Econ 302:Lesson 5

labor, capital

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 U-shaped average variable cost curve. a U-shaped average cost curve. a U-shaped marginal cost curve.

A cubic cost function implies:

use 0.8 fewer units of capital.

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

The short-run average cost curve reveals nothing regarding returns to scale.

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?

if the firm is technically efficient.

A production function defines the output that can be produced

would indicate that capital and labor cannot be substituted for each other in production.

An L-shaped isoquant

is a curve that shows all the combinations of inputs that yield the same total output.

An isoquant

-4/5.

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

Both I and II are true.

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

No, we cannot change all of the production inputs in the short run.

Does it make sense to consider the returns to scale of a production function in the short run?

output

Fixed costs are fixed with respect to changes in

the marginal rate of technical substitution of inputs is constant.

If the isoquants are straight lines, then

the average product of labor is always equal to the marginal product of labor

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

Expenditures for capital machinery and equipment Expenditures for research and development Expenditures for wages Expenditures for raw materials

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

No, the marginal product of labor is constant (for a given K).

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?

q = 9L

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?

the optimal capital-labor ratio remains the same.

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 opportunity costs of the factors of production that the firm owns.

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

isoquant curve.

The function which shows combinations of inputs that yield the same output is called a(n)

marginal cost must be constant and equal to b.

The key assumption required for us to use a linear variable cost function of the form VC = bq is that:

marginal returns.

The law of diminishing returns refers to diminishing

the addition to total output due to the addition of the last unit of an input, holding all other inputs constant.

The marginal product of an input is

the absolute value of the slope of an isoquant. the ratio of the marginal products of the inputs

The marginal rate of technical substitution is equal to:

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

The short run is

Neither, the costs are identical.

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?

I is true and II is false.

Use the following statements to answer this question: I. The long-run average cost (LAC) curve is the envelope of the short-run average cost (SAC) curves. II. The long-run marginal cost (LMC) curve is the envelope of the short-run marginal cost (SMC) curves.

I is true, and II is false.

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.

Average fixed cost

Which of the following costs always declines as output increases?

F(K,L) = K + L - 1

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

Capital and Equipment, Labor, Plant Size

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

Rising marginal cost implies that average total cost is also rising.

Which of the following relationships is NOT valid?

II only

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."