Chp. 4,6,7

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The function which shows combinations of inputs that yield the same output is called a(n): A) isoquant curve. B) isocost curve. C) production function. D) production possibilities frontier.

The horizontal summation of the demands of each consumer at different price levels is called: A) the market demand curve. B) the price elasticity of market demand. C) speculative demand. D) consumer surplus

5 Copyright © 2018 Pearson Education, Inc.16) The total cost (TC) of producing computer software diskettes (Q) is given as: What is the fixed cost? A) 200 B) 5Q C) 5 D) 5 + (200/Q) E) none of the above

A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as: A) the income effect. B) the substitution effect. C) the wealth effect. D) the total effect of a price change

A construction company builds roads with machinery (capital, K) and labor (L). If we plot the isoquants for the production function so that labor is on the horizontal axis, then a point on the isoquant with a small MRTS (in absolute value) is associated with high ________ use and low ________ use. A) labor, capital B) capital, labor C) concrete, gravel D) none of the above

A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function This production function exhibits: A) decreasing returns to scale for all output levels. B) constant returns to scale for all output levels. C) increasing returns to scale for all output levels. D) no clear pattern of returns to scale.

A learning curve may be stated as L = A + BN-b where L is the labor per unit and N is the cumulative number of units produced. Learning does not occur when: A) b = 0. B) b = 1. C) b > 0. D) b < 0.

A logarithmic variable cost function implies that: A) marginal cost is increasing at a decreasing rate. B) marginal cost is increasing at an increasing rate. C) marginal cost is constant. D) marginal cost is decreasing as quantity increases.

A mathematical technique used to solve constrained optimization problems (finding the consumer optimum, for example) is: A) the method of Lagrange multipliers. B) the Cobb-Douglas method. C) the Slutsky method. D) the Hicks substitution method.

A positive network externality associated with a good: A) yields more intrinsic value than without it. B) yields more extrinsic value but less intrinsic value from its consumption. C) results in less intrinsic or extrinsic value. D) is not associated with the value of a good in any way

A production function assumes a given: A) technology. B) set of input prices. C) ratio of input prices. D) amount of capital and labor. E) amount of output.

After a good falls in price, consumers are better off because they can buy the same amount of the good for less money, and thus have money left over for additional purchases. This fact is called: A) the income effect. B) the substitution effect. C) the wealth effect. D) the price effect.

An Engel curve is backward-bending when: A) the good is inferior after a certain level of income. B) the good is inferior at low levels of income. C) the good is inferior for all levels of income. D) the good is normal above a certain level of income.

An Engel curve: A) slopes upward for normal goods and downward for inferior goods. B) slopes upward for inferior goods and downward for normal goods. C) slopes upward for both normal and inferior goods. D) slopes downward for both normal and inferior goods

An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in a river. Use the following two statements to answer this question: I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent. II. The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

An individual demand curve can be derived from the ________ curve. A) price-consumption B) price-income C) income-substitution D) income-consumption E) Engel

As we move downward along a typical isoquant, the slope of the isoquant: A) becomes flatter. B) becomes steeper. C) remains constant. D) becomes linear.

Consider the following statements when answering this question: I. If the marginal product of labor falls whenever more labor is used, and labor is the only factor of production used by the firm, than at every output level the firm's short-run average variable cost exceeds marginal cost. II. If labor obeys the law of diminishing returns, and is the only factor of production used by the firm, then at every output level short-run average variable costs exceed marginal costs. A) I is true, and II is false. B) I is false, and II is true. C) I and II are both true. D) I and II are both false.

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

If a factory has a short-run capacity constraint (e.g., an auto plant can only produce 800 cars per day at maximum capacity), the marginal cost of production becomes ________ at the capacity constraint. A) infinite B) zero C) highly elastic D) less than the average variable cost

If an increase in the price of one good leads to an increase in the quantity demanded of another, the two goods are: A) substitutes. B) complements. C) independent. D) unrelated.

If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the: A) rate at which the firm can replace capital with labor without changing the output rate. B) average rate at which the firm can replace capital with labor without changing the output rate. C) marginal product of labor. D) marginal product of capital.

If two different fuel sources (e.g., coal and natural gas) are perfect substitutes in the long-run production of energy. How will a profit maximizing firm choose between these two inputs? A) The firm will only use the input with lower cost B) The firm will use equal amounts of the two inputs, even if one of the inputs has a lower cost. C) The firm will only use the input with higher cost. D) The firm cannot achieve a profit maximizing level of output under these circumstances.

In 1985, Alice paid $20,000 for an option to purchase ten acres of land. By paying the $20,000, she bought the right to buy the land for $100,000 in 1992. When she acquired the option in 1985, the land was worth $120,000. In 1992, it is worth $110,000. Should Alice exercise the option and pay $100,000 for the land? A) Yes B) No C) It depends on what the rate of inflation was between 1985 and 1992. D) It depends on what the rate of interest was.

In a production process, all inputs are increased by 10%; but output increases less than 10%. This means that the firm experiences: A) decreasing returns to scale. B) constant returns to scale. C) increasing returns to scale. D) negative returns to scale.

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.

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) a sunk cost

In our analysis, it is best to treat capital as if it was: A) rented, even if it was purchased. B) purchased, even if it is just rented. C) purchased and also rented. D) rented first, then purchased.

In recent years, the specification and estimation of demand curves have changed so that: A) analyses that used to be calculated in mainframe computers can now be carried out in a few seconds on a personal computer. B) the growth and complexity of markets make those analyses ever more complex and difficult to calculate with accuracy. C) the private sector often lacks the means or knowledge necessary for estimating demand relationships. D) marketing experts make frequent use of data, but its use for designing government policies has been diminishing

Part of the reason for the success of Facebook is: A) a strong positive network externality. B) a strong negative network externality. C) the avoidance of a positive externality. D) the avoidance of a negative externality.

Prospective sunk costs: A) are relevant to economic decision-making. B) are not considered as investment decisions. C) rise as output rises. D) do not occur when output equals zero.

Software companies continually work to develop new features of their products that make it easier for users to interact and share their work. As more of these features are embedded in the software, what happens to the individual demand curve for the software products? A) Demand curve becomes more elastic due to the bandwagon effect. B) Demand curve becomes less elastic due to the snob effect. C) Demand curve shifts, but its degree of elasticity does not change. D) There is no change in the individual demand curve.

Suppose capital and labor are perfect substitutes in a long-run production process. If labor costs $15 per hour and the rental rate of capital is $20 per hour, what can we say about the profit maximizing choice of labor and capital inputs? A) We will only use labor in the production process. B) We will only use capital in the production process. C) We will use equal amounts of capital and labor. D) The optimal capital-labor ratio is 0.75-to-1.

Suppose the long-run cost function is C = 3q. What is the cost-output elasticity for this case? A) 1 B) 3 C) 1/3 D) 2

The advantage of an isoelastic demand curve is that: A) both price and income elasticities are constant along the curve. B) price elasticity is constant and income elasticity changes along the curve. C) income elasticity is constant and price elasticity changes along the curve. D) both price and income elasticity change along the curve.

The area below the demand curve and above the price line measures: A) consumer surplus. B) economic profit. C) elasticity of demand. D) the total value obtained from consuming the good or service.

