Quiz 5

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

E

A production function defines the output that can be produced if the firm is technically efficient. at the lowest cost, given the inputs available. as technology changes over time. for the average firm. in a given time period if no additional inputs are hired.

A

A variable cost function of the form: implies a marginal cost curve that is Upward sloping. quadratic. U-shaped. constant.

A

A variable cost function of the form: implies a marginal cost curve that is upward sloping. U-shaped. constant. quadratic.

A

Which of the following costs always declines as output increases? Average fixed cost Marginal cost Fixed cost Average variable cost Average cost

A

Consider the following statements when answering this question. I. A technology with increasing returns to scale will generate a long-run average cost curve that has economies of scale. II. Diminishing returns determines the slope of the short-run marginal cost curve, whereas returns to scale determine the slope of the long-run marginal cost curve. I is false, and II is true. Both I and II are true. Both I and II are false. I is true, and II is false.

B

A variable cost function of the form: VC = 52 + 2Q + 3Q2 implies a marginal cost curve that is quadratic. U-shaped. upward sloping. constant.

C

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

D

An L-shaped isoquant would indicate that capital and labor cannot be substituted for each other in production. would indicate that the firm could switch from one output to another costlessly. would indicate that capital and labor are perfect substitutes in production. is impossible. would indicate that the firm could not switch from one output to another.

A

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. Yes, returns to scale determine the diminishing marginal returns of the inputs. Yes, this is an important short-run characteristic of production functions. No, returns to scale is a property of the consumer's utility function.

A

Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making? I. "Even though I hate my MBA classes, I can't quit because I've spent so much money on tuition." II. "To break into the market for soap our firm needs to spend $10M on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account." II only Neither I nor II Both I and II I only

A

Scenario 7.2: The production function for earthquake detectors (Q) is given as follows: Q = 4K1/2L1/2 where K is the amount of capital employed and L is the amount of labor employed. The price of capital, PK, is $18 and the price of labor, PL, is $2. Refer to Scenario 7.2. This production function is an example of which of the following types of production functions? Lagrange Cobb-Douglas Leontief Fixed proportions none of the above

B

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). If the wage rate paid to the pilots increases relative to the rental rate of capital for the airplanes, then: the optimal capital-labor ratio should increase. the optimal capital-labor ratio remains the same. the optimal capital-labor ratio should decrease. We do not have enough information to answer this question.

B

The key assumption required for us to use a linear variable cost function of the form VC = bq is that: marginal cost must be increasing at rate b. marginal cost must be constant and equal to b. marginal cost is always greater than average variable cost. fixed costs must be zero.

B

The law of diminishing returns refers to diminishing average returns. total returns. marginal returns. all of these.

C

Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be 25/20 or 1.25. 25/500. -4/5. 500.

C

Fixed costs are fixed with respect to changes in time. wages. output. capital expenditure.

C

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? Yes, this is true for all values of K. Yes, if capital also exhibits diminishing marginal returns. No, the marginal product of labor is constant (for a given K). No, the marginal product of labor is increasing (for a given K).

C

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? q = 3K2 q = 3L q = 9L q = 3L2

C

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 ΔL / ΔQ. ΔQ ∙ L. ΔQ / ΔL. Q / L.

C

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 ΔQ ∙ L. ΔL / ΔQ. ΔQ / ΔL. Q / L.

C

A cubic cost function implies: a U-shaped average variable cost curve. a U-shaped average cost curve. a U-shaped marginal cost curve. all of the above

D

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 firm experiences increasing, constant, and decreasing returns in that order. The firm experiences increasing returns to scale. The firm experiences first decreasing, then increasing returns to scale. The short-run average cost curve reveals nothing regarding returns to scale.

D

A production function defines the output that can be produced in a given time period if no additional inputs are hired. for the average firm. as technology changes over time. if the firm is technically efficient. at the lowest cost, given the inputs available.

D

For any given level of output: average fixed cost must be greater than average variable cost. average variable cost must be greater than average fixed cost. marginal cost must be greater than average cost. fixed cost must be greater than variable cost. None of the above is necessarily correct.

