Chapter 7 The Cost of Production, Chapter 6 Production, Chapter 4 Individual Demand and Market Demand

Refer to Scenario 7.1. The total cost to produce 50 cookies is:

A) *$20*

A production function assumes a given:

A) *technology.*

The law of diminishing returns assumes that:

A) *there is at least one fixed input.*

Which of the following equations based on capital (K) and labor (L) inputs does not represent a plausible production function?

A) F(K,L) = 3KL B) F(K,L) = 3K C) F(K,L) = K + L - 1 D) F(K,L) = 10(KL)^0.5

A firm's expansion path is:

C) *a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices.*

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?

E) *Carolyn can determine all of the above costs given the information provided.*

For any given level of output:

E) *None of the above is necessarily correct.*

Refer to Scenario 7.1. Which piece of information would NOT be helpful in calculating the marginal cost of the 75th unit of output?

E) *The firm's fixed cost*

Which of the following costs are always increasing as output increases?

E) *Total Cost and Variable Cost*

If the law of diminishing returns applies to labor then:

E) *after some level of employment, the marginal product of labor must fall*

In the long run, which of the following is considered a variable cost?

E) *all of the above*

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.*

When the average product is decreasing, marginal product:

E) *is less than average product.*

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 +5Q. What is the average fixed cost?

E) *none of the above*

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*

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:

E) *the marginal product of labor is 3 times the marginal product of capital.*

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?

A) *AVC is relatively low.*

An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in a river. Use the following two statements to answer this question: I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent. II. The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees.

A) *Both I and II are true.*

Use the following two statements to answer this question: 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.

A) *Both I and II are true.*

Use the following two statements to answer this question: 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.

A) *Both I and II are true.*

Consider the following statements when answering this question: I. If the marginal product of labor falls whenever more labor is used, and labor is the only factor of production used by the firm, than at every output level the firm's short-run average variable cost exceeds marginal cost. II. If labor obeys the law of diminishing returns, and is the only factor of production used by the firm, then at every output level short-run average variable costs exceed marginal costs.

A) *I is true, and II is false.*

Which of the following is NOT an expression for the cost minimizing combination of inputs?

A) *MRTS = MPL /MPK*

Which of the following relationships is NOT valid?

A) *Rising marginal cost implies that average total cost is also rising.*

Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000, and the interest rate is 10 percent. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all of his expenses) if he farms the land this year. What should he do?

A) *Sell to ABC Corporation.*

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?

A) *The firm will only use the input with lower cost*

Suppose capital and labor are perfect substitutes in a long-run production process. If labor costs $15 per hour and the rental rate of capital is $20 per hour, what can we say about the profit maximizing choice of labor and capital inputs?

A) *We will only use labor in the production process.*

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) *a fixed 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:

A) *below average total cost.*

Refer to Scenario 7.1. For 100 cookies, the average total cost is:

A) *falling.*

If a factory has a short-run capacity constraint (e.g., an auto plant can only produce 800 cars per day at maximum capacity), the marginal cost of production becomes ________ at the capacity constraint.

A) *infinite*

When an isocost line is just tangent to an isoquant, we know that:

A) *output is being produced at minimum cost.*

Fixed costs are fixed with respect to changes in:

A) *output.*

In our analysis, it is best to treat capital as if it was:

A) *rented, even if it was purchased.*

Trisha believes the production of a dress requires 4 labor hours and 2 machine hours to produce. If Trisha decides to operate in the short run, she must spend $500 to lease her business space. Also, a labor hour costs $15 and a machine hour costs $35. What is Trisha's cost of production as a function of dresses produced?

Answer: Since the production of a dress requires spending $60 for labor and $70 for machine hours, Trisha's cost function is: C(q) = 130q + 500

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?

B) *$15.00 per hour*

Suppose that the price of labor () is $10 and the price of capital () is $20. What is the equation of the isocost line corresponding to a total cost of $100?

B) *100 = 10L + 20K*

The total cost (TC) of producing computer software diskettes (Q) is given as: . What is the variable cost?

B) *5Q*

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.

B) *I is true, and II is false.*

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?

B) *If the marginal product of labor is a concave curve, then the MC curve is also concave.*

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*

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 = 100KL^0.5*

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 will:

B) *follow the 45-degree line from the origin.*

Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision:

B) *is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold.*

The law of diminishing returns refers to diminishing:

B) *marginal returns.*

13) Incremental cost is the same concept as ________ cost.