The change in demand resulting from this change in real purchasing power is called: A) the income effect. B) the substitution effect. C) the wealth effect. D) the price effect.

The cost-output elasticity can be written and calculated as: A) MC/AC. B) AC/MC. C) (AC)(MC). D) (AC)2(MC). E) (AC)(MC)2.

The key assumption required for us to use a linear variable cost function of the form VC = bq is that: A) marginal cost must be constant and equal to b. B) marginal cost must be increasing at rate b. C) fixed costs must be zero. D) marginal cost is always greater than average variable cost.

The law of diminishing returns assumes that: A) there is at least one fixed input. B) all inputs are changed by the same percentage. C) additional inputs are added in smaller and smaller increments. D) all inputs are held constant.

The standardization of software applications that people can easily share is an example of: A) a positive network externality. B) a negative network externality. C) a network externality that can be positive or negative. D) an innovation that does not carry a network externality.

The technique of constrained optimization can be used to describe: A) the conditions that must hold if the consumer is maximizing utility. B) the conditions that may prevent the consumer from maximizing utility. C) the conditions that may lead to an increase or decrease in marginal utility. D) the best use of a given amount of income

Two firms, each producing different goods, can achieve a greater output than one firm producing both goods with the same inputs. We can conclude that the production process involves: A) diseconomies of scope. B) economies of scale. C) decreasing returns to scale. D) increasing returns to scale.

Use the following two statements to answer this question: I. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output. II. The marginal cost of a given level of output is the slope of the line that is tangent to the variable cost curve at that level of output. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Use the following two statements to answer this question: I. A growing firm's average cost of production will decline over time if output continually expands and economies of scale are present. II. A firm's average cost of production can decline over time if learning occurs as cumulative output increases. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false

Use the following two statements to answer this question: I. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output. II The marginal cost of a given level of output is the slope of the line that is tangent to the total cost curve at that level of output. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false

Using calculus, we measure marginal utility as the utility change that results from: A) a very small increase in consumption. B) a very large increase in consumption. C) an average increase in consumption. D) anything other than changes in consumption.

When a product transformation curve is bowed outward, there are ________ in production. A) economies of scope B) economies of scale C) diseconomies of scope D) diseconomies of scale E) none of the above

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.

When demand is inelastic, an increase in price causes the seller's total revenues to: A) increase. B) decrease. C) remain the same. D) fall to zero

When demand is inelastic, an increase in price leads to: A) an increase in total expenditures. B) a decrease in total expenditures. C) no change in total expenditures. D) an undetermined change in expenditures.

When we solve the firm's dual production problem (i.e., maximize output subject to a cost constraint) by the method of Lagrange multipliers, the optimal value of the Lagrange multiplier equals the: A) marginal product per unit cost of each variable input. B) marginal product of capital. C) marginal product of labor. D) marginal cost of production.

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

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

Which of the following statements does not explain why US health care expenditures are higher than in other countries? A) Government policies have shifted the health care production function downward over time. B) Consumer incomes have increased, which allows consumers to purchase more health care. C) The US health care system is relatively inefficient compared to other countries. D) Demand for health care in the US has increased, so health care production occurs at a higher point on the total product curve than in other countries.

Which would not increase the productivity of labor? A) An increase in the size of the labor force B) An increase in the quality of capital C) An increase in the quantity of capital D) An increase in technology E) An increase in the efficiency of energy

Why do firms tend to experience decreasing returns to scale at high levels of output? A) Firms face more problems with coordinating tasks and communications among managers and workers at very high levels of output. B) Government tax policy tends to discourage large-scale production operations. C) Firms face fewer problems with inventory management and marketing as output reaches very high levels. D) Firms tend to use more capital and less labor at higher levels of output.

You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. As you increased the number of employees hired per hour from three to five, your total output increased by 5 cars to 15 cars per hour. What is the average product of labor at the new levels of labor? A) AP = 3 cars per worker B) AP = 5 cars per worker C) AP = 4 cars per worker D) We do not have enough information to answer this question

Consider the following statements when answering this question: I. Suppose a semiconductor chip factory uses a technology where the average product of labor is constant for all employment levels. This technology obeys the law of diminishing returns. II. Suppose a semiconductor chip factory uses a technology where the marginal product of labor rises, then is constant and finally falls as employment increases. This technology obeys the law of diminishing returns. A) I is true, and II is false. B) I is false, and II is true. C) Both I and II are true. D) Both I and II are false.

Suppose that the price of labor (Pl) is $10 and the price of capital (Pk) is $20. What is the equation of the isocost line corresponding to a total cost of $100? A) PL + 20PK B) 100 = 10L + 20K C) 100 = 30(L+K) D) 100 + 30 E) none of the above

Suppose the long-run cost function is C = 2q2. What is the cost-output elasticity for this case? A) 1 B) 2 C) 1/2 D) 4

The demand curve for the daily edition of the Lubbock Avalanche Journal is D = 85,000 - 30,000P. The current price of the newspaper is $0.50. Derive the Consumer Surplus for the newspaper.

At a price of $0.50, the quantity demanded is 70,000. The vertical axis intercept of the demand curve is $2.83 (choke price). Thus, Consumer Surplus is 1/2(2.83-.5)70000 = 81550

Consider the following statements when answering this question: I. Whenever the marginal product of labor curve is a downward sloping curve, the average product of labor curve is also a downward sloping curve that lies above the marginal product of labor curve. II. If a firm uses only labor to produce, and the production function is given by a straight line, then the marginal product of labor always equals the average product of labor as labor employment expands. A) I is true, and II is false. B) I is false, and II is true. C) Both I and II are true. D) Both I and II are false.

Consider the following statements when answering this question: I. Whenever a firm's average variable costs are falling as output rises, marginal costs must be falling too. II. Whenever a firm's average total costs are rising as output rises, average variable costs must be rising too. A) I is true, and II is false. B) I is false, and II is true. C) I and II are both true. D) I and II are both false.

) A variable cost function of the form: VC = 52 + 2Q + 3Q^2 implies a marginal cost curve that is: A) constant. B) upward sloping. C) U-shaped. D) quadratic

A change in consumption of a good associated with a change in its price, with the level of utility held constant, is referred to as: A) the income effect. B) the substitution effect. C) the wealth effect. D) the total effect of a price change

A firm produces leather handbags and leather shoes. If there are economies of scope, the product transformation curve between handbags and shoes will be: A) a straight line. B) bowed outward (concave). C) bowed inward (convex). D) a rectangle

A firm uses two factors of production. Irrespective of how much of each factor is used, both factors always have positive marginal products which imply that: A) isoquants are relevant only in the long run. B) isoquants have negative slope. C) isoquants are convex. D) isoquants can become vertical or horizontal. E) none of the above

A firm's marginal product of labor is 4 and its marginal product of capital is 5. If the firm adds one unit of labor, but does not want its output quantity to change, the firm should: A) use five fewer units of capital. B) use 0.8 fewer units of capital. C) use 1.25 fewer units of capital. D) add 1.25 units of capital.

A negative network externality causes demand to become: A) more elastic. B) less elastic. C) unit elastic. D) perfectly inelastic.

A study of the per capita consumption of gasoline: in 10 countries demonstrates that: A) the consumption of gasoline does not appear to be related to the price of gasoline. B) higher gasoline prices do result in lower consumption of gasoline. C) higher gasoline prices actually increase the consumption of gasoline. D) higher gasoline prices reduce consumption in some of those countries, but not in others.

