Econ exam 2
An isocost line reveals the
input combinations that can be purchased with a given outlay of funds.
An isoquant
is a curve that shows all the combinations of inputs that yield the same total output.
According to the law of diminishing returns
the marginal product of an input will eventually decline.
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
the marginal product of labor is 3 times the marginal product of capital.
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average total cost?
5 + (200/Q)
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the variable cost?
5Q
When the average product is decreasing, marginal product
is less than average product.
The function which shows combinations of inputs that yield the same output is called a(n)
isoquant curve
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
isoquants have negative slope
The slope of the total product curve is the
marginal product
The rate at which one input can be reduced per additional unit of the other input, while holding output constant, is measured by the
marginal rate of technical substitution
The law of diminishing returns refers to diminishing
marginal returns
The total cost of producing a given level of output is
minimized when the ratio of marginal product to input price is equal for all inputs.
A production function assumes a given
technology.
Assume that average product for six workers is fifteen. If the marginal product of the seventh worker is eighteen,
average product is rising.
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:
equal zero.
TC = 4000 + 5Q + 10Q2. Average Variable Cost
TVC/Q = (5Q + 10Q^2)/ Q = 5+10Q
A firm's expansion path is
a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices.
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 fixed cost.
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the fixed cost?
200
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
All of the above
Which of the following costs always declines as output increases?
Average fixed cost
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.
I is false, and II is true.
TC = 4000 + 5Q + 10Q2. Marginal Cost
MC = 5 + 20Q
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?
MP = 5K
Which of the following is true of cost curves?
The MC curve goes through the minimum of both the AVC curve and the ATC curve.
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
The fact that input prices are positive
Which always increase(s) as output increases?
Total Cost and Variable Cost
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?
Yes.
As we move downward along a typical isoquant, the slope of the isoquant
becomes flatter.
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
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
could reduce the cost of producing its current output level by employing more labor and less capital.
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
the ratio of the marginal product of waste water to the marginal product of machinery.
The law of diminishing returns applies to
the short run only.
At every output level, a firm's short-run average cost (SAC) equals or exceeds its long-run average cost (LAC) because
there are at least as many possibilities for substitution between factors of production in the long run as in the short run.
At the current level of output, long-run marginal cost is $50 and long-run average cost is $75. This implies that:
there are economies of scale.
The law of diminishing returns assumes that
there is at least one fixed input
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
two
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
use 0.8 fewer units of capital.
A straight-line isoquant
would indicate that capital and labor are perfect substitutes in production.
An L-shaped isoquant
would indicate that capital and labor cannot be substituted for each other in production
The MRTS for isoquants in a fixed-proportion production function is:
zero or undefined
Writing total output as Q, change in output as ΔQ, total labor employment as ΔL, and change in labor employment as L, the marginal product of labor can be written algebraically as
ΔQ / ΔL.
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?
$15.00 per hour
The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced. The total cost to produce 50 cookies is
$20
The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced. The total cost to produce 100 cookies is
$25.00
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the marginal cost?
5
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
A) An increase in the size of the labor force
TC = 4000 + 5Q + 10Q2. Average Fixed Cost
AFC = 4000/Q
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?
AP = 5K
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
All of the above
Which of the following inputs are variable in the long run? A) labor. B) capital and equipment. C) plant size. D) all of these.
All of these
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.
Carolyn can determine all of the above costs given the information provided.
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) A and B only
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.
E) None of the above is necessarily correct.
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
I is false, and II is true.
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.
I is false, and II is true.
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?
The firm will only use the input with lower cost
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
below average total cost
In a production process, all inputs are increased by 10%; but output increases less than 10%. This means that the firm experiences
decreasing returns to scale
If the isoquants are straight lines, then
the marginal rate of technical substitution of inputs is constant.
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?
AP = 3 cars per worker
TC = 4000 + 5Q + 10Q2. Average Total Cost
ATC = TC/Q = (4000 +5Q +10Q^2)/Q
From Example 7.2, most pizza restaurants have large fixed costs and relatively low variable costs. What does this tell us about the average variable cost (AVC) of producing pizza?
