ECO 6425 Exam 2

T/F The scale economies index is positive if the cost-output elasticity if greater than 1

F

T/F A negative scale economies index indicates the presence of diseconomies of scale.

t

If the isoquants are straight lines, then

the marginal rate of technical substitution of inputs is constant.

Marginal product crosses the horizontal axis (equal to 0) at the point where

total profit is maximized

The scale economies index is equal to

one minus the cost-output elasticity

Marginal profit is negative when

output exceeds the profit maximizing level

Bubba Burgers discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery?

Adding another product to increase profits

A technological innovation shifts the marginal cost curve downward, what cost curve does not shift

Average Fixed Cost Curve

What cost always declines as output increases

Avg Fixed Cost

Assume that average product for six worked is 15. If the marginal product of the seventh worker is 18...

average product is rising

An upward sloping isoquant

cannot be derived from a production function when a firm is assumed to maximize profits

In an increasing-cost industry, expansion of output

causes input prices to rise as demand for them grows

According to the law of diminishing returns

the marginal product of an input will eventually decline

If the isoquants are straight lines

the marginal rate of technical substitution of inputs is constant

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e. one pilot for each plane). If the wage rate paid to the pilots increases relative to the rental rate of capital for the airplanes, then:

the optimal capital labor ration remains the same

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

If the capital market is competitive, the user cost of capital equals

the rental rate of capital, the return in that market, the rate of return investing elsewhere

Suppose the market demand curve is perfectly elastic in an increasing-cost industry. If an output of t per unit is imposed on all producers of the good, what happens to the market equilibrium outcome?

The price paid by buyers does not change and output decreases

What is true regarding the relationship between returns to scale and economies of scope?

There is no definite relationship between returns to scale and economies of scope

Important factors that contribute to labor productivity growth is

growth in the capital stock and technlogical change

Incremental Cost is the same concept as

marginal cost

The slope of the total product curve is the

marginal product

For the firm's cost minimization problem, one of the key assumptions for each input is that:

marginal product is increasing at a decreasing rate

The rate at which one unit can be reduced per additional unit of the other input while holding output constant is measured by

marginal rate of technical substitution

Marginal Profit =

marginal revenue minus marginal cost

economies of scope refer to

muliproduct firms

A production function assumes a given

technology

The link between productivity of labor and the standard of living is

that over the long run consumers as a whole can increase their rate of consumption only by increasing labor productivity

Marginal product of an input

the addition to total output due to the addition of the last unit of an input, holding all other inputs constant.

Annual economic depreciation equals

the amortization payment made annually for the purchase of an asset, spread over the life of an asset.

When TR and TC have the same slope...

they are furthest from each other

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?

Output decreases by more than 25%

Increasing returns to scale in production means:

less than twice as much of all inputs are required to double output.

T/F Production functions with inputs that are perfect substitutes always exhibit constant returns to scale

F

T/F we cannot measure the returns to scale for a fixed-proportion production function

F

Short Run

A time period when one input is fixed

T/F If the marginal product of labor is at its maximum the average product of labor is falling

F

What is not an example of production coordination provided by firms?

Establish industry safety regulations

Suppose a plant manager ignores some implicit marginal costs of production so that the perceived MC curve is below the actual MC curve. What is the likely outcome from this error?

Firm produces more than optimal quantity and earns lower profits.

Why do firms tend to experience decreasing returns to scale at high levels of output?

Firms face more problems with coordinating task and communications among managers and workers at very high levels of output.

What statement does not explain why US healthcare expenditures are higher than other countries?

Government policies have shifted the healthcare production function downward over time.

Does rising marginal cost imply that average total cost also rises?

No

Because of the relationship between a perfectly competitive firm's demand curve and it's marginal revenue curve, the profit maximization condition for the firm can be written as

P=MC

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.

Production Function

T/F If the marginal product of labor is zero, the total product of labor is at it's maximum

T

What is true of cost curves?

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

What types of cost are always increasing as output increases?

Total and Variable Cost

T/F The ATC of a given level of output is the slope of the line from origin to the total cost curve at that level of output

True

The marginal cost of a given output is the slope of the line that is tangent to the total cost curve at that level of output.

True

A cubic function implies...

U shaped AVC curve, U shaped MC curve, U shaped AC curve

With increasing returns to scale, isoquants for unit increases in output become

closer and closer together

If input prices are constant, a firm with increasing returns to scale can expect

costs to go up less than double as output doubles

If the isoquants in an isoquant map are downward sloping but bowed away from the origin, the the production technology violates the assumption of

diminishing marginal returns

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

dis economies or scope

The cost-output elasticity is used to measure:

economies of scale

The function that shows the combination of inputs that yield the same outputs is called an

isoquant curve

When an isocost line is just tangent to an isoquant, we know that:

output is being produced at minimum cost.

The demand curve facing a perfectly competitive firm

perfectly horizontal

Revenue is equal to

price times quantity

The marginal rate of technical substitution is equal to the:

ratio of the marginal products of the inputs

A firm's marginal product of labor is 4 and it's marginal product of capital is 5. If the firm adds one unit of labor, but does not want it's output quantity to change, the firm should:

use 0.8 fewer units

If current profit output is less than the profit maximizing output, then the next unit produced...

will increase revenue more than it increases cost.

An L-shaped isoquant

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