Module 2

Bundle A is preferred to bundle B. Bundle B is preferred to bundle C. If preferences are transitive, then

bundle A is preferred to bundle C.

In a production function, the input that refers to machinery is called

capital

A production function can include many inputs. Which of the following are the most commonly used inputs?

capital labor

Marginal cost (MC) is given by

change C/ change Q

LMC(Q, Q) < O describes cost

complementarities.

Vertical integration

-reduces opportunism. -mitigates transaction costs.

An affordable bundle of goods and services that yields the most satisfaction is generally referred to as equilibrium.

consumer

All affordable goods and services can be represented by which of the following?

consumer opportunities

Once a firm makes a specialized investment, other firms may attempt to take advantage of the sunk nature of the investment. This is known as

-the "hold up" problem -opportunism

It is optimal to acquire an input through a contract when

-the cost of the contract is less than the transaction costs. -the contracting environment is simple.

A firm manager should consider vertical integration if

-the input has characteristics that are hard to specify in a contract. -there are substantial specialized investments.

If 15 workers produce 180 cars per day, what is the average product of labor (APL)? APL = cars

12

One disadvantage of revenue-based incentive schemes is that

'there is no incentive to reduce costs.

The value of the output produced by the last unit of a particular input is called

'value marginal product.

In the production process, the manager must do which of the following?

-Ensure the firm operates on the production function --Derive the market demand curve -Establish the correct level of inputs

With respect to the short run average cost curves, what is true of the long run average cost curve?

-It lies above no point on the short run average cost curves. -It equals short run average cost when short run curves use fixed inputs optimally.

Due to the complexities of human thought process:

-behavior models are abstractions of the way we make decisions. -behavior models are simplifications of real-world human decision-making.

Disadvantages of contracts are that they are

-costly to write. -unable to cover all contingencies.

When inputs are somewhat substitutable,

-isoquants are somewhere in between Leontief and linear. -the rate at which the manager can substitute among inputs changes along an isoquant.

A small sandwich shop has 8 employees and produces 216 sandwiches per day. After hiring another employee (9 total), the shop produces 231 sandwiches per day. The marginal product of the 9th labor (MPL) equals sandwiches.

15

Suppose that increasing output from 1000 units to 1100 units increases costs from $5,500 to $7,000. The marginal cost of producing each of the additional units is $

15

Moving along an indifference curve from one bundle to another, a consumer gains 1 unit of X and gives up 3 units of Y. The marginal rate of substitution is between goods X and Y.

3

If a worker's marginal product of labor (MPL) equals 115 and the firm sells its product for $6.00, what is the value marginal product of labor (VMP )? VMPL

690

What happens to average fixed cost (AFC) as output declines?

AFC increases

Where does the marginal cost (MC) curve intersect the average variable cost (AVC) curve?

At minimum AVC.

Which of the following statements is correct?

Average fixed costs decline continuously as output expands.

What is the marginal product of labor (MP ) for the following linear production function? Q = = aK + ßL

B

For a linear production function, Q = aK + ßL, what is the marginal rate of technical substitution (MRTS)?

B/a

What is the marginal product of labor (MP) for the following Cobb-Douglas production function? Q = F(K, L) = Kae

BKa Lb-1

Given the cost function, C(Q) = f + aQ + bQ2 + cQ3, which of the following defines the Marginal Cost (MC) function?

C(Q) = a + 2bQ + 3cQ2

What is another name for the Leontief production function?

Fixed proportions production function

A production function that assumes that inputs are relatively substitutable is called a

Cobb-Douglas production function

Suppose a firm expands its output and experiences the same level of long-run average cost. What is this condition called?

Constant returns to scale

Indicate one disadvantage of using contracts to obtain inputs.

Contracts require costly, up-front expenditures.

The MPL of the 5th worker is 9 units, the MPL of the 6th worker is 7 units and the MPL of the 7th worker is 4 units. This is an example of which of the following?

Decreasing marginal returns

Suppose a firm expands its output and experiences higher long-run average cost. What is this condition called?

