Economics Test BSU

Which statements are true 1. The firms decision to produce zero output when the price is less than the average variable cost of production is known as the shutdown rule 2. The firm's supply decision is to generate zero output for all prices below the minimum AVC

1 and 2 are true

What is the difference between a production function and an isoquant?

A production function describes the maximum output that can be achieved with any given combination on inputs. An isoquant identifies all of the different combinations of inputs that can be used to produce one particular level of ouput.

What is the long run?

An amount of time needed to make all production inputs variable

Which cost always declines as output increases?

Average fixed cost

Technological innovation shifts marginal cost curve downward. Which curve does NOT shift?

Average fixed cost curve

Why would a firm that incurs losses choose to produce rather than shut down?

Because revenue is greater than variable costs, resulting in smaller losses than would result from shutting down

T or F 1. Production functions describe what is technically feasible when the firm operates efficiently 2. The production function shows the least cost method of producing a given level of output

Both true

In an industry with perfect competition if product price falls, no firm can survive. Agree or disagree?

Disagree because firms will exit the industry in the long run, reducing supply until the price rises to the lowest point on the long run average cost curve

T or F "Decreasing returns to scale" and "diminishing returns to a factor of production" are two phrases that mean the same thing

False

If a competitive firm has a u-shaped marginal cost curve then the profit maximizing output is found where

MC = MR and MC is increasing

Can an isoquant ever slope upward?

No. It would imply that adding more of both inputs keeps output constant

In a perfectly competitive industry the profit maximizing condition can be expressed as

P = MC

Characteristics of a perfectly competitive industry

Price takers No barriers to entry Full information Homogeneous products

What is NOT a necessary condition for long run equilibrium under perfect competition?

Prices are relatively low

Opportunity Costs are

The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

What is a homogeneous product?

The qualities and characteristics of a market good or service do not vary between different suppliers.

A firms short run average cost curve is u-shaped. Which conclusion can be reached regarding the firms returns to scale

The short run average cost curve reveals nothing regarding returns to scale

At profit maximizing level of output, what is true of the total revenue and total cost curves?

They must have the same slope

What always increases as output increases?

Total cost and variable cost

T or F As output increases the difference between a firms average total cost and average variable cost curves cannot rise

True

T or F In the short run the firm should produce where price equals marginal cost

True

T or F Under perfect competition an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input) also shifts the average variable cost curve upward.

True

Increase in the demand for a good, which is produced by a competitive industry, will raise the short run and long run market price

Will raise short run market price but not long run market price

Can a firm have a production function that exhibits increasing, constant, and decreasing returns to scale as output increases?

Yes, specialization leads to increasing RTS, proportional increases lead to constant RTS, and finally bureaucratic problems can lead to decreasing RTS

For consideration of such issues as labors productivity growth nationwide, the relevant measure is the

average product of labor

Demand curve facing a perfectly competitive firm is the same as its ___________ curve and its ___________ curve

average revenue curve and its marginal revenue curve

In a short run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus, marginal cost is ______ average variable cost

below

A Cobb-Douglas production function can exhibit

constant, increasing, or decreasing returns to scale

Assume that a firms 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 _______

decline

An improvement in technology would result in

downward shifts of MC and increases in output

Medallions are expensive, but can be resold, and are therefore an example of a

fixed cost

The long run supply curve in a constant cost industry is linear and ___________

horizontal

If the marginal cost of production is diminishing as more units of output are produce, then the marginal product of labor is __________

increasing

In an increasing cost industry, expansion of output causes

input prices to rise as demand for them grows

Thomas Malthus "Essay on the Principle of Population" talked about which central ideas?

law of diminishing returns

When the average product is decreasing, marginal product is ____ than average product

less

The slope of the total product curve is the ________ _______

marginal product

With its current levels of input use, a firms MRTS is 3 (capital on vertical axis, labor on horizontal axis) this implies that the marginal _______ __ _____ is 3 times the marginal _______ __ _______

marginal product of labor is 3 times the marginal product of capital

If market price for a competitive firms output doubles then

marginal revenue doubles

A firm maximizes profit by operating at the level of output where

marginal revenue equals marginal cost

Suppose all firms have constant marginal costs that are the same for each firm in the short run. In this case, the market level supply curve is ___________ and producer surplus equals _________

perfectly elastic and producer surplus equals zero

A firm should produce in the short run as long as ________ is ________

producer surplus is positive

The law of diminishing returns applies to the _____ run only

short run

Isoquant properties

slopes downward from left to right isoquant lying above and to the right represents a higher output level isoquants cannot cross convex to origin

The marginal rate of technical substitution is equal to

the absolute value of the slope of an isoquant the ratio of the marginal products of the inputs

Marginal Revenue graphically is

the slope of the total revenue curve at a given point

Why might you expect the marginal product of additional workers to diminish eventually?

they may get in each others way, and output will increase at a diminishing rate

Marginal product crosses the horizontal axis (is equal to zero) at the point where

total product is maximized

T or F If the marginal product of labor is zero, the total product of labor is at its maximum

true

Marginal product of the 2nd and 3rd workers might be increasing because

workers can specialize at a separate task, and output will increase at an increasing rate

At profit maximizing level of output, marginal profit is

zero