Econ 5

average product (AP)

a measure of output produced per unit of input

20. For a cost function C = 100 + 10Q + Q 2, the average variable cost of producing 20 units of output is A. 10. B. 20. C.30. D. none of the statements associated with this question are correct.

30

10. For the cost function C(Q) = 100 + 2Q + 3Q 2 , the average fixed cost of producing 2 units of output is A. 100. B.50. C. 3. D. 2.

50

60. What is the marginal cost of producing 90 units of output? A. 5.32. B.8.75. C. 11.67. D. 21.00.

8.75

For the cost function C(Q) = 100 + 2Q + 3Q2, the total variable cost of producing 2 units of output is: A. 16. B. 12. C. 4. D. None of the answers are correct.

A. 16.

Suppose the production function is given by Q = 3K + 4L. What is the marginal product of capital when 10 units of capital and 10 units of labor are employed? A. 3 B. 4 C. 11 D. 45

A. 3

Which of the following cost functions exhibits economies of scope when three (3) units of good one and two (2) units of good two are produced? A. C = 50 − 5Q1Q2 + 0.5Q12 + Q22. B. C = 10 + 4Q1Q2 + Q12 + Q22. C. C = 15 + 5Q1Q2 + 2Q1 + 4Q2. D. C = 5 + Q1Q2 + Q12Q22.

A. C = 50 − 5Q1Q2 + 0.5Q12 + Q22.

Which of the following sets of economic data is minimizing the cost of producing a given level of output? A. MPL = 20, MPK = 40, w = $16, r = $32. B. MPL = 20, MPK = 40, w = $32, r = $16. C. MPL = 40, MPK = 20, w = $16, r = $32. D. MPL = 40, MPK = 40, w = $16, r = $32.

A. MPL = 20, MPK = 40, w = $16, r = $32.

When there are economies of scope between two products which are separately produced by two firms, merging into a single firm can

Accomplish a reduction in costs

MP(capital) =

change in Q / change in K =

MP(labor) =

change in Q / change in L =

MC =

change in TC / change in Q =

15. The production function Q = L^5 K^5 is called A.Cobb Douglas. B. Leontief. C. Linear. D. none of the statements associated with this question are correct.

cobb douglas

cubic cost function

costs are a cubic function of output; provides a reasonable approximation to virtually any cost function

variable costs

costs that change with changes in output; include the costs of inputs that vary with output

4. Suppose the production function is given by Q = 3K + 4L. What is the marginal product of capital when 10 units of capital and 10 units of labor are employed? A. 3. B. 4. C. 11. D. 45.

3

7. Suppose the production function is given by Q = 3K + 4L. What is the marginal product of capital when 5 units of capital and 10 units of labor are employed? A.3. B. 4. C. 11. D. 45.

3

56. Suppose you are a manager of a factory. You purchase five (5) new machines at one million dollars each. If you can resell two of the machines for $500,000 and three of the machines for $200,000, what are the sunk costs of purchasing the machines? A. $5 million. B. $500,000. C.$3.4 million. D. $1.6 million.

3.4 million

6. Suppose the production function is given by Q = min {K, L}. How much output is produced when 4 units of labor and 9 units of capital are employed? A. 0. B. 4. C. 9. D. 13.

4

25. The production function for a competitive firm is Q = K5L5 The firm sells its output at a price of $10, and can hire labor at a wage of $5. Capital is fixed at one unit. The maximum profits are A.5. B. 10. C. 15. D. none of the statements associated with this question are correct.

5

less capital and more labor

If the marginal product per dollar spent on capital is less than the marginal product per dollar spent on labor, then in order to minimize costs the firm should use

Which of the following "costs" could a firm that wants to remain in business avoid if it halted current production?