Diseconomies of scale

Suppose it is cheaper for an auto maker to produce hybrid vehicles and diesel SUVs in the same factory than it is to have two separate facilities for each vehicle. What condition exists?

Economies of scope

What is an advantage of producing inputs internally?

Firms don't rely on other firms for materials

C(Q) defines

average total cost

Spot exchange refers to which of the following?

Informal relationship between buyer and seller

What is the analytical tool that defines a combination of inputs that yields the same output?

Isoquant

The Leontief production function implies that isoquants are what shape?

L-shaped

Marginal Product of Capital (MP k) is given by:

MP = AQ

Marginal Product of Labor (MP) is given by:

MPl =change Q/ change L

At the point of consumer equilibrium,

MRS = Px/ Py

The affordable bundle that generates the most consumer satisfaction is given at

MRS = Px/Py consumer equilibrium

Which of the following describes the rate at which labor and capital can be substituted for each other?

Marginal rate of technical substitution

Which function defines the cost of producing at least 2 types of output?

Multiproduct cost function

From the point of view of a firm's owner, which of the following will help reduce the effects of the principal-agent problem?

Performance-based incentive

The budget set can be defined as which of the following?

PxX + PyY <- M

If a consumer spends all of his or her income on either good X or good Y or a combination of both, then the budget line is given by which of the following?

PxX + PyY = M

The budget constraint can be given by which of the following expressions?

PxX+PyY=M Y=m/p - Px/Py *X

Suppose the linear production function of a firm is given by Q = F(K, L) = aK + bL, where a and b are constants. Suppose it takes workers (L) 4 hours to produce what a machine (K) can make in 1 hour. Which of the following equations correctly states the production function of the firm?

Q = 4K +L

Which of the following describes the maximum output that can be produced with a fixed set of inputs?

Q = where K is capital and L is labor OR Production function

Which of the following is a Cobb-Douglas production function? (Mark all that apply.)

Q=F(K,L) = K 0.25 + L 0.25 Q= F(K,L) =Ka + Lb

If, in the short run, capital is fixed equal to K&*, what is the short-run production function?

Q=f(L) = F(K*,L)

Fixed cost (FC) equals

TC - VC

VC(Q) The expression, defines

average variable cost

When income is constant and the price of good X, P , increases, what is the effect on the budget line (x is measured on the horizontal axis, y on the vertical axis)?

The budget line rotates clockwise.

Suppose capital, K, is on the vertical axis and labor, L, is on the horizontal axis in a graph. Which of the following would be true if the price of labor, w, increased?

The isocost line rotates clockwise

What can emerge when business ownership is separated from business control?

The principal-agent problem

What must be true about combinations of labor and capital along a given isoquant?

They all must produce the same amount of output

If the cost of each additional unit of labor is w, a firm will employ additional workers until in the range of diminishing marginal product

VMPl =w

When a firm produces the inputs it needs to make the final product, it practices which of the following?

Vertical integration

What is the marginal product of capital (MP ) for the following linear production function?

a

The following quadratic multiproduct cost function: C(QI, 02) = f + aQlQ2 + (QIY + (Q2)2 exhibits cost complementarity when

a<0

What is the marginal product of capital (MPK) for the following Cobb-Douglas production function? Q = F(K, L) = Kae

aK a-1 Lb

Y — — - X, represents

an affordable combination of goods X and Y.

Economists

are able to model human behavior.

The measure of output per unit of input is called

average product

Total product per worker is called

average product of labor

Procuring inputs using a legal document that creates an extended relationship between the buyer and seller of an input is called a

contract

When a firm experiences economies of scale, increasing the size of the operation the minimum average cost.

decreases

assets are general investments made by a firm that allow it to exchange with a particular buyer.

dedicated

If marginal cost (MC) is less than minimum average variable cost (AVC), then MC is

either increasing or decreasing.