After a good falls in price, consumers will tend to buy more of the good that has become cheaperand less of those goods that are now relatively more expensive. This fact is called: A) the income effect. B) the substitution effect. C) the wealth effect. D) the price effect.

An alternative way of looking at the consumer's utility maximization decision is called duality in consumer theory, which consists in: A) looking at the optimum in consumption in terms of setting the marginal utilities equal to the ratio of prices rather than looking at the point where an indifference curve is tangent to a budget line. B) choosing the lowest budget line that touches a given indifference curve rather than choosing the highest indifference curve, given a budget constraint. C) constructing a Lagrangian multiplier instead of focusing on the equal marginal principle. D) decomposing the effects of a price change on consumption, without recourse to budget lines.

Annual economic depreciation equals: A) the value of capital at end of year minus new investment. B) the amortization payment made annually for the purchase of an asset, spread over the life of the asset. C) the annual loss of value of buildings and machines due to deterioration. D) the change in the weighted average cost of capital, or percentage change in the components of debt and equity.

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.

Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good. A) more; more B) more; less C) less; more D) less; less

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.

Consider the following statements when answering this question: I. As Boeing's production fell 10% to 100 planes last year, learning by doing cannot account for this year's changes in long-run average costs. II. Failure to take into account the effects of learning by doing will lead to overestimates of the cost-output elasticity. A) I is true, and II is false. B) I is false, and II is true. C) Both I and II are true. D) Both I and II are false.

Assume that average product for six workers is fifteen. If the marginal product of the seventh worker is eighteen, A) marginal product is rising. B) marginal product is falling. C) average product is rising. D) average product is falling.

Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision: A) is correct and shows a solid command of the nature of opportunity cost. B) is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold. C) is incorrect because when the price of a stock falls, the law of demand states that he should buy more shares. D) is incorrect because it treats the price of the shares as an explicit cost.

Coupons and rebates are examples of: A) market incentives that may distort prices. B) direct market experiments. C) strategies that complicate the construction of a log-linear demand function. D) price distortions that prevent firms from learning about consumer behavior.

Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3.19) See Scenario 4.1. What is Daniel's budget constraint? A) 240 = 3Pc + 3Pd B) 240 = 3Qc + 3Qd C) 240 = (Pc)(Qc) D) 240 = (Qc)(Qd) E) none of the above

For an inferior good, the income and substitution effects A) work together. B) work against each other. C) can work together or in opposition to each other depending upon their relative magnitudes. D) always exactly cancel each other.

For consideration of such issues as labor's productivity growth nationwide, the relevant measure is the: A) marginal product of labor. B) average product of labor. C) total product of labor. D) wage. E) cost of capital.

If the isoquants are straight lines, then: A) inputs have fixed costs at all use rates. B) the marginal rate of technical substitution of inputs is constant. C) only one combination of inputs is possible. D) there are constant returns to scale.

If the quantity of a good demanded by a typical consumer increases in response to the growth in purchases of other consumers, A) a negative network externality is present. B) a positive network externality is present. C) a network externality is absent. D) a network externality can be positive or negative.

If we take the production function and hold the level of output constant, allowing the amounts of capital and labor to vary, the curve that is traced out is called: A) the total product. B) an isoquant. C) the average product. D) the marginal product. E) none of the above

In a certain textile firm, labor is the only short term variable input. The manager notices that the marginal product of labor is the same for each unit of labor, which implies that: A) the average product of labor is always greater that the marginal product of labor. B) the average product of labor is always equal to the marginal product of labor. C) the average product of labor is always less than the marginal product of labor. D) as more labor is used, the average product of labor falls. E) there is no unambiguous relationship between labor's marginal and average products.

Increasing returns to scale in production means: A) more than 10% as much of all inputs are required to increase output 10%. B) less than twice as much of all inputs are required to double output. C) more than twice as much of only one input is required to double output. D) isoquants must be linear.

Incremental cost is the same concept as ________ cost. A) average B) marginal C) fixed D) variable

Joe's Organic Cereal Company produces granola breakfast cereal under a fixed proportion production system in which 22 ounces of cereal are packaged in each cardboard box. However, the plant production manager decides to reduce the amount of cereal per box to 20.5 ounces at the start of the next year. For the isoquant map, cereal is plotted in the vertical axis, and boxes are on the horizontal axis. What happens to the curves in the isoquant map as a result of this change? A) Shift upward B) Shift downward C) Shift rightward D) Shift leftward

Marginal product crosses the horizontal axis (is equal to zero) at the point where: A) average product is maximized. B) total product is maximized. C) diminishing returns set in. D) output per worker reaches a maximum. E) All of the above are true.

Other things being equal, the lower the value of elasticity: A) the less likely the profitability of a price increase. B) the more likely the profitability of a price increase. C) the greater the responsiveness in quantity demanded to a price change. D) the lower the corresponding increase in firm revenue.

Some economists conduct empirical research on the theory of the firm by measuring the degree of technical efficiency achieved by actual firms. What type of research contributions are provided by these studies? A) Normative B) Positive C) Administrative D) Executive

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). The expansion path for this business will: A) increase at a decreasing rate because we will substitute capital for labor as the business grow. B) follow the 45-degree line from the origin. C) not be defined. D) be a vertical line.

Suppose that the demand for artichokes (Qa) is given as: Qa = 200 - 4 Use the information in Scenario 4.2. What is the price elasticity of demand if the price of artichokes is $10? A) 0 B) -0.25 C) -1 D) -4 E) negative infinity

Suppose the production of long-distance airline flights is described by a fixed proportion production process in which three crew members (i.e., labor) are required for each aircraft (i.e., capital). If the airline operates with four crew members per plane, then we know that: A) the production process violates diminishing margin returns. B) production at this point is technically inefficient. C) the isoquants for this production process are upward sloping. D) the airline will have negative profits.

Suppose there are ten identical manufacturing firms that produce computer chips with machinery (capital, K) and labor (L), and each firm has a production function of the form q = 10KL0.5. What is the industry-level production function? A) Q = 10K10L5 B) Q = 100KL0.5 C) Q = 100L0.5 D) none of the above

The analysis of utility maximization is carried out under the assumption of: A) increasing marginal utility. B) diminishing marginal utility. C) diminishing total utility. D) a constant rate of marginal utility.

The cost-output elasticity is used to measure: A) economies of scope. B) economies of scale. C) the curvature in the fixed cost curve. D) steepness of the production function.

The difference between what a consumer is willing to pay for a unit of a good and what must be paid when actually buying it is called: A) producer surplus. B) consumer surplus. C) cost benefit analysis. D) net utility.

The law of diminishing returns refers to diminishing: A) total returns. B) marginal returns. C) average returns. D) all of these.

The opposite of the bandwagon effect is: A) a positive network externality. B) the snob effect. C) a network externality, positive or negative. D) the substitution effect.

The production function in Scenario 7.3 exhibits: A) decreasing returns to scale. B) constant returns to scale. C) increasing returns to scale. D) all of the above at various levels of outp

The rate at which one input can be reduced per additional unit of the other input, while holding output constant, is measured by the: A) marginal rate of substitution. B) marginal rate of technical substitution. C) slope of the isocost curve. D) average product of the input.

