Exam 3 Micro-Theory

SRATC is typically U-shaped because, as output increases, AFC decreases, but _______ increases.

AVC

A business firm is paying 10 times as much for a unit of labor as they do for a unit of capital. If MPL =MPK, then, in the long run, the firm should_________ its capital-labor ratio.

Increase

A line that connects all of the possible tangency points in the long run is known as the

LR Expansion path

When a small firm in my industry produces at minimum SRATC, its cost per unit is equal to that of a much larger firm producing at its minimum SRATC. This is evidence that returns to scale are ____

constant_

3) A firm uses two factors of production. Both factors always have positive marginal products which imply that A) isoquants have negative slope B) isoquants are convex C) isoquants can become vertical or horizontal D) none of the above

A) isoquants have negative slope A: the slope of the isoquant is -MPL/MPK

12) When an isocost line is just tangent to an isoquant, then A) output is being produced at minimum cost. B) output is being produced at maximum 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: because that is the point at which MPL/MPK = w/r

11) 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: this is a true relationship but it does not represent the cost minimization rule.

9) In a short-run production process, at the current level of output, APL is falling. Thus, A) average fixed cost is constant. B) marginal cost is above average variable cost. AVC = w/APL C) marginal cost is below average fixed cost. D) marginal cost is below average variable cost.

B: AVC = w/APL. If APL is falling, then AVC is rising. If AVC is rising, MC > AVC.

16) To model the input decisions for a production system, we plot labor on the horizontal axis and capital on the vertical axis. In the short run, labor is a variable input and capital is fixed. The short-run expansion path for this production system is: A) a vertical line. B) a horizontal line. C) equal to the 45-degree line from the origin. D) not defined.

B: since K is fixed, the firm expands only by hiring more L.

15) A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $20 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. Assuming convex isoquants, 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.

C: MPL/MPK = 3/5. w/r = 10/20. MPL/MPK > w/r. labor is a bargain; employ more labor and less capital.

10) 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: is true by definition

13) A firm's long run 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: is true by definition

Capital and labor are perfect substitutes in a business firm's production process. If w=2, and r=1, the firm will employ only ________

Capital

4) The marginal rate of technical substitution is equal to the A) slope of the total product curve. B) change in output minus the change in labor. C) change in output divided by the change in labor. D) ratio of the marginal products of the inputs.

D) ratio of the marginal products of the inputs.

2) According to the law of diminishing returns A) the total product of an input will eventually be negative. B) the total product of an input will eventually decline. C) the marginal product of an input will eventually be negative. D) the marginal product of an input will eventually decline. E) none of the above

D) the marginal product of an input will eventually decline.

6) An L-shaped isoquant A) is impossible. B) would indicate that the firm could switch from one output to another costlessly. C) would indicate that the firm could not switch from one output to another. D) would indicate that capital and labor cannot be substituted for each other in production. E) would indicate that capital and labor are perfect substitutes in production.

D) would indicate that capital and labor cannot be substituted for each other in production.

8) The total cost (TC) of producing computer software CDs (Q) is given as: TC = 200 + 5Q What is the average total cost? A) 500 B) 5Q C) 5 D) 5 + (200/Q)

D: ATC = TC/Q

14) With its current levels of input use, a firm's MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis). This implies A) the firm could produce 3 more units of output if it increased its use of capital by one unit (holding labor constant). B) if the firm reduced its capital stock by one unit, it would have to hire 3 more workers to maintain its current level of output. C) if it used one more unit of both capital and labor, the firm could produce 3 more units of output. D) the marginal product of labor is 3 times the marginal product of capital.

D: MRTS = MPL/MPK

5) A straight-line isoquant A) would indicate that the firm could switch from one output to another costlessly. B) would indicate that the firm could not switch from one output to another. C) would indicate that capital and labor cannot be substituted for each other in production. D) would indicate that capital and labor are perfect substitutes in production.

D: for perfect substitutes, MPL/MPK is constant

As output increases, a firm notices that average productivity of labor decreases. At the same time, it will notice that average fixed costs _____

Decrease

1) When the average product is decreasing, marginal product A) equals average product. B) is increasing. C) exceeds average product. D) is decreasing. E) is less than average product.

E: if MPL < APL, then APL decreases

7) Refer to Figure 6.2. The situation pictured is one of A) constant returns to scale, because the line through the origin is linear. B) decreasing returns to scale, because the isoquants are convex. C) decreasing returns to scale, because doubling inputs results in less than double the output. D) increasing returns to scale, because the isoquants are convex. E) increasing returns to scale, because doubling inputs results in more than double the amount of output.

E: when inputs are doubled from 10,1 to 20,2, the output is more than double. Additionally, to get output to double from 100 to 200 requires an increase in inputs that is less than doubling.

A business owner believes that total cost is minimized if they set MPL =MPK figuring they are getting just as much additional output from a unit of capital as from a unit of labor. This is indeed cost minimizing only if ______

______w=r______________.

4) In the short run, _______ is assumed to be the fixed input.

___capital________________

5) In the short run, on the K,L graph, the slope of the expansion path is ______

__zero (horizontal line).

If doubling all inputs results in tripling output, then the slope of the LRAC curve is ______

negative