To minimize the cost of producing a given level of output, the marginal product per dollar spent should be for all inputs. (Use one word or a mathematical operator)

equal

When average total cost (ATC) is at its minimum, marginal cost (MC) cost (ATC). average total

equal

To maximize profits, a firm manager should produce a level of output such that the marginal benefit is marginal cost.

equal to

When a consumer has no incentive to change to a different, affordable bundle of goods and services, the consumer has reached

equilibrium

True or false: It is generally the case that indifference curves have the same shape across all consumers.

false

A cost that does not change with output is called a cost

fixed

Graphically, what is the distance between total cost (TC) and variable cost (VC)?

fixed cost

An advantage of using spot exchange to acquire inputs is that it allows the firm to

focus more on converting inputs into output.

Performance-based reward programs for firm managers are typically called contracts.

incentive

Profit-sharing programs tend to compensation. both the firm's profits and managerial

increase

Specialized investments (increase/decrease) transaction costs.

increase

Under a piece-rate compensation method, workers are likely to

increase quantity at the expense of quality.

In a production function, the input that refers to workers is called

labor

The short-run production function is generally expressed as a function of which of the following inputs?

labor only

The downward-sloping portion of the VMP defines the demand for maximizing firm. It slopes downward due to by a profit

labor; diminishing marginal returns

Given fixed prices, when consumer income decreases, the budget line shifts to the (Enter one word)

left

MPL MP , the firm should use > (less/more) capital and (less/more) labor to minimize costs.

less more

When the price of labor rises, firms have a tendency to use

less labor and more capital.

According to the law of diminishing marginal rate of technical substitution, as a producer uses of an input, level of output. of the other input must be used to achieve the same

less; more

The production. run is a period of time during which a manager can change all factors of

long

x p represents the rate of substitution. (Enter only one word in the blank.)

market

MPL MP , the firm should use minimize costs. labor to

more less

Profit sharing provides an incentive to increase effort by

paying workers based on the firm's success.

Consumer ___ generally determine which goods and services will be consumed, given that they are affordable.

preferences

For any two bundles of goods and/or services, A and B, if A is preferred to B, or B is preferred to A, or the consumer is indifferent between A and B, then:

preferences are complete.

In order to be effective, spot checks must be

random frequent

When specialized investments are required to facilitate an exchange, the relationship that results is known exchange (2 words) as a(n)

relationship specific

In order to maintain solid job performance, firm owners may rely on a manager's interest in working for another firm some day. What type of external incentive is this?

reputation

Revenue sharing can be particularly effective when productivity is connected to rather than costs.

revenue

Linking workers' compensation to the underlying revenue of the firm is called

revenue sharing

The run is a period of time during which at least one factor of production is fixed.

short

Points on an indifference curve:

show consumption bundles that generate the same amount of satisfaction.

The cost of bargaining increases when able to exchange. imply(ies) that only a few parties are

specialized investments

When a firm's acquisition of an input does not involve specialized investments, it can use exchange without concern for opportunism.

spot

The most straightforward way to obtain inputs is by

spot exchange

When a buyer acquires inputs from a seller through an informal relationship, it is called (2 words)

spot exchange

A cost that is incurred and unrecoverable is called a cost.

sunk

The budget set defines combinations of goods and services

that are affordable.

The marginal rate of substitution (MRS) is

the absolute value of the slope of the indifference curve.

By connecting managerial compensation to performance, a firm's owner can reduce or avoid

the principal-agent problem.

Consumer equilibrium occurs at the point where the MRS is equal to

the ratio of the prices.

The minimum possible cost of producing each output level with fixed and variable factors is given by

the short-run cost function.

At the cost-minimizing input mix,

the slope of the isoquant equals the slope of the isocost line.

Spot checks work through , performance bonuses work through

threat; reward

Costs incurred in the acquisition of an input that exceed the cost of the input itself are called

transaction costs

Since specialized investments are often sunk, relationship-specific exchanges create which of the following?

transaction costs

Suppose that you plan to leave your current job at the end of the month. As a result, you spend almost no time at all learning to use the computer programs that are specific to only your current employer. This is an example of

underinvestment

Costs that change when output changes are called blank.) costs. (Enter one word in the

variable

In the long run, all costs are

variable

When a firm produces its own inputs, it engages in integration.

vertical

The principal-agent problem exists not only between owners and managers, but also between managers and

workers