The response to a change in the relative prices of goods is called: A) the income effect. B) the substitution effect. C) the wealth effect. D) the price effect.

The scale economies index (SCI) is equal to: A) the cost-output elasticity. B) one minus the cost-output elasticity. C) 100 times the degree of economies of scope (SC). D) marginal cost divided by average cost

The total cost (TC) of producing computer software diskettes (Q) is given as: . What is the variable cost? A) 200 B) 5Q C) 5 D) 5 + (200/Q) E) none of the above

The total cost of producing a given level of output is: A) maximized when a corner solution exists. B) minimized when the ratio of marginal product to input price is equal for all inputs. C) minimized when the marginal products of all inputs are equal. D) minimized when marginal product multiplied by input price is equal for all inputs.

Through their marketing and advertising efforts, companies try to: A) minimize the impact of the snob effect. B) augment the impact of the snob effect. C) increase the elasticity of their demands. D) increase price more than quantity sold.

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.

Use the following statements to answer this question. I. The numerical labels attached to indifference curves are meaningful only in an ordinal way. II. The numerical labels attached to isoquants are meaningful only in an ordinal way. A) both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) both I and II are false.

Use the following statements to answer this question: I. The long-run average cost (LAC) curve is the envelope of the short-run average cost (SAC) curves. II. The long-run marginal cost (LMC) curve is the envelope of the short-run marginal cost (SMC) curves. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false.

Use the following two statements to answer this question: I. If the marginal product of labor is zero, the total product of labor is at its maximum. II If the marginal product of labor is at its maximum, the average product of labor is falling. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Use the following two statements to answer this question: I. Increasing returns to scale cause economies of scale. I. Economies of scale cause increasing returns to scale. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Use the following two statements to answer this question: I. Isoquants cannot cross one another. II. An isoquant that is twice the distance from the origin represents twice the level of output. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Use the following two statements to answer this question: I. Production functions describe what is technically feasible when the firm operates efficiently. II. The production function shows the least cost method of producing a given level of output. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

We manufacturer automobiles given the production function q = 5KL where q is the number of autos assembled per eight-hour shift, K is the number of robots used on the assembly line (capital) and L is the number of workers hired per hour (labor). If we use K = 10 robots and L = 10 workers in order to produce q = 450 autos per shift, then we know that production is: A) technologically efficient. B) technologically inefficient. C) maximized. D) optimal.

When Post cereals, the producer of Grape Nuts (GN), was going to acquire Nabisco's Shredded Wheat (SW), Post wanted to know how a price increase in GN would affect profitability and whether to increase price before or after the merger. After fitting the log-linear function, log(QGN) = 1.998 - 2.085 log(PGN) + 0.62 log(I) + 0.14 log(PSW), Post cereals concluded that: A) The two cereals were close substitutes, so the lost revenue from an increase in the price of one would be recovered by the increased sales in the other. B) The cross-price elasticity confirmed that the two cereals were substitutes, but not close substitutes. C) There would be a large increase in the quantity demanded of Grape Nuts in response to an increase in the price of Shredded Wheat. D) The demand for Grape Nuts was both price and income inelastic.

When a demand curve is expressed in log-linear form, such as log(Q) = a - b log(P) + b2 log(P2) + c log(I), the coefficients of the demand determinants correspond to: A) changes in determinants other than price. B) the elasticity values of those determinants. C) the parameters that may fluctuate in value. D) the independent variables in the model.

When demand is elastic, an increase in price causes the seller's total revenue to: A) increase. B) decrease. C) remain the same. D) fall to zero.

When demand is elastic, an increase in price leads to: A) an increase in total expenditures. B) a decrease in total expenditures. C) no change in total expenditures. D) an undetermined change in expenditures.

When demand is written as log(Q) = -0.23 - 0.34 log(P) + 1.33 log(I), the price elasticity of demand equals: A) -0.23 B) -0.34 C) -0.72 D) 1.33

When network externalities are present, the market demand for the good in question becomes: A) less elastic. B) more elastic. C) unit elastic. D) perfectly inelastic.

When network externalities are present: A) we can obtain the market demand curve simply by summing individuals' demands. B) one person's demand also depends on the demands of otherpeople. C) a person's demand cannot be affected by the number of other people who have purchased the good. D) the social cost of production is larger than the private cost.

Which of the following is an example of speculative demand? A) When the actual price of housing increases, the quantity demanded of housing decreases. B) When the expected price of housing increases, the demand for housing increases. C) When the price of home ownership increases, the demand for rental housing increases. D) When the demand for housing increases, the demand for house insurance increases.

Which of the following is true concerning the substitution effect of a decrease in price? A) It will lead to an increase in consumption only for a normal good. B) It always will lead to an increase in consumption. C) It will lead to an increase in consumption only for an inferior good. D) It will lead to an increase in consumption only for a Giffen good.

Which of the following is true regarding utility along a price-consumption curve? A) It is constant. B) It changes from point to point. C) It changes only if income changes. D) It changes only for normal goods.

Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making? I. "Even though I hate my MBA classes, I can't quit because I've spent so much money on tuition." II. "To break into the market for soap our firm needs to spend $10M on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account." A) I only B) II only C) Both I and II D) Neither I nor II

With increasing returns to scale, isoquants for unit increases in output become: A) farther and farther apart. B) closer and closer together. C) the same distance apart. D) none of these.

You have just won a cash award of $500 for academic excellence. A) The substitution effect of this award will be larger than its income effect. B) The income effect of this award will be larger than its substitution effect. C) The substitution and income effects will be of identical size. D) It is impossible to know whether the substitution effect is larger than the income effect or vice versa.

You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. Three employees can generate an average product of 4 cars per person in each hour, and five employees can generate an average product of 3 cars per person in each hour. What is the marginal product of labor as you increase the labor from three to five employees? A) MP = 3 cars B) MP = 1.5 cars C) MP = 15 cars D) MP = -1 cars

Your firm owns an old truck that is used to make local deliveries. The truck is fully depreciated and only costs $1.20 per hour to operate, but you could rent it to another firm for $15.00 per hour. What is the opportunity cost of operating this truck in your business? A) $1.20 per hour B) $15.00 per hour C) $16.20 per hour D) Less than $1.20 per hour

A Giffen good A) is always the same as an inferior good. B) is the special subset of inferior goods in which the substitution effect dominates the income effect. C) is the special subset of inferior goods in which the income effect dominates the substitution effect. D) must have a downward sloping demand curve.

A cubic cost function implies: A) linear average fixed cost curve. B) linear marginal cost curve. C) a U-shaped average cost curve. D) all of the above

A farmer uses L units of labor and K units of capital to produce Q units of corn using a production function F(K,L). A production plan that uses K' = L' = 10 to produce Q' units of corn where Q' < F(10,10) is said to be: A) technically feasible and efficient. B) technically unfeasible and efficient. C) technically feasible and inefficient. D) technically unfeasible and inefficient. E) none of the above

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.

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

A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called: A) an isoquant. B) a production possibility curve. C) a production function. D) an isocost function.

A production function defines the output that can be produced: A) at the lowest cost, given the inputs available. B) for the average firm. C) if the firm is technically efficient. D) in a given time period if no additional inputs are hired. E) as technology changes over time.

