Econ 351 Chapter 8 Key Terms

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.

A) AP = 3 cars per worker

Consider the following statements when answering this question I. The marginal product of labor is declining and the average product of labor is increasing as output is increased. Thus, marginal product of labor is above the average product of labor. II. The Law of Diminishing Returns results in total output declining. 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) I is true, and II is false.

If input prices are constant, a firm with constant 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.

A) costs to double as output doubles.

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.

A) isoquant curve.

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.

A) rate at which the firm can replace capital with labor without changing the output rate.

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) neither the short nor the long run. E) all inputs, with no reference to the time period.

A) the short run only.

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). What is the average product of labor? A) AP = 5 B) AP = 5K C) AP = 5L D) AP = 5K/L

B) AP = 5K

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.

B) I is true, and II is 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.

B) I is true, and II is false.

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) MP = 1.5 cars

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). What is the marginal product of labor? A) MP = 5 B) MP = 5K C) MP = 5L D) MP = 5K/L

B) MP = 5K

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.

B) marginal rate of technical substitution.

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

B) marginal returns.

We manufactured 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.

B) technologically inefficient.

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.

B) the marginal rate of technical substitution of inputs is constant.

Which of the following relationships is valid? A) Declining marginal product of labor implies that average product of labor is also declining. B) When marginal product of labor is above average product of labor, the latter is falling. C) The marginal product of labor intersects average product of labor at its maximum. D) If average product of labor is increasing as labor increases, the marginal product of labor should be increasing

C) The marginal product of labor intersects average product of labor at its maximum.

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

C) a production function.

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) average product is rising.

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.

C) costs to go up less than double as output doubles.

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.

C) is a curve that shows all the combinations of inputs that yield the same total output.

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.

C) marginal product.

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 E) q = 9

C) q = 9L

Which of the following production functions exhibits constant returns to scale? A) q = KL B) q = KL^0.5 C) q = K + L D) q = K^0.4 L^0.5

C) q = K + L

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

C) two

Marginal Product of Labor

Change in output/Change in Labor Input

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.

D) Both I and II are false.

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.

D) a time period in which at least one input is fixed.

Which of the following inputs are variable in the long run? A) labor. B) capital and equipment. C) plant size. D) all of these.

D) all of these.

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.

D) ratio of the marginal products of the inputs.

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

D) the marginal product of an input will eventually decline.

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.

E) is less than average product.

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

E) the addition to total output due to the addition of the last unit of an input, holding all other

Fixed-Proportions Production Function

Production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output.

Average Product of labor

Q/L

Marginal Product

additional output produced as an input is increased by one unit

Marginal Rate of Technical Substitution (MRTS)

amount by which the quantity of one input can be reduced when one extra unit of another input is used so that output remains constant

Long Run

amount of time needed to make all production inputs variable

Labor Productivity

average product of labor for an entire industry or for the economy as a whole

Isoquants

curve showing all possible combinations of inputs that yield the same output

Theory of the Firm

describes how a firm makes cost-minimizing production decisions and how the firm's resulting cost varies with its output

Technological Change

development of new technologies allowing factors of production to be used more efficiently

Production Function

function showing the highest output that a firm can produce for every specified combination of inputs

Isoquant Map

graph combining a number of isoquants used to describe a production function

Factors of Production

inputs into the production process (e.g. labor, capital, and materials)

Average Product

output per unit of a particular input

Short Run

period of time in which quantities of one or more production factors cannot be changed

Law of Diminishing Marginal Returns

principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease

Fixed Input

production factor that cannot be varied

Returns To Scale

rate at which output increases as inputs are increased proportionately

Constant Returns to Scale

situation in which output doubles when all inputs are doubled

Decreasing Returns to Scale

situation in which output less than doubles when all inputs are doubled

Increasing Returns to Scale

situation in which output more than doubles when all inputs are doubled

Stock of Capital

total amount of capital available for use in production