MICROECONOMICS CH 6
7) Technological improvement
D) All of the above are true.
21) Refer to Figure 6.1. Which of the following statements is false?
D) At point E the average product of labor is negative.
11) Use the following two statements to answer this question:
D) Both I and II are false.
20) The marginal rate of technical substitution is equal to:
E) A and B only, A) the absolute value of the slope of an isoquant. AND B) the ratio of the marginal products of the inputs.
II. TRUE
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 TRUE
Isoquants cannot cross one another.
I. TRUE
Production functions describe what is technically feasible when the firm operates efficiently.
I. FALSE
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. TRUE
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.
9) Use the following two statements to answer this question:
TRUE If the marginal product of labor is zero, the total product of labor is at its maximum. FALSE If the marginal product of labor is at its maximum, the average product of labor is falling.
I. TRUE
The numerical labels attached to indifference curves are meaningful only in an ordinal way.
II. FALSE
The numerical labels attached to isoquants are meaningful only in an ordinal way.
II. FALSE
The production function shows the least cost method of producing a given level of output.
II. FALSE
An isoquant that is twice the distance from the origin represents twice the level of output.
23) Michael's Dairy farm production function is given by y(K, L) = 2 , where K is the number of machine milkers and L is the amount of labor hours he uses. Does this production function exhibit increasing, constant or decreasing returns to scale? Holding the number of machine milkers constant at 16, is the marginal product of labor increasing, constant or decreasing as more labor is used?
Answer: Since y(1.1K, 1.1L) = 2 = (2 ) < (1.1)y(K, L), we know the production process exhibits decreasing returns to scale. Holding the number of machine milkers constant at 16 will still result in a downward sloping marginal product of labor curve. That is, the marginal product of labor decreases as more labor is used.
22) Bridget's Brewery production function is given by y(K, L) = 2 , where K is the number of vats she uses and L is the number of labor hours. Does this production process exhibit increasing, constant or decreasing returns to scale? Holding the number of vats constant at 4, is the marginal product of labor increasing, constant or decreasing as more labor is used?
Answer: Since y(1.1K, 1.1L) = 2 = 1.1(2 ) = 1.1y(K, L), we know the production process exhibits constant returns to scale. Holding the number of vats constant at 4 will still result in a downward sloping marginal product of labor curve. That is the marginal product of labor decreases as more labor is used.
7) The situation pictured in Figure 6.2
C) is consistent with diminishing marginal product.
15) A production function in which the inputs are perfectly substitutable would have isoquants that are
C) linear.
2) The slope of the total product curve is the
C) marginal product.
6) Refer to Figure 6.2. The situation pictured is one of
E) increasing returns to scale, because doubling inputs results in more than double the amount of output.
6) When the average product is decreasing, marginal product
E) is less than average product.
9) The situation pictured in Figure 6.3
E) shows diminishing marginal products of labor and capital.
5) The marginal product of an input is
E) the addition to total output due to the addition of the last unit of an input, holding all other inputs constant.
22) A straight-line isoquant
E) would indicate that capital and labor are perfect substitutes in production.
18) The diagram below shows an isoquant for the production of wheat.
PONT D
4) Use the following two statements to answer this question:
PRODUCTION TRUE - THE PROD FALSE
31) 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
25) Which would not increase the productivity of labor?
A) An increase in the size of the labor force
20) Why do firms tend to experience decreasing returns to scale at high levels of output?
A) Firms face more problems with coordinating tasks and communications among managers and workers at very high levels of output.
37) Which of the following statements does not explain why US health care expenditures are higher than in other countries?
A) Government policies have shifted the health care production function downward over time.
29) For Figure 6.9 in the book, 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
2) A production function assumes a given
A) TECHNOLOGY
10) As we move downward along a typical isoquant, the slope of the isoquant
A) becomes flatter.
17) An examination of the production isoquants in the diagram below reveals that:
A) capital and labor will be used in fixed proportions.
12) A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function C = L0.5 + M0.75. This production function exhibits
A) decreasing returns to scale for all output levels.