E

In the long run, which of the following is considered a variable cost? Expenditures for capital machinery and equipment Expenditures for research and development Expenditures for wages Expenditures for raw materials all of the above

E

The marginal product of an input is total product divided by the amount of the input used to produce this amount of output. the addition to total output that adds nothing to total revenue. the addition to total output due to the addition of one unit of all other inputs. the addition to total output that adds nothing to profit. the addition to total output due to the addition of the last unit of an input, holding all other inputs constant.

E

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 as more labor is used, the average product of labor falls the average product of labor is always greater that the marginal product of labor the average product of labor is always less than the marginal product of labor there is no unambiguous relationship between labor's marginal and average products.

A

Which of the following equations based on capital (K) and labor (L) inputs does not represent a plausible production function? F(K,L) = 3KL F(K,L) = 10(KL)0.5 F(K,L) = K + L - 1 F(K,L) = 3K

C

Which of the following relationships is NOT valid? When marginal cost is below average total cost, the latter is falling. When marginal cost is above average variable cost, AVC is rising. Rising marginal cost implies that average total cost is also rising. none of the above

C

With increasing returns to scale, isoquants for unit increases in output become farther and farther apart. the same distance apart. closer and closer together. none of these.

C

Scenario 7.3: Use the production function: Q = 4L1/2K1/2. Refer to Scenario 7.3. Suppose that the price of labor is $5 and the price of capital is $20. Your firm desires to produce 200 units of output. How much labor will be hired to minimize the costs of producing 200 units of output? 100 25 200 50 none of the above

A

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. the addition to total output that adds nothing to profit. total product divided by the amount of the input used to produce this amount of output. the addition to total output due to the addition of one unit of all other inputs. the addition to total output that adds nothing to total revenue.

A

Use the following two statements to answer this question: 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 is false, and II is true. Both I and II are false. Both I and II are true.

A

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? Fly by Night. Neither, the costs are identical. Fly Right. Neither, Fly by Night has lower costs at small output levels and Fly Right has lower costs at high output levels.

B

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. Both I and II are true. I is true, and II is false. Both I and II are false. I is false, and II is true.

B

An isoquant cannot have a negative slope. is a curve that shows all possible output levels that can be produced at the same cost. is a curve that shows all the combinations of inputs that yield the same total output. must be linear. is a curve that shows the maximum total output as a function of the level of labor input.

C

Scenario 7.2: The production function for earthquake detectors (Q) is given as follows: Q = 4K1/2L1/2 where K is the amount of capital employed and L is the amount of labor employed. The price of capital, PK, is $18 and the price of labor, PL, is $2. Refer to Scenario 7.2. Suppose that you receive an order for 60 earthquake detectors. How much labor will you use to minimize the cost of 60 earthquake detectors? 5 1 45 10 none of the above

C

The difference between the economic and accounting costs of a firm are the accountant's fees. the corporate taxes on profits . the opportunity costs of the factors of production that the firm owns. the sunk costs incurred by the firm. the explicit costs of the firm.

C

An L-shaped isoquant would indicate that the firm could switch from one output to another costlessly. would indicate that the firm could not switch from one output to another. would indicate that capital and labor are perfect substitutes in production. would indicate that capital and labor cannot be substituted for each other in production. is impossible.

D

If the isoquants are straight lines, then there are constant returns to scale. inputs have fixed costs at all use rates. only one combination of inputs is possible. the marginal rate of technical substitution of inputs is constant.

D

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? No. It depends on what the rate of inflation was between 1985 and 1992. It depends on what the rate of interest was. Yes.

D

Scenario 7.3: Use the production function: Q = 4L1/2K1/2. Refer to Scenario 7.3. Suppose that the price of labor is $5 and the price of capital is $20.? What is the total cost of producing 200 units of output? 100 1500 2000 1000 none of the above

D

The total cost (TC) of producing computer software diskettes (Q) is given as: What is the average fixed cost? 500 5 + (200/Q) 5Q 5 none of the above

E