Variable costs

Marginal Revenue Product (MRP)

What an additional worker adds to the firm's revenue VMP = MRP = MPL x MR = MPL x P (VMP: Value of the Marginal Product)

Optimizing Rule

When MB > MC, increase input until MB = MC

36. It is profitable to hire units of labor as long as the value of marginal product A. is less than wage. B. exceeds average product. C. equals price. D.exceeds wage.

exceeds wage

constant returns of scale

exist when long-run average costs remain constant as output is increased

cost complementarities

exist when the marginal cost of producing one output is reduced when the output of another product is increased

economies of scope

exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms

economies of scale

exist whenever long-run average costs decline as output increases

diseconomies of scale

exist whenever long-run average costs increase as output increases

average fixed cost (AFC)

fixed costs divided by the number of units of output

short run

in the _ , some factors of production are fixed, and this limits your choices in making input decisions

17. You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces and sells a given output. If w = $40, r = $100, MP L= 4, and MP K = 40 the firm: A. is cost minimizing. B. should use less L and more K to cost minimize. C. should use more K and less L to cost minimize. D. is profit maximizing but not cost minimizing.

should use more K and less L to cost minimize.

marginal benefit equals the marginal cost

to maximize profits, a manager should use inputs at levels at which the _

54. Costs that change as output changes are: A.Variable costs. B. Fixed costs. C. Sunk costs. D. None of the statements associated with this question are correct.

variable costs

average variable cost (AVC)

variable costs divided by the number of units of output

average total cost (ATC)

total cost divided by the number of units of output

24. The production function for a competitive firm is Q = K.5L5 . The firm sells its output at a price of $10, and can hire labor at a wage of $5. Capital is fixed at one unit. The profit-maximizing quantity of labor is A. 2/5. B.1 C. 10. D. none of the statements associated with this question are correct.

1

18. If the production function is Q = K^5L^5 and capital is fixed at 1 unit, then the average product of labor when L = 25 is A. 2/5. B.1/5. C. 10. D. none of the statements associated with this question are correct.

1/5

39. Given the linear production function Q = 10K + 5L, if Q = 10,000 and K = 500, how much labor is utilized? A. 600 units. B. 800 units. C. 500 units. D. 1000 units.

1000 units

8. Suppose the production function is given by Q = 3K + 4L. What is the average product of capital when 5 units of capital and 10 units of labor are employed? A. 3. B. 4. C.11. D. 45.

11

58. What is the average variable cost of producing 50 units of output? A. 21. B. 34. C.14. D. 20.

14

9. For the cost function C(Q) = 100 + 2Q + 3Q 2 , the marginal cost of producing 2 units of output is A. 2. B. 3. C. 12. D.14.

14

11. For the cost function C(Q) = 100 + 2Q + 3Q 2 , the total variable cost of producing 2 units of output is A.16. B. 12. C. 4. D. none of the statements associated with this question are correct.

16

59. What is the average total cost of producing 160 units of output? A. 12.98. B. 16.31. C. 22.04. D. 19.38.

19.38

Given the following table, how many workers should be hired to maximize profits? Labor 12345 Marginal Product labor 8 32 16 -1 -12 vmpl 32 128 64 -4 -48 wage 100 100 100 100 100 A. 1. B.2. C. 3. D. 4.

2

57. What is the total cost of producing 125 units of output? Q 0 20 50 90 125 145 160 FC 1000 VC 0 350 700 1050 1400 1750 2100 A. 1000. B. 2050. C. 1400. D.2400.

2400

Difficulty: Medium 35. What is the value marginal product of labor if: P = $10, MP L= $25, and AP L= 40? A. $10,000. B. $1,000. C. $400. D.$250.

250

If the production function is Q = K.5L.5 and capital is fixed at 1 unit, then the average product of labor when L = 25 is: A. 2/5. B. 1/5. C. 10. D. None of the answers are correct.

B. 1/5.

For the cost function C(Q) = 100 + 2Q + 3Q2, the average fixed cost of producing 2 units of output is: A. 100. B. 50. C. 3. D. 2.

B. 50.

69. Which of the following cost functions exhibits economies of scope when three (3) units of good one and two (2) units of good two are produced? A.C = 50 - 5Q1Q2 + 0.5Q12 + Q22. B. C = 10 + 4Q1Q2+ Q12+ Q22 C. C = 15 + 5Q1Q2+ 2Q1 + 4Q2 D. C = 5 + Q1Q2 + Q12Q22

C = 50 - 5Q1Q2+0.5Q12+ Q22

ATC =

C(Q) / Q =

Suppose the production function is given by Q = K1/2L1/2, and that Q = 30 and K = 25. How much labor is employed by the firm? A. 49 B. 6 C. 36 D. 25

C. 36

Suppose the production function is given by Q = 3K + 4L. What is the average product of capital when 10 units of capital and 10 units of labor are employed? A. 3 B. 4 C. 7 D. 45

C. 7

You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces and sells a given output. If w = $40, r = $100, MPL = 20, and MPK = 40 the firm: A. is cost minimizing. B. should use less L and more K to cost minimize. C. should use more L and less K to cost minimize. D. is profit maximizing but not cost minimizing.