2) In a production process, all inputs are increased by 10%; but output increases less than 10%. This means that the firm experiences
A) decreasing returns to scale.
6) The function which shows combinations of inputs that yield the same output is called a(n)
A) isoquant curve.
26) A construction company builds roads with machinery (capital, K) and labor (L). If we plot the isoquants for the production function so that labor is on the horizontal axis, then a point on the isoquant with a small MRTS (in absolute value) is associated with high ________ use and low ________ use.
A) labor, capital
12) 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.
19) Refer to Figure 6.1. At point A, the marginal product of labor is
A) rising.
15) The law of diminishing returns applies to
A) the short run only.
9) The law of diminishing returns assumes that
A) there is at least one fixed input.
41) A bakery operating in the short run has found that when the level of employment in its baking room was increased from 4 to 10, in increments of one, its corresponding levels of production of bread were 110, 115, 122, 127, 130, 132, and 133.
A. CALCULATE THE MPL AND EXPLAIN THIS PRODUCTION FUNCTION EXHIBITS DIMINISHING MARGINAL PRODUCTIVITY OF LABOR
24) Leann's Telecommunication firm production function is given by y(K, L) = 200 , where K is the number of internet servers and L is the number of labor hours she uses. Does this production function exhibit increasing, constant or decreasing returns to scale? Holding the number of internet servers constant at 8, is the marginal product of labor increasing, constant or decreasing as more labor is used?
Answer: Since y(1.1K, 1.1L) = 200 = (200 ) > 1.1y(K, L), we know the production process exhibits increasing returns to scale. Holding the number of internet servers constant at 8 will still result in a downward sloping marginal product of labor curve. That is, the marginal product of labor decreases as more labor is used.
25) Homer's boat manufacturing plant production function is y(K, L) = where K is the number of hydraulic lifts and L is the number of labor hours he employs. Does this production function exhibit increasing, decreasing or constant returns to scale? At the moment, Homer uses 20,000 labor hours and 50 hydraulic lifts. Suppose that Homer can use any amount of either input without affecting the market costs of the inputs. If Homer increased his use of labor hours and hydraulic lifts by 10%, how much would his production increase? Increasing the use of both inputs by 10% will result in Homer's costs increasing by exactly 10%. If Homer increases his use of all inputs by 10%, what will increase more, his production or his costs? Given that Homer can sell as many boats as he produces for $75,000, does his profits go up by 10% with a 10% increase in input use?
Answer: Since y(1.1K, 1.1L) = = ( ) < 1.1y(K, L), we know the production process exhibits decreasing returns to scale. Increasing input use by 10% will result in production increasing by less than 10%. According to the equation above, output would increase by about 6.9%. Since Homer can sell as many boats as he likes for $75,000, we know that Homer's revenue increases by 6.9%. Since costs go up by a larger amount than revenue, Homer's profits will not increase by 10%. This can be shown as follows: = TR(L, K) - (1.1)TC(L, K) < (1.1){TR(L, K) - TC(L, K)} = (1.1) .
26) Marge's Hair Salon production function is y(K, L) = where K is the number of hair dryers and L is the number of labor hours she employs. Does this production function exhibit increasing, decreasing, or constant returns to scale? At the moment, Marge uses 16 labor hours and 16 hair dryers. Suppose that Marge can use any amount of either input without affecting the market costs of the inputs. If Marge increased her use of labor hours and hair dryers by 10%, how much would her production increase? Increasing the use of both inputs by 10% will result in Marge's costs increasing by exactly 10%. If Marge increases her use of all inputs by 10%, what will increase more, her production or her costs? Given that Marge earns $12.50 for each unit produced, do her profits go up or down when she increases her input use by 10%?
Answer: Since y(1.1K, 1.1L) = = (1.1)( ) = 1.1y(K, L), we know the production process exhibits constant returns to scale. Increasing input use by 10% will result in production increasing by 10%. According to the equation above, output would increase by 10%. Since Marge can sell as many units as she likes for $12.50, we know that Marge's revenue increase by 10%. Since costs go up by the same amount as revenue, Marge's profits go up by 10% = (1.1) TR(L, K) - (1.1)TC(L, K) = (1.1){TR(L, K) - TC(L, K)} = (1.1) .