B) *marginal*

The total cost of producing a given level of output is:

B) *minimized when the ratio of marginal product to input price is equal for all inputs.*

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.*

Annual economic depreciation equals:

B) *the amortization payment made annually for the purchase of an asset, spread over the life of the asset.*

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.*

Refer to Scenario 7.1. The total cost to produce 100 cookies is:

C) *$25.00*

Jim left his previous job as a sales manager and started his own sales consulting business. He previously earned $70,000 per year, but he now pays himself $25,000 per year while he is building the new business. What is the economic cost of the time he contributes to the new business? A) $25,000 per year

C) *$70,000 per year*

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:

C) *-4/5.*

We typically think of labor as a variable cost, even in the very short run. However, some labor costs may be fixed. Which of the following items represents an example of a fixed labor cost?

C) *A salaried manager who has a three-year employment contract*

Consider the following statements when answering this question. I. With convex isoquants, a firm's expansion path cannot be negatively sloped. II. If a firm uses only two factors of production, one of whose marginal product becomes negative when its use exceeds a certain level, then a cost-minimizing firm's expansion path will have vertical or horizontal segments.

C) *Both I and II are true.*

Which of the following actions is NOT an example of the production coordination provided by firms?

C) *Establish industry safety regulations*

Consider the following statements when answering this question I. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then the marginal costs of production are constant too. II. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then short-run average total costs cannot rise as output rises.

C) *I and II are both true.*

Consider the following statements when answering this question. I. Increases in the rate of income tax decrease the opportunity cost of attending college. II. The introduction of distance learning, which enables students to watch lectures at home, decreases the opportunity cost of attending college.

C) *I and II are both true.*

Consider the following statements when answering this question: 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.

C) *I and II are both true.*

Consider the following statements when answering this question: 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.

C) *I and II are both true.*

Consider the following statements when answering this question: 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.

C) *I and II are both true.*

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.*

The law of diminishing returns can apply to:

C) *both the short and the long run.*

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:

C) *could reduce the cost of producing its current output level by employing more labor and less capital.*

Which of the following is the user cost of capital?

C) *economic depreciation + (interest rate)(value of capital)*

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:

C) *equal zero.*

A production function defines the output that can be produced:

C) *if the firm is technically efficient.*

An isocost line reveals the

C) *input combinations that can be purchased for a given total cost.*

The slope of the total product curve is the:

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?

C) *q = 9L*

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.*

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.*

The difference between the economic and accounting costs of a firm are:

C) *the opportunity costs of the factors of production that the firm owns.*

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:

C) *the optimal capital-labor ratio remains the same.*

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 +5Q. What is the average total cost?

D) *5 + (200/Q)*

Which of the following statements is true regarding the differences between economic and accounting costs?

D) *Accounting costs include only explicit costs.*

Technological improvement:

D) *All of the above are true.*

Which of the following costs always declines as output increases?

D) *Average fixed cost*

Use the following two statements to answer this question: 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.

D) *Both I and II are false.*

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

D) *Both I and II are false.*

Which of the following statements correctly uses the concept of opportunity cost in decision making? I. "Because my secretary's time has already been paid for, my cost of taking on an additional project is lower than it otherwise would be." II. "Since NASA is running under budget this year, the cost of another space shuttle launch is lower than it otherwise would be."

D) *I and II are both false.*

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*

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*

Suppose a pizza restaurant has two pizza ovens that may be used to bake pizzas, so the restaurant has a maximum capacity constraint that affects the shape of the firm's short-run marginal cost curve. What happens to maximum capacity segment of this curve if the firm adds another pizza oven?

D) *Shifts rightward*

The short run is:

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

At the optimum combination of two inputs,

D) *all of the above*

Which of the following is the user cost of capital per dollar of capital?

D) *all of the above*

If the capital market is competitive, the user cost of capital equals:

D) *all of the above.*

Which of the following inputs are variable in the long run?

D) *all of these*

In a short-run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus,

D) *marginal cost is below average variable cost.*

According to the law of diminishing returns:

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

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:

D) *the production of an additional unit of dynamite costs the same regardless of whether chemicals or labor are used.*

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.*

In the short run, suppose average total cost is a straight line and marginal cost is positive and constant. Then, we know that:

E) *B and C are correct.*

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:

E) *the ratio of the marginal product of waste water to the marginal product of machinery.*

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

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.

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 +5Q. What is the fixed cost?

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 +5Q. What is the marginal 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

Prospective sunk costs:

are relevant to economic decision-making