C. should use more L and less K to cost minimize.

Marginal Factor Cost (MFC)

Change in total cost associated with hiring one more unit of an input

Q = f(K,L) = K^(a) x L^(b)

Cobb-Douglas production function =

remain constant as output is increased

Constant returns to scale exist when long-run average costs

For the cost function C(Q) = 100 + 2Q + 3Q2, the marginal cost of producing 2 units of output is: A. 2. B. 3. C. 12. D. 14.

D. 14.

Average fixed cost

Declines continuously as output is expanded

When marginal cost curve is below an average cost curve, average cost is

Declining with output

Change in MP of labor (ΔMPL)

Direct relationship between MPL and MRP (VMP) Inc. MPL --> Inc. MRP --> Inc. demand for labor; MRP shifts right Dec. MPL --> Dec. MRP --> Dec. demand for labor; MRP shifts left

Two firms producing identical products may merge due to the existence of:

Economies of scale

68. For the multiproduct cost function C(Q 1,Q2) = 100 + 2Q1Q2 + 4Q12, what is the marginal cost function for good one? A. MC1 = 2Q2 + 4Q1 - Q22 B.MC1 = 2Q2 + 8Q1 C. MC1= 100 + 2Q1Q2+ 4Q12 D. MC1= 4Q12- 2 Q22

MC1 = 2Q2 + 8Q1

Formula for Marginal Product

MP = ΔQ/ΔL

Which of the following sets of economic data is minimizing the cost of producing a given level of output? A.MPL = 20, MPK= 40, w = $16, r = $32. B. MPL= 20, MPK= 40, w = $32, r = $16. C. MPL = 40, MPK= 20, w = $16, r = $32. D. MPL = 40, MPK = 40, w = $16, r = $32.

MPL= 20, MPK= 40, w = $16, r = $32.

Formula for Marginal Revenue

MR = ΔTR/ΔQ

Formula for Marginal Revenue Product

MRP = MP x MR

22. Which of the following conditions is true when a producer minimizes the cost of producing a given level of output? A. The MRTS is equal to the ratio of input prices. B. The marginal product per dollar spent on all inputs is equal. C. The marginal products of all inputs are equal. D.The MRTS is equal to the ratio of input prices and the marginal product per dollar spent on all inputs is equal.

The MRTS is equal to the ratio of input prices and the marginal product per dollar spent on all inputs is equal.

AVC =

VC(Q) / Q =

isoquant

defines the combination of inputs that yield the same level of output

profit-maximizing input usage rule

defines the demand for an input by a profit-maximizing firm

The marginal rate of technical substitution

is the absolute value of the slope of the isoquant.

52. In order to minimize the cost of producing a given level of output, a firm manager should use more inputs when: A. Its price rises. B. Its price falls. C. Its price remains the same. D. The price of other inputs fall.

its price falls

70. The minimum average cost of producing alternate levels of output, allowing for optimal selection of all variables of production is defined by the: A. Long run average total cost curve. B. Short run average fixed cost curve. C. Short run marginal cost curve. D. Long run marginal cost curve

long run average total cost curve

29 The change in total output attributable to the last unit of an input is the: A. Total product. B. Average product. C.Marginal product. D. Marginal return.

marginal product

34. Total product begins to fall when: A. Marginal product is maximized. B. Average product is below zero. C. Average product is negative. D.Marginal product is zero.

marginal product is zero

23. If the production function is Q = KL and capital is fixed at 1 unit, then the marginal product of labor when L = 25 is A. ¼. B. 1/10. C. 15. D.none of the statements associated with this question are correct.

none of the statements associated with this question are correct

33. If the last unit of input increases total product we know that the marginal product is: A.positive. B. negative. C. zero. D. indeterminate.

positive

cost minimization

producing output at the lowest possible cost

Q = f(K,L)

product function =

28. The creation of a new product is referred to as: A. Process innovation. B. Independent research and development. C.Product innovation. D. Patent disclosure.

product innovation

27. The recipe that defines the maximum amount of output that can be produced with K units of capital and L units of labor is the: A. Production function. B. Technological constraint. C. Research and development schedule. D. Total product.

