ch 6-8

The table below provides the total revenues and costs for a small landscaping company in a recent year. Refer to Table 7-2. The explicit costs for this firm are $186 900. $178 500. $217 300. $217 700. $186 500.

$186 500.

The table below provides information on output per month and short-run costs for a firm producing outdoor wooden lounge chairs. All costs are in dollars. Refer to Table 7-5. What is the average variable cost of producing 10 chairs? $220 $22 $200 $420 $42

$22

Suppose a production function for a firm takes the following algebraic form: Q = 2KL - (0.2)L2, where Q is the output of sweaters per day. Now suppose the firm is operating with 8 units of capital (K=8) and 10 units of labour (L=10). What is the output of sweaters? 60 sweaters per day 155 sweaters per day 80 sweaters per day 140 sweaters per day 30 sweaters per day

140 sweaters per day

Which of the following are likely to be sources of increasing productivity? 1. substitution toward labour and away from capital (with constant technology) 2. better-trained labour 3. increases in technological know-how 1 only 2 only 3 only 1 and 2 only 2 and 3 only

2 and 3 only

The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Refer to Table 7-3. The marginal product of labour is at its maximum when the firm changes the amount of labour hired from 0 to 1 unit. 1 to 2 units. 2 to 3 units. 3 to 4 units. 4 to 5 units.

2 to 3 units.

Refer to Table 7-5. Given the information in the table about short-run costs, this firm would minimize the average total cost of production when producing 10 chairs. 15 chairs. 20 chairs. 25 chairs. 30 chairs

25 Chairs

Suppose capital costs $8 per unit and labour costs $4 per unit. For a profit- maximizing firm operating at its optimal factor mix, if the marginal product of capital is 60, the marginal product of labour must be 90. 20. 30. 10. 120.

30

The Smith family is allocating its monthly household expenditure between only two goods, food and clothing. Suppose the price of food is $5 per unit, the price of clothing is $10 per unit, and the marginal utility the family is receiving from its consumption of food is currently 25. What is the family's marginal utility from its consumption of clothing if it is maximizing its utility? 50 12.5 5 10 25

50

The table below shows the quantities of toffee bars and bags of cashews that a consumer could consume over a 1-week period. Refer to Table 6-1. If this consumer purchases 3 toffee bars and 4 bags of cashews per week, his/her total utility will be 57. 23. 54. 31. 7.

57

A basic hypothesis of marginal utility theory is that the utility a consumer derives from successive units of a good diminishes as total consumption of the good increases. This hypothesis is known as A. the law of diminishing marginal utility. B. the utility theory of demand. C. utility maximization. D. the paradox of value. E. the law of diminishing total utility.

A

Assume you are consuming two goods, X and Y. Suppose the money prices for X and Y remain unchanged, but your income increases by 20%. What happens to your consumption of good X? A. It increases or decreases, depending on whether it is normal or inferior. B. It decreases. C. It increases by 20%. D. It increases. E. It stays the same.

A

Christine is allocating her household expenditure between cleaning services and gardening services in order to maximize the household's total utility. For the quantities of cleaning and gardening services she has chosen, an increase in the price of cleaning service will, ceteris paribus, A. reduce the marginal utility per dollar spent on cleaning service. B. increase the marginal utility per dollar spent on cleaning service. C. have no effect on the marginal utility per dollar spent on cleaning service. D. increase the marginal utility of a unit of cleaning service. E. reduce the marginal utility of a unit of cleaning service.

A

Consider the income and substitution effects of price changes. Suppose the price of potatoes falls and we observe a decrease in an individual's purchases of potatoes. Which of the following can we infer? A. The income effect is negative and outweighs the substitution effect. B. The income effect is positive and exceeds the substitution effect. C. The income effect just offsets the substitution effect. D. The income effect is negative and reinforces the substitution effect. E. The substitution effect outweighs the income effect.

A

If a consumer is faced with a choice of products A, B, C, ..., and has a given money income, the consumer's utility will be maximized when A. MUA/PA = MUB/PB = MUC/PC = ... B. MUA = MUB = MUC = ... C. TUA = TUB = TUC = ... D. PA = PB = PC = ... E. MUA = PA; MUB = PB; MUC = PC; ...

