) Variable Cost only E) Total Cost and Variable Cost

E) Total Cost and Variable Cost

In the long run, which of the following is considered a variable cost? A) Expenditures for wages B) Expenditures for research and development C) Expenditures for raw materials D) Expenditures for capital machinery and equipment E) all of the above

E) all of the above

Complete the following table: Total Variable Fixed Marginal Output Cost Cost Cost Cost 0 50 1 60 2 75 3 100 4 150 5 225 6 400

Total Variable Fixed Marginal Output Cost Cost Cost Cost 0 50 0 50 - 1 60 10 50 50 2 75 25 50 15 3 100 50 50 25 4 150 100 50 50 5 225 175 50 75 6 400 350 50 175