27) Apu's Squishy production function is y(K, L) = K where K is the number of squishy machines and L is the number of labor hours he employs. Does this production function exhibit increasing, decreasing or constant returns to scale? At the moment, Apu uses 2 squishy machines and 4 labor hours. Suppose that Apu can use any amount of either input without affecting the market costs of the inputs. If Apu increased his use of labor hours and squishy machines by 100%, how much would his production increase? Increasing the use of both inputs by 100% will result in Apu's costs increasing by exactly 100%. If Apu increases his use of all inputs by 100%, what will increase more his production or his costs? Given that Apu can sell as many squishies as he produces for $1.00, do his profits go up or down when he increases his input use by 100%?
Answer: Since y(2K, 2L) = (2K) = (K ) > 2y(K, L), we know the production process exhibits increasing returns to scale. Increasing input use by 100% will result in production increasing by more than 100%. Since Apu can sell as many units as he likes for $1.00, we know that Apu's revenue increases by more than 100%. Since costs go up by only 100%, Apu's profits go up by more than 100%. This can be shown as follows: = TR(L, K) - (2)TC(L, K) > (2){TR(L, K) - TC(L, K)} = (2) .
47) Laura's Internet Services firm can design computer systems according to the function y(K, L) = , where K is the amount of gigabyte storage she has available and L is the amount of labor hours she employs. Currently, Laura has 125 gigabytes of storage. Sketch the change in the marginal product of labor curve for Laura's firm for values of L= 1, 2, 3, 4, and 5, if she increases her gigabyte storage capacity to 216.
Answer: We can approximate the change in the marginal product of labor as indicated in the following table. The marginal product of labor has increased when Laura added additional storage capacity.
33) 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?
B) AP = 5K
28) Consider the following statements when answering this question;
B) I is false, and II is true.
29) Consider the following statements when answering this question;
B) I is false, and II is true.
5) Use the following statements to answer this question.
B) I is true, and II is false. THE NUMERICAL TABLES ATTACHED TO INDIFFERENCE CURVES ARE MEANINGFUL ONLYIN AN ORDINAL WAY AND FALSE THAT NUMERICAL LABELS ATTACHED TO ISOQUANTS ARE MEANINGFUL ONLY IN AN ORDINAL WAY
3) Use the following two statements to answer this question:
B) I is true, and II is false.ISOQUANTS CANNOT CROSS ONE ANOTHER AND FALSE THAT AN ISOQUAT THAT IS TWICE THE DISTANCE FROM THE ORIGIN REPRESENTS TWICE THE LEVEL OF OUTPUT
30) 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?
B) MP = 1.5 cars
34) 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?
B) MP = 5K
12) Some economists conduct empirical research on the theory of the firm by measuring the degree of technical efficiency achieved by actual firms. What type of research contributions are provided by these studies?
B) Positive
9) Suppose there are ten identical manufacturing firms that produce computer chips with machinery (capital, K) and labor (L), and each firm has a production function of the form q = 10KL0.5. What is the industry-level production function?
B) Q = 100KL0.5
31) Joe's Organic Cereal Company produces granola breakfast cereal under a fixed proportion production system in which 22 ounces of cereal are packaged in each cardboard box. However, the plant production manager decides to reduce the amount of cereal per box to 20.5 ounces at the start of the next year. For the isoquant map, cereal is plotted in the vertical axis, and boxes are on the horizontal axis. What happens to the curves in the isoquant map as a result of this change?
B) Shift downward
2) 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:
B) an isoquant.
23) For consideration of such issues as labor's productivity growth nationwide, the relevant measure is the
B) average product of labor.
4) With increasing returns to scale, isoquants for unit increases in output become
B) closer and closer together.
4) 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
B) isoquants have negative slope
3) Increasing returns to scale in production means
B) less than twice as much of all inputs are required to double output.
11) The rate at which one input can be reduced per additional unit of the other input, while holding output constant, is measured by the
B) marginal rate of technical substitution.