AVC is relatively low
Which of the following statements is true regarding the differences between economic and accounting costs?
Accounting costs include only explicit costs.
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.
B and C are correct.
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.
Both I and II are false.
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.
Both I and II are false.
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.
Both I and II are true.
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.
Both I and II are true.
In the short run, the point at which diminishing marginal returns to labor begin is the point at which the marginal cost curve
Bottoms out
Why do firms tend to experience decreasing returns to scale at high levels of output?
Firms face more problems with coordinating tasks and communications among managers and workers at very high levels of output.
D) Nuclear power plant
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
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.
I and II are both true.
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.
I and II are both true.
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.
I is true, and II is false.
I. Increasing returns to scale cause economies of scale. II. Economies of scale cause increasing returns to scale.
I is true, and II is false.
I. Isoquants cannot cross one another. II. An isoquant that is twice the distance from the origin represents twice the level of output
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?
MP = 1.5 cars
What describes the graphical relationship between average product and marginal product?
Marginal product cuts average product from above, at the maximum point of average product.
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.
May be any 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?
Neither, the costs are identical
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?
No, the marginal product of labor is constant (for a given K).
Does it make sense to consider the returns to scale of a production function in the short run?
No, we cannot change all of the production inputs in the short run.
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 percent
Marginal Cost is
Positive or zero
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
Rising marginal cost implies that average total cost is also rising.
TC = 4000 + 5Q + 10Q2. Total Fixed Cost:
TFC = 4000
TC = 4000 + 5Q + 10Q2. Total Variable Cost
TVC = TC - TFC TVC = 5Q + 10Q2
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?
The short-run average cost curve reveals nothing regarding returns to scale.
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 production function
The short run is
a time period in which at least one input is fixed
If the law of diminishing returns applies to labor then
after some level of employment, the marginal product of labor must fall.
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:
an isoquant.
The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced. For 100 cookies, the average total cost is
falling.
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 wil
follow the 45-degree line from the origin.
From Equation (7.1) in the book, the short-run marginal cost of production is MC = w/MPL. Based on this equation, which of the following statements is NOT true? A) If the marginal product of labor is constant, then MC is constant. B) If the marginal product of labor is a concave curve, then the MC curve is also concave. C) If the marginal product of labor is a concave curve, then the MC curve is U-shaped. D) MC increases as the marginal product of labor declines.
if the marginal product of labor is a concave curve, then the MC curve is also concave.
Increasing returns to scale in production means
less than twice as much of all inputs are required to double output.
A production function in which the inputs are perfectly substitutable would have isoquants that are
linear.
When there are economies of scale
long-run marginal cost is declining.
In a short-run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus,
marginal cost is below average variable cost.
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average fixed cost? A) 500 B) 5Q C) 5 D) 5 + (200/Q) E) none of the above
none of the above
When an isocost line is just tangent to an isoquant, we know that
output is being produced at minimum cost
Fixed costs are fixed with respect to changes in
output.
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
rate at which the firm can replace capital with labor without changing the output rate.
The marginal rate of technical substitution is equal to the
ratio of the marginal products of the inputs.
The marginal product of an input is
the addition to total output due to the addition of the last unit of an input, holding all other inputs constant.
When labor usage is at 12 units, output is 36 units. From this we may infer that
the average product of labor is 3.
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
the average product of labor is always equal to the marginal product of labor
The difference between the economic and accounting costs of a firm are
the opportunity costs of the factors of production that the firm owns.
A firm wants to minimize the total cost of producing 100 tons of dynamite. The firm uses two factors of production, chemicals and labor. The combination of chemicals and labor that minimizes production costs will be found where
the production of an additional unit of dynamite costs the same regardless of whether chemicals or labor are used
Marginal product crosses the horizontal axis (is equal to zero) at the point where
total product is maximized