A production function in which the inputs are perfectly substitutable would have isoquants that are: A) convex to the origin. B) L-shaped. C) linear. D) concave to the origin.

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 for a given total cost. D) output combinations that can be produced with a given outlay of funds.

An isoquant: A) must be linear. B) cannot have a negative slope. C) is a curve that shows all the combinations of inputs that yield the same total output. D) is a curve that shows the maximum total output as a function of the level of labor input. E) is a curve that shows all possible output levels that can be produced at the same cost.

An upward sloping isoquant: A) can be derived from a production function with one input. B) can be derived from a production function that uses more than one input where reductions in the use of any input always reduces output. C) cannot be derived from a production function when a firm is assumed to maximize profits. D) can be derived whenever one input to production is available at zero cost to the firm. E) none of the above

As an economy recovers from a recession, the observed level of labor productivity tends to decline. Why? A) The total product remains the same during the recovery, but the number of workers declines. B) The total product increases during the recovery, but the number of workers declines. C) The marginal product of labor declines as new workers enter the expanding work force. D) The marginal product of labor increases at a slower rate than the decline in employment.

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.

Consider the following statements when answering this question I. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then the marginal costs of production are constant too. II. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then short-run average total costs cannot rise as output rises. A) I is true, and II is false. B) I is false, and II is true. C) I and II are both true. D) I and II are both false.

Consider the following statements when answering this question. I. Increases in the rate of income tax decrease the opportunity cost of attending college. II. The introduction of distance learning, which enables students to watch lectures at home, decreases the opportunity cost of attending college. A) I is true, and II is false. B) I is false, and II is true. C) I and II are both true. D) I and II are both false.

Consider the following statements when answering this question. I. With convex isoquants, a firm's expansion path cannot be negatively sloped. II. If a firm uses only two factors of production, one of whose marginal product becomes negative when its use exceeds a certain level, then a cost-minimizing firm's expansion path will have vertical or horizontal segments. A) I is true, and II is false. B) I is false, and II is true. C) Both I and II are true. D) Both I and II are false.

Consider the following statements when answering this question: I. A firm's marginal cost curve does not depend on the level of fixed costs. II. As output increases the difference between a firm's average total cost and average variable cost curves cannot rise. A) I is true, and II is false. B) I is false, and II is true. C) I and II are both true. D) I and II are both false.

Consider the following statements when answering this question: I. A technology with increasing returns to scale will generate a long-run average cost curve that has economies of scale. II. Diminishing returns determine the slope of the short-run marginal cost curve, whereas returns to scale determine the slope of the long-run marginal cost curve. A) I is true, and II is false. B) I is false, and II is true. C) Both I and II are true. D) Both I and II are false.

Consider the following statements when answering this question: I. The marginal cost curve intersects the average total cost and average variable cost curves at their minimum values. II. When a firm has positive fixed costs, the output level associated with minimum average variable costs is less than the output associated with minimum average total costs. A) I is true, and II is false. B) I is false, and II is true. C) I and II are both true. D) I and II are both false.

Economies of scope refer to: A) changes in technology. B) the very long run. C) multiproduct firms. D) single product firms that utilize multiple plants. E) short-run economies of scale.

For a given pair of production outputs, the degree of economies of scope: A) is constant across different output levels. B) only increases as the level of output increases. C) may increase or decrease with output. D) will always tend to zero as output becomes very large.

If input prices are constant, a firm with increasing returns to scale can expect: A) costs to double as output doubles. B) costs to more than double as output doubles. C) costs to go up less than double as output doubles. D) to hire more and more labor for a given amount of capital, since marginal product increases. E) to never reach the point where the marginal product of labor is equal to the wage.

If the isoquants in an isoquant map are downward sloping but bowed away from the origin (i.e., concave to the origin), then the production technology violates the assumption of: A) technical efficiency. B) free disposal. C) diminishing marginal returns. D) positive average product.

In the demand equation log(Q) = a - b log(P) + b2 log(P2) + c log(I), where P is the price of the good in question, P2 is the price of a second good and I is income, the second good must be: A) a normal good. B) an inferior good. C) a substitute for the good in question. D) a complement for the good in question.

In the short run, suppose average total cost is a straight line and marginal cost is positive and constant. Then, we know that fixed costs must: A) be declining with output. B) be positive. C) equal zero. D) We do not have enough information to answer this question.

Jim left his previous job as a sales manager and started his own sales consulting business. He previously earned $70,000 per year, but he now pays himself $25,000 per year while he is building the new business. What is the economic cost of the time he contributes to the new business? A) $25,000 per year B) Zero C) $70,000 per year D) $45,000 per year

Joe owns a coffee house and produces coffee drinks under the production function q = 5KL where q is the number of cups generated per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). The average product of labor and the marginal product of labor are both equal to AP = MP = 5K. Does labor exhibit diminishing marginal returns in this case? A) Yes, if capital also exhibits diminishing marginal returns. B) Yes, this is true for all values of K. C) No, the marginal product of labor is constant (for a given K). D) No, the marginal product of labor is increasing (for a given K).

Joe owns a small coffee shop, and his production function is q = 3KL where q is total output in cups per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). If Joe's capital is currently fixed at K=3 machines, what is his short-run production function? A) q = 3L B) q = 3L2 C) q = 9L D) q = 3K2

One of the factors contributing to the fact that labor productivity is higher in the U.S. than in the People's Republic of China is: A) China's larger stock of capital. B) the higher capital/labor ratio in China. C) the higher capital/labor ratio in the U.S. D) China's smaller stock of fossil fuels. E) the fact that much labor in the U.S. is in management.

Recent research estimates that the short-run price elasticity of demand for gasoline in the U.S. is -0.3, and the long-run price elasticity of demand is -1.4. What happens if the government increases the federal gasoline tax? A) Consumer expenditures on gasoline increase over the short run and long run. B) Consumer expenditures on gasoline decline over the short run and increase over the long run. C) Consumer expenditures on gasoline increase over the short run and decline over the long run. D) Consumer expenditures on gasoline decrease over the short run and long run.

Refer to Figure 4.3.2 above. How do total expenditures on movie tickets vary along the demand curve? A) Since quantity demanded increases as price decreases, total expenditures increase. B) Since the quantity is sold at lower and lower prices, total expenditures decrease as quantity demanded increases. C) Total expenditures remain the same between points along the demand curve. D) Total expenditures increase through the upper portion of the curve and then decrease at low price levels

Suppose a firm has multiproduct cost function that is additive such that C(q1,q2) = C(q1) + C(q2). What is the degree of economies of scope (SC) for this firm? A) 2 B) 1 C) Zero D) Negative

Suppose the price of rice increases and you view rice as an inferior good. The substitution effect results in a ________ change in rice consumption, and the income effect leads to a ________ change in rice consumption. A) positive; positive B) positive; negative C) negative; positive D) negative; negative

The Malthusian dilemma relates to marginal product in that: A) starvation can be averted only if marginal product is constant. B) because of diminishing marginal product, the amount of food produced by each additional member of the population increases. C) because of diminishing marginal product, the amount of food produced by each additional member of the population decreases. D) because of diminishing marginal product, the wage falls as the population decreases. E) because of diminishing average product, the population will not have additional capital to work with.