production function

Formula for Profit

profit = TR - TC

decreasing (diminishing) marginal returns

range of input usage over which marginal product declines

increasing marginal returns

range of input usage over which marginal product increases

14. You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces and sells a given output. If w = $40, r = $100, MP L = 20, and MPK= 40 the firm: A. is cost minimizing. B. should use less L and more K to cost minimize. C. should use more L and less K to cost minimize. D. is profit maximizing but not cost minimizing.

should use more L and less K to cost minimize.

law of diminishing marginal returns

states that the marginal product of an additional unit of an input will at some point be lower than the marginal product of the previous unit

technology

summarizes the feasible means of converting raw inputs, such as steel, labor, and machinery, into an output such as an automoblie

55. Costs that are forever lost after they have been paid are: A. Production costs. B. Fixed costs. C.Sunk costs. D. Variable costs.

sunk cost

67. Which of the following cost functions exhibits cost complementarity? A. -4Q1Q2 + 8Q1 B. -4Q2 + 8Q1. C. 6Q1Q2 - Q1 D. 4Q2Q1 + 8Q1

-4Q1Q2 + 8Q1

5. Suppose the production function is given by Q = min{K, L}. How much output is produced when 10 units of labor and 9 units of capital are employed? A. 0. B. 4. C.9. D. 13.

9

The difference between average total costs and average variable costs is

Average fixed cost

the same level of output.

An isoquant defines the combination of inputs that yield the producer:

Profit-Maximizing Hiring Rule

Hire workers up to the point at which the addition to cost from hiring the last worker is equal to the addition to revenue from hiring the last worker Hire until MRP = MFC = VMP = W for the (last) marginal worker

7 Assumptions of the profit-maximizing hiring decision model

Goal of the firm is to maximize profit Firm sells output in a perfectly competitive market Firm hires workers in a perfectly competitive labor market Firm uses only two inputs: Total Cost = Pmt to Capital + Pmt to Labor Capital fixed (in the short run) Labor is the only variable input

Change in the price of output (ΔP)

Direct relationship between P and MRP (VMP) Inc. P of output --> Inc. MRP --> Inc. demand for labor Dec. P of output --> Dec. MRP --> Dec. demand for labor

AFC =

FC / Q =

13. Which of the following statements is incorrect? A. Fixed costs do not vary with output. B. Sunk costs are those costs that are forever lost after they have been paid. C.Fixed costs are always greater than sunk costs. D. Fixed costs could be positive when sunk costs are zero.

Fixed costs are always greater than sunk costs.

Firm sells output in a perfectly competitive market (explanation)

Individual firms are so small relative to the entire market that it *can sell all it produces at the going market price*. The firm is a "*price-taker*" in the output market and *marginal revenue = price*.

Firm hires workers in a perfectly competitive labor market (explanation)

Individual firms can hire as many constant quality workers as it wants at the going wage rate. The firm is a "price-taker" in the labor market and the marginal cost of labor = marginal factor cost = wage MCL = MFC = W)

If the price of labor increases, in order to minimize the costs of producing a given level of output, the firm manager should use

Less labor and more capital

Formula for Marginal Cost

MC = ΔTC/ΔQ

38. Firm managers should use inputs at levels where the: A. Marginal benefit equals marginal cost. B. Price equals marginal product. C. Value marginal product of labor equals wage. D.Marginal benefit equals marginal cost and value marginal product of labor equals wage.

Marginal benefit equals marginal cost and value marginal product of labor equals wage.

Suppose the marginal product of labor is 10 and the marginal product of capital is 8. If the wage rate is $5 and the price of capital is $2, then in order to minimize costs the firm should use

More capital and less labor

The isoquants are normally drawn with a convex shape because inputs are

Not perfectly substitutable

VPM(capital) =

P x MP(capital) =

VPM(labor) =

P x MP(labor) =

AP(capital) =

Q / K =

AP(labor) =

Q / L =

An isocost line

Represents the combinations of K and L that cost the firm the same amount of money

Diminishing Returns to Labor (Diminishing Marginal Product)

Sets in when MP begins to decline

You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces and sells a given output. If w = $40, r = $100, MPL = 4, and MPK = 40 the firm:

Should use more K and less L to cost minimize

Formula for Total Cost

TC = TVC + TFC

Formula for Total Revenue

TR = P x Q

Marginal Product of Labor (MPL)

The change in output due to hiring one more worker MPL = Δoutput / Δlabor = ΔQ / ΔL

accounting costs and opportunity costs.