A

Refer to Figure 6-1. The marginal utility of the second unit of the good consumed is A 20 B 30 C 50 D40 E 10

A 20

Suppose there are only two goods, A and B, and that consumer income is constant. If the price of good A falls and the consumption of good B rises, we can conclude that A is a normal good. B is an inferior good. A is an inferior good. B is a normal good. both A and B are normal goods.

B is a normal good.

Laurie spends all of her money buying bread and cheese. The marginal utility she receives from the last loaf of bread is 60 and from the last block of cheese is 30. The price of bread is $3 and the price of cheese is $2. Laurie A. is buying bread and cheese in utility-maximizing amounts. B. should buy more cheese and less bread in order to maximize her utility. C. should buy more bread and more cheese in order to maximize her utility. D. should buy more bread and less cheese in order to maximize her utility. E. is spending too much money on bread and cheese.

D

he table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets per month. Refer to Table 8-1. Which production technique is obviously technically inefficient? A B C D All four techniques are inefficient.

D

Refer to Table 6-2. If Dave rents 3 movies in one week, his total consumer surplus is ________ and the total amount he pays is ________. $6.50; $5.00 $24.50; $24.50 $5.50; $5.00 $19.50; $15.00 $9.50; $15.00

E $9.50; $15.00

Refer to Figure 8-1. Which of the four firms in the figure is displaying decreasing returns to scale at all output levels? Firm A Firm B Firm C Firm D All firms are displaying increasing returns to scale.

Firm C

The theory of the firm is based on the following two key assumptions: Firms seek to maximize revenues, and to maximize undistributed profits. Firms seek to become as large as possible, and they seek to maximize total revenue. Firms seek to maximize profit, and to distribute the maximum value in dividends. Each firm has a highly diversified product, and this leads to profit maximization. Firms seek to maximize profits, and the firm is a single, consistent decision-making unit.

Firms seek to maximize profits, and the firm is a single, consistent decision-making unit.

What is consumer surplus? It is the same concept as total utility. It is the marginal value that consumers place on their purchases. It is the same as Karl Marx's notion of surplus value. It is the sum of the extra value placed on each unit of a commodity above the market price paid for each. It is the total value that consumers place on their purchases.

It is the sum of the extra value placed on each unit of a commodity above the market price paid for each.

Which of the following conditions indicate cost minimization, assuming two inputs, labour (L) and capital (K)? MPK/PK = MPL/PL MPK/PL = MPL/PK PK = PL MPL = MPK PK ∙ MPK = PL ∙ MPL

MPK/PK = MPL/PL

The condition required for a consumer to be maximizing utility, for any pair of products, X and Y, is MUX = MUY. PX(MUX) = PY(MUY). MUX/PX = MUY/PY. MUX/PY = MUY/PX. PX = PY.

MUX/PX = MUY/PY.

Suppose Commercial Footwear Inc. is making a cost-minimizing decision about the level of output to produce with a given technology. Which of the following is a long-run decision? Should we hire additional labour to work in the existing facility? Should we change to a lower-cost leather supplier? Should we invest in research in the hope of developing a new technology for shoe production? Should we hire more accountants to investigate ways to reduce our corporate tax payments? Should we build a larger shoe manufacturing facility?

NOT A B D

Which of the following statements about the relationship between marginal product and average product is correct? When marginal product exceeds average product, average product must be rising. When average product exceeds marginal product, marginal product must be rising. Average product equals marginal product when marginal product is at its maximum. Average product equals marginal product at marginal product's lowest point. When marginal product is falling, average product is falling.

When marginal product exceeds average product, average product must be rising.

Assume an individual with a downward-sloping demand curve is paying a single price for each unit of some commodity. He will experience consumer surplus on all of the units bought. all units that were not bought at that particular price. all units bought with the possible exception of the last unit. the first unit only. none of the units.

all units bought with the possible exception of the last unit.

Which of the following statements best describes an important assumption economists make about consumers? Consumers spend all of their current income. usually save as much as possible of their income. are motivated to maximize their utility. are poor judges of what is best for them. are motivated to maximize their profit.

are motivated to maximize their utility.

Consider a firm's short-run cost curves. Which one of the following types of cost declines over the whole range of output? total variable cost marginal cost average variable cost total fixed cost average fixed cost

average fixed cost

Consider the short-run and long-run cost curves for a firm. If there is an improvement in the firm's technology, the firm will move to a lower point on both its long-run and short-run average cost curves. there will be no change in the cost curves in the long run. both the long-run and short-run average cost curves will shift downward. the firm will move to a lower point on its long-run average cost curve only. there will be a downward shift in the long-run average cost curve but not in the short-run average cost curve.

both the long-run and short-run average cost curves will shift downward.