The aggregate demand for good X is Q = 20 - P. If the price rises from P = $4 to P = $5, what is the change in consumer surplus? A) $4.50 B) $5.50 C) $15.50 D) $16

The cost-output elasticity equals 1.4. 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) marginal cost is less than average cost.

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.

The dual approach to the consumer's problem consists in finding: A) the highest indifference curve that just touches the budget line. B) the maximum income required to achieve a given level of utility. C) the least-cost budget line required to achieve a given level of utility. D) all of the above

The income-consumption curve A) illustrates the combinations of incomes needed with various levels of consumption of a good. B) is another name for income-demand curve. C) illustrates the utility-maximizing combinations of goods associated with every income level. D) shows the utility-maximizing quantity of some good (on the horizontal axis) as a function of income (on the vertical axis).

The law of diminishing returns can apply to: A) the short run only. B) the long run only. C) both the short and the long run. D) neither the short nor the long run. E) all inputs, with no reference to the time period.

The link between the productivity of labor and the standard of living is: A) tenuous and changing. B) inverse. C) that over the long run, consumers as a whole can increase their rate of consumption only by increasing labor productivity. D) that over the long run, consumers' rate of consumption is not related to labor productivity. E) that the productivity of labor grows much more erratically than the standard of living.

The marginal utility associated with the additional consumption of X is given by: A) the second derivative of the utility function with respect to good X. B) equal to total utility. C) the partial derivative of the utility function with respect to good X. D) the Lagrangian multiplier

The slope of the total product curve is the: A) average product. B) slope of a line from the origin to the point. C) marginal product. D) marginal rate of technical substitution.

The total cost (TC) of producing computer software diskettes (Q) is given as: What is the marginal cost? A) 200 B) 5Q C) 5 D) 5 + (200/Q) E) none of the above

Two small airlines provide shuttle service between Las Vegas and Reno. The services are alike in every respect except that Fly Right bought its airplane for $500,000, while Fly by Night rents its plane for $30,000 a year. If Fly Right were to go out of business, it would be able to rent its plane to another airline for $30,000. Which airline has the lower costs? A) Fly Right. B) Fly by Night C) Neither, the costs are identical. D) Neither, Fly by Night has lower costs at small output levels and Fly Right has lower costs at high output levels.

Use the following statements to answer this question: I. The scale economies index is positive if the cost-output elasticity that is greater than one. II. A negative scale economies index indicates the presence of diseconomies of scale. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false

We typically think of labor as a variable cost, even in the very short run. However, some labor costs may be fixed. Which of the following items represents an example of a fixed labor cost? A) An hourly employee B) A temporary worker who is paid by the hour C) A salaried manager who has a three-year employment contract D) none of the above

What describes the graphical relationship between average product and marginal product? A) Average product cuts marginal product from above, at the maximum point of marginal product. B) Average product cuts marginal product from below, at the maximum point of marginal product. C) Marginal product cuts average product from above, at the maximum point of average product. D) Marginal product cuts average product from below, at the maximum point of average product. E) Average and marginal product do not intersect.

What is the economies of scope character for a firm that has a straight-line product transformation curve? A) Economies of scope (SC > 0) B) Diseconomies of scope (SC < 0) C) SC = 0 D) SC = 1

When a product transformation curve for a firm is bowed inward, there are ________ in production. A) economies of scope B) economies of scale C) diseconomies of scope D) diseconomies of scale

When labor usage is at 12 units, output is 36 units. From this we may infer that: A) the marginal product of labor is 3. B) the total product of labor is 1/3. C) the average product of labor is 3. D) none of the above

When we solve the firm's cost minimization problem by the method of Lagrange multipliers, the optimal value of the Lagrange multiplier equals the: A) marginal product of labor. B) marginal product of capital. C) marginal cost of production. D) cost-output elasticity.

When would it be plausible to describe the demand for a product by drawing a straight line, Q = a - bP ? A) In the vast majority of scenarios B) Practically never C) Only if no important factors other than price affect demand D) If we believe that factors other than price alone determine demand

Which of the following actions is NOT an example of the production coordination provided by firms? A) Manage production activities of workers B) Pay wages to workers C) Establish industry safety regulations D) Set the production schedule for each week

Which of the following algebraic forms of a demand curve yields an isoelastic demand curve? A) Q = a - b log(P) + c log(I) B) Q = a - bP + cI C) log(Q) = a - b log(P) + c log(I) D) log(Q) = bP + cI

Which of the following claims is true at each point along a price-consumption curve? A) Utility is maximized but income is not all spent. B) All income is spent, but utility is not maximized. C) Utility is maximized, and all income is spent. D) The level of utility is constant.

Which of the following equations based on capital (K) and labor (L) inputs does not represent a plausible production function? A) F(K,L) = 3KL B) F(K,L) = 3K C) F(K,L) = K + L - 1 D) F(K,L) = 10(KL)^.5

Which of the following goods is an inferior good in the United States? A) Health care B) Entertainment C) Rental housing D) all of the above.

Which of the following is NOT related to the slope of isoquants? A) The fact that inputs have positive marginal product B) The fact that inputs have diminishing marginal product C) The fact that input prices are positive D) The fact that more of either input increases output E) The fact that there are diminishing returns to inputs

Which of the following is the user cost of capital? A) implicit cost of capital + explicit cost of capital B) interest rate × value of capital - depreciation C) economic depreciation + (interest rate)(value of capital) D) interest rate - depreciation

Which of the following is true regarding income along a price-consumption curve? A) Income is increasing. B) Income is decreasing. C) Income is constant. D) The level of income depends on the level of utility.

Which of the following production functions exhibits constant returns to scale? A) q = KL B) q = KL0.5 C) q = K + L D) q = log(KL)

Which scenario below would lead to lower profits as we double the inputs used by the firm? A) Increasing returns to scale with constant input prices B) Constant returns to scale with constant input prices C) Constant returns to scale with rising input prices (perhaps because the firm is not a price-taker in the input markets) D) all of the above

You are currently using three printing presses and five employees to print 100 sales manuals per hour. If the MRTS at this point is 0.5 (capital is on the vertical axis of the isoquant map), then you would be willing to exchange ________ employees for one more printing press in order to maintain current output. A) zero B) one C) two D) three

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A Cobb-Douglas production function: A) exhibits constant returns to scale. B) exhibits increasing returns to scale. C) exhibits decreasing returns to scale. D) can exhibit constant, increasing, or decreasing returns to scale.

A cubic cost function implies: A) a U-shaped average variable cost curve. B) a U-shaped marginal cost curve. C) a U-shaped average cost curve. D) all of the above

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.

A group of friends recently started manufacturing specialty T-shirts. The business has grown rapidly, with monthly production up from 50 to 250 in the first 6 months. During this same period, average production cost has been cut in half. The firm's long-run average cost curve over this range of output: A) is downward sloping. B) is upward sloping. C) is horizontal. D) may be any of the above.

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

Aggregation examples of market demand could include: A) the demand for home computers by households with or without children. B) the domestic and foreign demand for wheat. C) the demands of different demographic groups. D) all of the above

An Engel curve shows combinations of: A) income and prices. B) two goods, for different levels of income. C) two goods, for different levels of prices. D) income and the quantity consumed of one good

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.

An important factor that contributes to labor productivity growth is: A) growth in the capital stock. B) technological change. C) the standard of living. D) A and B only E) A, B, and C are correct.

Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good. A) more; more B) more; less C) less; more D) less; less

At every output level, a firm's short-run average cost (SAC) equals or exceeds its long-run average cost (LAC) because: A) diminishing returns apply in the short run. B) returns to scale only exist in the long run. C) opportunity costs are taken into account in the short run. D) there are at least as many possibilities for substitution between factors of production in the long run as in the short run. E) none of the above

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

Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery? A) Bubba adds more varied inputs to burger production. B) Bubba expands burger production, focusing on that one good. C) Bubba contracts burger production. D) Bubba adds grilled chicken sandwiches to the menu. E) Bubba cuts back on the diversity of the menu.

Consider the following statements when answering this question: I. If a technology exhibits diminishing returns then it also exhibits decreasing return to scale. II. If a technology exhibits decreasing returns to scale then it also exhibits diminishing returns. A) I is true, and II is false. B) I is false, and II is true. C) Both I and II are true. D) Both I and II are false.

Does it make sense to consider the returns to scale of a production function in the short run? A) Yes, this is an important short-run characteristic of production functions. B) Yes, returns to scale determine the diminishing marginal returns of the inputs. C) No, returns to scale is a property of the consumer's utility function. D) No, we cannot change all of the production inputs in the short run

Estimations of demand are used as input in this type of scenario: A) understanding automobile demand to decide whether to offer below-market-rate loans for new cars. B) understanding the demand for oil in order to impose a new oil import tax. C) as input into a firm's decision-making process. D) all of the above

Fill in the blanks. Poorer countries have a ________ demand for U.S. wheat because they usually ________. A) less elastic; find other substitutes B) less elastic; can't find other substitutes C) more elastic; can't find other substitutes D) more elastic; find other substitutes

For many firms, capital is the production input that is typically fixed in the short run. Which of the following firms would face the longest time required to adjust its capital inputs? A) Firm that makes DVD players B) Computer chip fabricator C) Flat-screen TV manufacturer D) Nuclear power plant

For the firm's cost minimization problem, one of the key assumptions for each input is that: A) marginal product is constant. B) marginal product is increasing at a decreasing rate. C) marginal product is increasing at an increasing rate. D) marginal product is decreasing at an increasing rate.

From the profit maximizing conditions for the Cobb-Douglas production function, we find that the optimal input demands for labor and capital may be related as L = brK/(aw). Under what conditions are the expenditures on capital and labor equal? A) Constant returns to scale B) Increasing returns to scale C) Decreasing returns to scale D) a = b

General Motors estimates that U.S. demand for its newest product will be: Qus = 300,000 - .5p Export demand will be Qex = 25,000 - .5p. The total market demand curve for this product will be a: A) straight line with a slope of -0.5. B) straight line with a slope of -1.0. C) kinked line with the kink at Q = 25,000. D) kinked line with the kink at P = 50,000. E) none of the above

If the capital market is competitive, the user cost of capital equals: A) the rental rate of capital. B) the return in that market. C) the rate of return of investing elsewhere. D) all of the above

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

Luxury brands like designer sun glasses are goods that may exhibit snob effects. Suppose this is true, and the price for a particular brand increases. What happens to the component changes in the quantity demanded? A) Pure price effect and snob effect are negative. B) Pure price effect and snob effect are positive. C) Pure price effect is positive, snob effect is negative. D) Pure price effect is negative, snob effect is positive

Many mining and mineral extraction processes tend to exhibit increasing returns to scale. Suppose copper mines have increasing returns, and the existing copper mines reduce their capital and labor inputs by 25 percent in response to a global recession. What is the expected impact on copper output? A) Output increases by less than 25 percent. B) Output decreases by less than 25 percent. C) Output decreases by exactly 25 percent. D) Output decreases by more than 25 percent.

Price elasticity of demand measures the: A) slope of the demand curve. B) sensitivity of quantity demanded to changes in the price of substitute goods. C) sensitivity of price to changes in the quantity demanded of substitute goods. D) sensitivity of quantity demanded to changes in price.

Some luxury product manufacturers will purposefully raise prices on their goods in order to reduce sales volume. This strategy may successfully increase sales revenue if the luxury goods are subject to the ________ effect and have relatively ________ demand. A) bandwagon; elastic B) bandwagon; inelastic C) snob; elastic D) snob; inelastic

Suppose a pizza restaurant has two pizza ovens that may be used to bake pizzas, so the restaurant has a maximum capacity constraint that affects the shape of the firm's short-run marginal cost curve. What happens to maximum capacity segment of this curve if the firm adds another pizza oven? A) Shifts upward B) Shifts downward C) Shifts leftward D) Shifts rightward

Technological improvement: A) can hide the presence of diminishing returns. B) can be shown as a shift in the total product curve. C) allows more output to be produced with the same combination of inputs. D) All of the above are true.

The MRTS for isoquants in a fixed-proportion production function is: A) zero or one. B) always zero. C) always one. D) zero or undefined.

The Slutsky equation is a formula for: A) maximizing total utility, subject to a budget constraint. B) calculating the marginal utility of income. C) calculating the marginal utility of the last dollar spent on one good or another. D) decomposing the effects of a price change into substitution and income effects.

The aggregate demand for good X is Q = 20 - P, and the market price is P = $8. What is the maximum amount that consumers are willing to pay for the quantity demanded at this price? A) $72 B) $96 C) $144 D) $168

The concerns about world food production raised by Malthus have not materialized because: A) input prices have fallen over time. B) crop prices have risen over time. C) Malthus was wrong about the diminishing returns to labor in agriculture. D) technological improvements have increased our ability to produce food over time.

The learning curve is graphically represented as a plot of: A) labor per unit on the horizontal axis and total cost on the vertical axis. B) labor per unit on the horizontal axis and total number of units produced on the vertical axis. C) total cost on the vertical axis and total number of units produced on the horizontal axis. D) labor per unit on the vertical axis and cumulative number of units produced on the horizontal axis.

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.

The presence of a learning curve may induce a decision maker in a startup firm to choose: A) low levels of output to exploit economies of scale. B) high levels of output to exploit economies of scale. C) low levels of output to shift the average cost curve down over time. D) high levels of output to shift the average cost curve down over time. E) to produce more than one output.

The short run is: A) less than a year. B) three years. C) however long it takes to produce the planned output. D) a time period in which at least one input is fixed. E) a time period in which at least one set of outputs has been decided upon.

The textbook discusses the carpet industry situated in the southeastern U.S., and the authors indicate that smaller carpet mills have ________ returns to scale while larger mills have ________ returns to scale. A) increasing, decreasing B) increasing, constant C) constant, decreasing D) constant, increasing

The total cost (TC) of producing computer software diskettes (Q) is given as: What is the average total cost? A) 500 B) 5Q C) 5 D) 5 + (200/Q) E) none of the above

Use the following statements to answer this question: I. We cannot measure the returns to scale for a fixed-proportion production function. II. Production functions with inputs that are perfect substitutes always exhibit constant returns to scale. A) I and II are true. B) I is true and II is false. C) II is true and I is false. D) I and II are false.

