ECON 323 - HW4

Which of the following is NOT an expression for the cost minimizing combination of inputs? A) MRTS = MPL /MPK B) MPL/w = MPK/r C) MRTS = w/r D) MPL/MPK = w/r E) none of the above

A

Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000, and the interest rate is 10 percent. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all of his expenses) if he farms the land this year. What should he do? A) Sell to ABC Corporation. B) Farm the land for another year and sell to XYZ Corporation. C) Accept either offer as they are equivalent. D) Reject both offers.

A

Suppose a production function has MRTS = K/(4L) with capital (K) on the vertical axis of the isoquant map. Suppose L=100 hours and K=400 machine hours at the current level of output. How much additional labor is required to maintain output if we reduce capital by one machine hour? A) One hour B) Two hours C) Three hours D) Four hours

A

The law of diminishing returns applies to: A) the short run only. B) the long run only. C) both the short and the long run. D) all inputs, with no reference to the time period.

A

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.

A

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.

B

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.

B

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.

B

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.

B

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.

B

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

B

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.

C

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

C

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.

C

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.

C

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

C

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) technically feasible and efficient. B) technically unfeasible and efficient. C) technically feasible and inefficient. D) technically unfeasible and inefficient.

C

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.

C

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.

D

Envision an isoquant map with all isoquants bow in towards the origin. The distance between isoquants q=100 and q=50 is closer than the distance between isoquants q=50 to q=0. Then the production function exhibits: A) decreasing returns to scale, because the isoquants are convex. B) decreasing returns to scale, because doubling inputs results in less than double the amount of output. C) increasing returns to scale, because the isoquants are convex. D) increasing returns to scale, because doubling inputs results in more than double the amount of output.

D

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

D

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.

D

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

D

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

E