The costs of production include:

Derived Demand

The demand for an input is *derived from the demand for the output* the input helps produced. Hiring does not depend on utility of hiring, but because labor helps produce an output that can be sold for profit.

Which of the following conditions is true when a producer minimizes the cost of producing a given level of output?

The marginal product per dollar spent on all inputs is equal

In the short run, the marginal cost curve crosses the average total cost curve at

The minimum point of the average total cost curve

Using additional units of input reduces total product

The range over which marginal product is negative

It is profitable to hire labor so long as the

VMPL is greater than wage

negative

a _ marginal product means that the last unit of input actually reduced the total product

sunk cost

a cost that is forever lost after it has been paid

long-run average cost curve

a curve that defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of both fixed and variable factors of production

sunk costs

a decision maker should ignore _ to maximize profits or minimize losses

multiproduct cost function

a function that defines the cost of producing given levels of two or more types of outputs assuming all inputs are used efficiently

short-run cost function

a function that defines the minimum possible cost of producing each output level when variable factors are employed in the cost-minimizing fashion

isocost line

a line that represents the combinations of inputs that will cost the producer the same amount of money

linear production function

a production function that assumes a perfect linear relationship between all inputs and total output

Cobb-Douglas production function

a production function that assumes some degree of substitutability among inputs

Leontief production function

a production function that assumes that inputs are used in fixed proportions

law of diminishing marginal rate of technical substitution

a property of a production function stating that as less of one input is used, increasing amounts of another input must be employed to produce the same level of output

fixed-proportions production function

also called Leontief Production Function; a production function with L-shaped isoquants so that only one combination of labor and capital can be used

production function

an engineering relation that defines the maximum amount of output that can be produced with a given set of inputs

Sunk costs are those costs that

are forever lost after they have been paid.

12. If a firm's production function is Leontief and the wage rate goes up the A. firm must use more labor in order to minimize the cost of producing a given level of output. B. firm must use more capital in order to minimize the cost of producing a given level of output. C. firm must use less labor in order to minimize the cost of producing a given level of output. D.cost minimizing combination of capital and labor does not change.

cost minimizing combination of capital and labor does not change.

fixed costs

costs that do not change with changes in output; include the costs of fixed inputs used in production

16. The production function for a competitive firm is Q = K.5L.5 . The firm sells its output at a price of $10, and can hire labor at a wage of $5. Capital is fixed at 25 units. The profit-maximizing quantity of labor is A. 1. B. 2. C. 10. D.none of the statements associated with this question are correct.

none of the statements associated with this question are correct

19. For a cost function C = 100 + 10Q + Q 2 , the marginal cost of producing 10 units of output is A. 10. B. 200. C. 210. D.none of the statements associated with this question are correct.

none of the statements associated with this question are correct

negative marginal returns

range of input usage over which marginal product is negative

An isocost line

represents the combinations of K and L that cost the firm the same amount of money.

26. The feasible means of converting raw inputs such as steel, labor, and machinery into an output are summarized by: A. Land. B. Production. C. Capital. D.Technology.

technology

1. total product 2. average product 3. marginal product

the 3 most important measures of productivity:

Q = f(K,L) = min {aK,bL}

the Leontief production function =

marginal (incremental) cost (MC)

the change in total costs arising from a change in the managerial control variable Q

marginal product (MP)

the change in total output attributable to the last unit of an input

accounting costs

the costs most associated with the costs of producing

long run

the horizon over which the manager can adjust all factors of production

variable factors of production

the inputs the manager can adjust to alter production

fixed factors of production

the inputs the manager cannot adjust in the short run

Q = f(K,L) = aK + bL

the linear production function =

1. to ensure that the firm operates on the production function 2. to ensure that the firm uses the correct level of inputs

the manager's role in guiding the production process is twofold:

total product (TP)

the maximum level of output that can be produced with a given amount of inputs

marginal rate of technical substitution (MRTS)

the rate at which a producer can substitute between two inputs and maintain the same level of output

53. Fixed costs exist only in: A. The long run. B. Capital intensive markets. C.The short run. D. Labor intensive markets.

the short run

total cost

the sum of fixed and variable costs

short run

the time frame in which there are fixed factors of production

value marginal product

the value of the output produced by the last unit of an input