Marginal cost is defined as the cost per unit when the firm is operating at capacity. change in fixed cost resulting from an additional unit of output. change in total cost resulting from an additional unit of output. cost of an additional unit of a variable factor of production. difference between average total cost and average variable cost.

change in total cost resulting from an additional unit of output.

Economists use the term "marginal utility" to describe the total satisfaction received from consumption of a good. change in total satisfaction caused by consumption of an additional unit of a good. inverse of the measure of total utility. price paid for every unit consumed. average utility of each unit of a good consumed.

change in total satisfaction caused by consumption of an additional unit of a good.

Assume a firm is using 10 units of capital and 10 units of labour to produce 10 widgets per hour. By doubling both inputs the result is a doubling of output. This firm is experiencing constant returns to scale. increasing costs. diseconomies of scale. economies of scale. decreasing returns.

constant returns to scale.

In economics, the term "fixed costs" means costs incurred in the past that involve no implicit costs. opportunity costs. costs that are never accounted for. implicit costs. costs that do not vary with the level of output produced

costs that do not vary with the level of output produced

Assume a firm is using 10 units of labour and 10 units of capital and is producing 10 units of output per hour. Now both inputs are doubled, resulting in output rising to 18 units per hour. The firm is experiencing A. increasing returns to scale. decreasing costs. constant returns to scale. decreasing returns to scale. economies of scale.

decreasing returns to scale.

Although capital is a variable factor in the long run, once chosen, it often becomes a fixed factor for a long time. A profit-maximizing firm must therefore select a method of production that is economically efficient at current factor prices and sufficiently flexible to adapt to changing factor prices over time. economically efficient at current factor prices. labour intensive, as labour is always a variable factor. technologically advanced beyond methods currently used. adaptable to wide ranges of output over time.

economically efficient at current factor prices and sufficiently flexible to adapt to changing factor prices over time.

In defining a firm's long-run average cost curve, technology, factor prices, and the quantity of factors of production are all varied. factor prices are held constant and the quantity of factors of production used is varied. the time period must be longer than one year. factor prices are varied and the quantity of factors of production is held constant. factor prices are held constant and technology is assumed to change.

factor prices are held constant and the quantity of factors of production used is varied.

Canada has a much lower population density than does Japan. Therefore, the price of land, relative to the price of labour, is lower in Canada than in Japan. Consider a Canadian firm and a Japanese firm, both producing rice, both having access to the same technologies, and both striving to minimize their costs. The Canadian firm will use the two inputs, land and labour, in such a way that its land/labour ratio is equal to that of the Japanese firm. higher than that of the Japanese firm. equal to one. lower than that of the Japanese firm. indeterminate as there is insufficient information to know.

higher than that of the Japanese firm.

The total value that Doug places on his consumption of computer games equals the price multiplied by quantity demanded. his marginal utility multiplied by quantity demanded. price times marginal value. his total expenditure on computer games plus his consumer surplus. the total amount he pays for all the games he purchases.

his total expenditure on computer games plus his consumer surplus.

Which of the following is most likely a long-run decision for a firm? the amount of inventory to stock the number of workers to hire how many warehouses to build the hours a store should stay open the price at which to sell the product

how many warehouses to build

The opportunity cost of a firm owner's own money that he or she has invested in the firm is an example of implicit costs. direct production costs. sunk costs. explicit costs. accounting costs.

implicit costs.

When a cost-minimizing firm is faced with an increase in the relative price of labour, it adjusts its factor usage so as to increase the marginal product of labour relative to the marginal product of capital. use more labour per unit of output than before. maintain the previous usage of labour. use more of both capital and labour per unit of output. increase the marginal product of capital relative to the marginal product of labour.

increase the marginal product of labour relative to the marginal product of capital.

Refer to Figure 6-1. The consumer's total utility is decreasing at an increasing rate. constant. increasing at a decreasing rate. increasing at an increasing rate. decreasing at a decreasing rate.

increasing at a decreasing rate.