3) The law of diminishing returns refers to diminishing
B) marginal returns.
20) Refer to Figure 6.1. At which point on the total product curve is the average product of labor the highest?
B) point B.
30) Suppose the production of long-distance airline flights is described by a fixed proportion production process in which three crew members (i.e., labor) are required for each aircraft (i.e., capital). If the airline operates with four crew members per plane, then we know that:
B) production at this point is technically inefficient.
11) 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:
B) technologically inefficient.
12) 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
B) the average product of labor is always equal to the marginal product of labor
22) Refer to Figure 6.1. At point C
B) the average product of labor is greater than the marginal product of labor.
14) If the isoquants are straight lines, then
B) the marginal rate of technical substitution of inputs is constant.
17) Marginal product crosses the horizontal axis (is equal to zero) at the point where
B) total product is maximized.
21) 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
B) use 0.8 fewer units of capital.
13) Consider the following statements when answering this question;
BOTH ARE FALSE If a technology exhibits diminishing returns then it also exhibits decreasing return to scale AND If a technology exhibits decreasing returns to scale then it also exhibits diminishing returns.
18) Use the following statements to answer this question:
BOTH ARE FALSE We cannot measure the returns to scale for a fixed-proportion production function. AND Production functions with inputs that are perfect substitutes always exhibit constant returns to scale.
15) Which scenario below would lead to lower profits as we double the inputs used by the firm?
C) Constant returns to scale with rising input prices (perhaps because the firm is not a price-taker in the input markets)
14) Which of the following equations based on capital (K) and labor (L) inputs does not represent a plausible production function?
C) F(K,L) = K + L - 1
27) What describes the graphical relationship between average product and marginal product?
C) Marginal product cuts average product from above, at the maximum point of average product.
1) An isoquant
C) is a curve that shows all the combinations of inputs that yield the same total output.
19) In Example 6.5 in the book, the authors use the observed production data from the U.S. carpet industry to show that small firms likely have constant returns to scale and that large firms likely have increasing returns to scale. Are returns to scale in this industry likely to continue increasing as these firms become even larger?
C) No, the authors predict that returns to scale in carpet production will likely decline at some point.
35) 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?
C) No, the marginal product of labor is constant (for a given K).
19) Which of the following is NOT related to the slope of isoquants?
C) The fact that input prices are positive
38) As an economy recovers from a recession, the observed level of labor productivity tends to decline. Why?
C) The marginal product of labor declines as new workers enter the expanding work force.
3) 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
C) a production function.
18) Assume that average product for six workers is fifteen. If the marginal product of the seventh worker is eighteen,
C) average product is rising.
16) The Malthusian dilemma relates to marginal product in that
C) because of diminishing marginal product, the amount of food produced by each additional member of the population decreases.
8) An upward sloping isoquant
C) cannot be derived from a production function when a firm is assumed to maximize profits
11) If input prices are constant, a firm with increasing returns to scale can expect
C) costs to go up less than double as output doubles.
8) Refer to Figure 6.3. The situation pictured is one of
C) decreasing returns to scale, because doubling inputs results in less than double the amount of output.
24) If the isoquants in an isoquant map are downward sloping but bowed away from the origin (i.e., concave to the origin), then the production technology violates the assumption of:
C) diminishing marginal returns.
1) A production function defines the output that can be produced
C) if the firm is technically efficient.
10) A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function C = L0.5M0.75. This production function exhibits
C) increasing returns to scale for all output levels
1) According to the diagram below, where each isoquant's output level is marked to the right of the isoquant, production is characterized by
C) increasing returns to scale.
8) 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?
C) q = 9L
16) Which of the following production functions exhibits constant returns to scale?
C) q = K + L
5) A farmer uses L units of labor and K units of capital to produce Q units of corn using a production function F(K,L). A production plan that uses K' = L' = 10 to produce Q' units of corn where Q' < F(10, 10) is said to be
C) technically feasible and inefficient.
24) The link between the productivity of labor and the standard of living is
C) that over the long run, consumers as a whole can increase their rate of consumption only by increasing labor productivity.