Use the following two statements to answer this question: I. "Decreasing returns to scale" and "diminishing returns to a factor of production" are two phrases that mean the same thing. II Diminishing returns to all factors of production implies decreasing returns to scale. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Use the following two statements to answer this question: I. The average cost curve and the average variable cost curve reach their minima at the same level of output. II. The average cost curve and the marginal cost curve reach their minima at the same level of output. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

Use the following two statements to answer this question: I. The marginal product of labor is the slope of the line from the origin to the total product curve at that level of labor usage. II The average product of labor is the slope of the line that is tangent to the total product curve at that level of labor usage. A) Both I and II are true. B) I is true, and II is false. C) I is false, and II is true. D) Both I and II are false.

When there are economies of scale, A) MC > AC, so cost-output elasticity is greater than AC. B) MC < AC, so cost-output elasticity is less than AC. C) MC < AC, so cost-output elasticity is greater than 1. D) MC < AC, so cost-output elasticity is less than 1. E) long-run marginal cost is declining.

Which of the following are examples of situations involving a positive network externality? A) A social network B) The bandwagon effect C) Toys and fads D) All of the above

Which of the following are examples of situations with negative network externalities? A) A crowded beach B) A rare work of art C) Clothing made to order D) All of the above

Which of the following business combinations likely exhibit economies of scope? A) Banking services for individuals and banking services for other business B) Retail clothing stores and electronic (internet) clothing sales C) Hospitals that perform heart surgery and hospitals that perform cosmetic surgery D) all of the above

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

Which of the following examples represents a fixed-proportion production system with capital and labor inputs? A) Clerical staff and computers B) Airplanes and pilots C) Horse-drawn carriages and carriage drivers D) all of the above

Which of the following ideas were central to the conclusions drawn by Thomas Malthus in his 1798 "Essay on the Principle of Population"? A) Short-run time period B) Shortage of labor C) Law of diminishing resource availability D) Law of diminishing returns

Which of the following inputs are variable in the long run? A) Labor B) Capital and equipment C) Plant size D) all of these

Which of the following is the user cost of capital per dollar of capital? A) depreciation + interest rate B) the user cost of capital C) the opportunity cost of capital D) all of the above

Which of the following is true regarding the relationship between returns to scale and economies of scope? A) A firm experiencing economies of scope must also experience increasing returns to scale. B) Economies of scale and economies of scope must occur together. C) A firm experiencing increasing returns to scale must also experience economies of scope. D) There is no definite relationship between returns to scale and economies of scope.

Which of the following statements correctly uses the concept of opportunity cost in decision making? I. "Because my secretary's time has already been paid for, my cost of taking on an additional project is lower than it otherwise would be." II. "Since NASA is running under budget this year, the cost of another space shuttle launch is lower than it otherwise would be." A) I is true, and II is false. B) I is false, and II is true. C) I and II are both true. D) I and II are both false.

Which of the following statements is true regarding the differences between economic and accounting costs? A) Accounting costs include all implicit and explicit costs. B) Economic costs include implied costs only. C) Accountants consider only implicit costs when calculating costs. D) Accounting costs include only explicit costs.

Writing total output as Q, change in output as △Q, total labor employment as L, and change in labor employment as △L, the marginal product of labor can be written algebraically as: A) ΔQ ∙ L. B) Q / L. C) ΔL / ΔQ. D) ΔQ / ΔL.

Which of the following is NOT a reason for average costs to fall according to the learning curve? A) Workers accomplish tasks more quickly after doing the task a few times. B) Managers schedule more efficiently over time. C) Engineers determine more accurately what tolerances can be used. D) Suppliers may become better able to produce the exact inputs the firm needs. E) Competing firms leave the industry as the learning firm becomes more efficient.

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.

A plant uses machinery and waste water to produce steel. The owner of the plant wants to maintain an output of 10,000 tons a day, even though the government has just imposed a $100 per gallon tax on using waste water. The reduction in the amount of waste water that results from the imposition of this tax depends on: A) the amount of waste water used before the tax was imposed. B) the cost to the firm of using waste water before the tax was put in place. C) the rental rate of machinery. D) the marginal product of waste water only. E) the ratio of the marginal product of waste water to the marginal product of machinery.

A straight-line 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.

At a given level of labor employment, knowing the difference between the average product of labor and the marginal product of labor tells you: A) whether increasing labor use raises output. B) whether increasing labor use changes the marginal product of labor. C) whether economies of scale exist. D) whether the law of diminishing returns applies. E) how increasing labor use alters the average product of labor.

Carolyn knows average total cost and average variable cost for a given level of output. Which of the following costs can she not determine given this information? A) Total cost B) Average fixed cost C) Fixed cost D) Variable cost E) Carolyn can determine all of the above costs given the information provided.

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.

If the law of diminishing returns applies to labor then: A) the marginal product of labor must eventually become negative. B) the average product of labor must eventually become negative. C) the marginal product of labor must rise and then fall as employment rises. D) the average product of labor must rise and then fall as employment increases. E) after some level of employment, the marginal product of labor must fall.

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

In the short run, suppose average total cost is a straight line and marginal cost is positive and constant. Then, we know that A) marginal cost is less than average total cost. B) average total cost is positive and constant. C) average total cost equals marginal cost. D) A and B are correct. E) B and C are correct.

The cost-output elasticity is used to measure: A) input substitution flexibility. B) the slope of the firm's expansion path. C) the slope of long-run average cost. D) the slope of long-run marginal cost. E) economies of scale

The marginal product of an input is: A) total product divided by the amount of the input used to produce this amount of output. B) the addition to total output that adds nothing to total revenue. C) the addition to total output that adds nothing to profit. D) the addition to total output due to the addition of one unit of all other inputs. E) the addition to total output due to the addition of the last unit of an input, holding all other inputs constant.

The marginal rate of technical substitution is equal to: A) the absolute value of the slope of an isoquant. B) the ratio of the marginal products of the inputs. C) the ratio of the prices of the inputs. D) all of the above E) A and B only

Two isoquants, which represent different output levels but are derived from the same production function, cannot cross because: A) isoquants represent different utility levels. B) this would violate a technical efficiency condition. C) isoquants are downward sloping. D) additional inputs will not be used by profit maximizing firms if those inputs decrease output. E) Both B and D are true.

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.

Which of the following costs are always increasing 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

Which of the following situations is NOT possible? A) SAC and LAC are both increasing for some output levels. B) SAC is increasing but LAC is decreasing for some output levels. C) SAC is decreasing but LAC is increasing for some output levels. D) SAC and LAC are both decreasing for some output levels. E) All of the above are possible

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) the firm could produce 3 more units of output if it increased its use of labor by one unit (holding capital constant). C) 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. D) if it used one more unit of both capital and labor, the firm could produce 3 more units of output. E) the marginal product of labor is 3 times the marginal product of capital.

Snob effect

Negative network externality in which a consumer wishes to own an exclusive or unique good

Number 25 on Chp. 4 review

Trisha believes the production of a dress requires 4 labor hours and 2 machine hours to produce. If Trisha decides to operate in the short run, she must spend $500 to lease her business space. Also, a labor hour costs $15 and a machine hour costs $35. What is Trisha's cost of production as a function of dresses produced?

Since the production of a dress requires spending $60 for labor and $70 for machine hours, Trisha's cost function is: C(q) = 130q + 500

Bandwagon effect

Positive network externality in which a consumer wishes to possess a good in part because others do

network externality

Situation in which each individual's demand depends on the purchases of other individuals

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