"An objective of firms is to maximize profits." This statement is an unrealistic assumption, and therefore of little use to economists. has been proven by empirical testing to be always true. applies only to corporations. is an assumption used by economists to predict the behaviour of firms. is a normative statement and thus cannot be tested.

is an assumption used by economists to predict the behaviour of firms.

Consider the total, average, and marginal product curves for a firm in the short run. If AP = MP and both are positive, then total product is decreasing as extra units of the variable factor are employed. is increasing as extra units of the variable factor are employed. is at its minimum. may be either increasing or decreasing as extra units of the variable factor are employed. is at a maximum.

is increasing as extra units of the variable factor are employed.

In the long run, the law of diminishing marginal returns is not relevant because there are no fixed factors of production. does hold, regardless of production process. does not hold because technology is a variable. sometimes holds, depending on the production process. is exactly the same as in the short run.

is not relevant because there are no fixed factors of production.

A firm can raise financial capital without incurring debt by increasing its bank loans. issuing bonds. making extra dividend payments. issuing new shares. investing in new capital equipment.

issuing new shares.

The period of time over which the firm can vary any of its inputs for a given production technology is called the very-long run. very-short run. short run. long run. immediate run.

long run.

A profit-maximizing firm will increase its use of capital and decrease its use of labour when the total product of capital is higher than the total product of labour. marginal product of capital is higher than the marginal product of labour. average product of capital is higher than the average product of labour. marginal product of capital, per dollar spent on capital, is less than the marginal product of labour, per dollar spent on labour. marginal product of capital, per dollar spent on capital, is greater than the marginal product of labour, per dollar spent on labour.

marginal product of capital, per dollar spent on capital, is greater than the marginal product of labour, per dollar spent on labour.

Refer to Table 8-2. If capital costs $6 per unit and labour costs $4 per unit, which production method minimizes the cost of producing 1000 toys per day? method F method C method E method D method B

method E

Suppose a firm employs two inputs, X and Y, and that at their current levels of use MPX/PX > MPY/PY. To minimize the cost of production, the firm should hire more input Y only if its price falls. more input X and less input Y. more input Y and less input X. more input X only if its price decreases. more input X only if its price increases.

more input X and less input Y.

Refer to Figure 8-1. For which of the four firms would the family of short-run average total cost curves lie below the LRAC? Firm A Firm B Firm C Firm D none of the four firms

none of the above

If consumption of an extra unit of some good generates a marginal utility of zero, then consumption of that additional unit would mean that total utility would be increasing. not change. also be zero. be negative. be decreasing.

not change

What is the definition of productivity? output produced by a combination of two or more inputs the cost of a unit of output output produced per unit of input the efficient use of technology a measure of input used

output produced per unit of input

Consider the income and substitution effects of price changes. The income effect refers to the change in quantity demanded that occurs as a result of a change in real income, with relative prices held constant. money income, with relative prices held constant. preferences, with real income held constant. marginal utility, with real income held constant. relative prices, with real income held constant.

real income, with relative prices held constant.

Consider the long-run average cost curve for a firm. Any point representing a cost and output combination that is below the LRAC curve may represent actual cost and production levels in the short run. represents less efficient cost levels than points on the long-run average cost curve. is attainable only when all factors are variable. is attainable if the firm minimizes its costs according to the "principle of substitution." represents unattainable cost levels, given current technologies.

represents unattainable cost levels, given current technologies.

The paradox in "the paradox of value" refers to the situation where a good with a low total value commands a low price, while a good with a high total value commands a high price. situation where a good with a low total value commands a high price, while a good with a high total value commands only a low price. fact that goods with high total values command high prices. confusion between supply curves and demand curves. fact that goods with low total values command low prices.

situation where a good with a low total value commands a high price, while a good with a high total value commands only a low price.

Which of the following factors is most important as a source of sustained growth in material living standards? capital-labour substitution changing relative factor prices decrease in cost of capital population increase technological improvement

technological improvement

The opportunity cost to a firm of using an asset is zero if the asset was given to the firm for free. the asset has zero sunk costs associated with it. no money was spent to acquire the asset. the asset has no alternative uses. the asset is already owned by the firm.

the asset has no alternative uses.

The opportunity cost of any factor of production is the benefit forgone by not using it in its worst alternative. the benefit forgone by not using it in its best alternative. its explicit cost. the money actually paid to the factors of production. its accounting cost.

the benefit forgone by not using it in its worst alternative.