4) When labor usage is at 12 units, output is 36 units. From this we may infer that
C) the average product of labor is 3.
26) One of the factors contributing to the fact that labor productivity is higher in the U.S. than in the People's Republic of China is
C) the higher capital/labor ratio in the U.S.
28) 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.
C) two
16) Wally describes himself as a resilient fundamentalist when it comes to making investments in the stock market. At the moment, Wally uses only periodicals from the library when analyzing corporate fundamentals. The number of firms he can analyze in a day is given by the function: y(L) = 2 , where L is the number of hours a day he works. Sketch Wally's total number of firms analyzed as he increases his hours of work. If Wally begins using internet sources to learn about corporate fundamentals, the number of firms he can analyze in a day is given by the function: y(L) = 5 Sketch Wally's total number of firms analyzed as he increases his hours of work and uses the internet.
CH 6
32) An important factor that contributes to labor productivity growth is:
D) A and B only GROWTH IN THE CAPITAL STOCK AND TECHNOLOGICAL CHANGE
16) An examination of the production isoquants in the diagram below reveals that: GRAPH
D) Both B and C are correct. B) capital and labor are perfectly substitutable. AND C) except at the corners of the isoquants the MRTS is constant.
5) Use the following two statements to answer this question:
D) Both I and II are false. "Decreasing returns to scale" and "diminishing returns to a factor of production" are two phrases that mean the same thing. AND Diminishing returns to all factors of production implies decreasing returns to scale.
8) Which of the following ideas were central to the conclusions drawn by Thomas Malthus in his 1798 "Essay on the Principle of Population"?
D) Law of diminishing returns
17) Does it make sense to consider the returns to scale of a production function in the short run?
D) No, we cannot change all of the production inputs in the short run.
10) 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?
D) Nuclear power plant
21) 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?
D) Output decreases by more than 25 percent
7) The short run is
D) a time period in which at least one input is fixed.
27) Which of the following examples represents a fixed-proportion production system with capital and labor inputs?
D) all of the above
6) Which of the following inputs are variable in the long run?
D) all of these.
14) The textbook discusses the carpet industry situated in the southeastern U.S., and the authors indicate that smaller carpet mills have ________ returns to scale while larger mills have ________ returns to scale.
D) constant, increasing
13) The marginal rate of technical substitution is equal to the
D) ratio of the marginal products of the inputs.
36) The concerns about world food production raised by Malthus have not materialized because:
D) technological improvements have increased our ability to produce food over time.
10) According to the law of diminishing returns
D) the marginal product of an input will eventually decline.
23) An L-shaped isoquant
D) would indicate that capital and labor cannot be substituted for each other in production.
25) The MRTS for isoquants in a fixed-proportion production function is:
D) zero or undefined.
1) Writing total output as Q, change in output as Q, total labor employment as L, and change in labor employment as L, the marginal product of labor can be written algebraically as
D) ΔQ / ΔL.
7) Two isoquants, which represent different output levels but are derived from the same production function, cannot cross because
E) Both B and D are true. THIS WOULD VIOLATE A TECHNICAL EFFICIENCY CONDITION AND ADDITIONAL INPUTS WILL NOT BE USED BY PROFIT MAXIMIZING FIRMS IF THOSE INPUTS DECREASE OUTPUT
14) If the law of diminishing returns applies to labor then
E) after some level of employment, the marginal product of labor must fall.
13) At a given level of labor employment, knowing the difference between the average product of labor and the marginal product of labor tells you
E) how increasing labor use alters the average product of labor.
15) Ronald's Outboard Motor Manufacturing plant production function is y(K, L) = 25 . Ronald is investigating a new outboard motor manufacturing technique. Ronald believes that if he adopts the new technique, his production function for outboard motors will become: y(K, L) = 36 . Given that Ronald uses 4 units of machine hours, sketch his production function with the old technique and the new technique as he increases labor hours. With the new technique, do labor hours contribute more to production?
The slope of the new production function is steeper for all labor uses. This implies the marginal product of labor is higher for the new technique. This means that labor hours are contributing at a higher rate for the new technique.
I.FALSE
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.