A demand curve for a normal good is downward sloping due to the income effect. the substitution effect. the combination of income and substitution effects. neither the substitution effect nor the income effect. the Giffen effect.

the combination of income and substitution effects.

Suppose a firm is using 1500 units of labour and 20 units of capital to produce 100 tonnes of mineral ore. The price of labour is $20 per unit and the price of capital is $1000 per unit. The MPL equals 25 and the MPK equals 750. In this situation, the firm is minimizing its costs. the firm should increase the use of both inputs. the firm could lower its production costs by decreasing labour input and increasing capital input. the firm could lower its production costs by increasing labour input and decreasing capital input. the firm should decrease the use of both inputs.

the firm could lower its production costs by increasing labour input and decreasing capital input.

Suppose a consumer can purchase only two goods, soap and apples. If the price of soap falls and the consumption of apples increases, we can conclude that the increased consumption of apples is due to neither the income effect nor the substitution effect. the income effect only. both the income effect and the substitution effect. the deflation effect. the substitution effect only.

the income effect only.

Suppose RioTintoAlcan is considering the construction of a new aluminum smelter in Northern Quebec, the operation of which requires a great deal of electricity. Suppose also that the price of electricity is predicted to rise significantly in the near future. As a result, the firm decides to build a plant using existing technology that is more expensive but uses less electricity per tonne of aluminum produced. This behaviour is an example of long-run economies of scale. short-run profit maximization. the long-run principle of substitution. short-run cost minimization. innovation away from changes in factor prices.

the long-run principle of substitution.

If increasing quantities of a variable factor are applied to a given quantity of fixed factors, then the law of diminishing returns tells us that the marginal product and the average product of the variable factor will eventually decrease. total product will eventually begin to fall. the average product will eventually decrease with constant marginal product. the average product will eventually decrease, but only if total product is held constant. the marginal product will eventually decrease with constant average product.

the marginal product and the average product of the variable factor will eventually decrease.

Refer to Figure 6-7. Suppose that price is P0. Total consumer surplus is then given by the area above the market price. under the demand curve to the left of Q0. under the demand curve to the left of Q0, but above P0. under the entire demand curve. below P0 and to the left of Q0.

under the demand curve to the left of Q0, but above P0.

A short-run average total cost curve and a long-run average cost curve are tangent when the plant size is at the optimal level for that level of output. where the short-run cost curve is downward sloping. by coincidence. where the short-run cost curve is upward sloping. where the short-run cost curve is downward sloping and the plant size is optimal.

when the plant size is at the optimal level for that level of output.

A short-run average total cost curve will touch the long-run average cost curve at a level of output only when the quantity of the fixed factor being employed is at the optimal level for that level of output. by coincidence. where the short-run cost curve is downward sloping. where the short-run cost curve is downward-sloping and the quantity of the fixed factor is optimal. where the short-run cost curve is upward sloping.

when the quantity of the fixed factor being employed is at the optimal level for that level of output.

The substitution effect of a price change is equal to the income effect for normal goods. will result in the consumer buying less of a good at a higher price. is equal to the income effect for inferior goods. will result in the consumer buying less of a good at a lower price. outweighs the income effect for Giffen goods.

will result in the consumer buying less of a good at a higher price.

Which of the following statements most accurately makes the distinction between the long run and the very-long run with respect to the long-run average cost (LRAC) curve? A.In the long run, the LRAC curve is shifting down, whereas in the very-long run the firm is moving along the existing LRAC curve. In the long run, the LRAC curve is shifting up, whereas in the very-long run the firm is moving along the existing LRAC curve. In the long run, the firm is moving along the existing LRAC curve, whereas in the very-long run, the LRAC curve is shifting down. In the long run, the firm is moving along the existing LRAC curve, whereas in the very-long run, the LRAC curve is shifting up. There is no distinction between the long run and the very-long run with respect to the LRAC curve.

In the long run, the firm is moving along the existing LRAC curve, whereas in the very-long run, the LRAC curve is shifting down

Suppose a firm is experiencing increasing returns to scale. This is shown graphically by A. a horizontal long-run average cost curve. a downward-sloping long-run average cost curve. an upward-sloping long-run average cost curve. a vertical long-run average cost curve. None of the above; returns to scale have nothing to do with the shape of the long-run average cost curve.

a downward-sloping long-run average cost curve.