Chapter 7: Profit-Maximizing Firms
When Burning Bob's Salsa House hires one worker, 30 customers can be served in an hour. When Burning Bob's Salsa House hires two workers, 50 customers can be served in an hour. The marginal product of the second worker is ________ customers served per hour. A. 20 B. 30 C. 50 D. 67.5
A. 20
A firm is operating such that the marginal product of labor is 48 and the marginal product of capital is 12. The firm is minimizing its costs only if A. the rental rate is one fourth the wage. B. since capital is more productive than labor, the firm must be minimizing cost. C. the wage is one fourth the rental rate. D. Given this information the firm can't be minimizing cost under any circumstances.
A. the rental rate is one fourth the wage.
The marginal products of the first, second, and third workers are 50, 34, and 22, respectively. If four workers can produce 116 units of output, then the marginal product of the fourth worker is ________. A. 10 B. 12 C. 22 D. 116
A. 10
Refer to the scenario below to answer the question that follows. A lawn service company has the following production possibilities. With one, two, three, and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively. The marginal product of the second worker is A. 5. B. 4. C. 9. D. 3.
A. 5.
The additional output that can be produced by adding one additional unit of a specific input is called marginal product. True False
True
The flexibility of a firm's techniques of production is an important determinant of its costs. True False
True
Berkshire Hathaway acquires battery-maker Duracell from Procter and Gamble. This is a ________ decision.
This is a long-run decision.
Assume that we have a production process that exhibits increasing and then decreasing marginal productivity. That is, as we increase output, the marginal product of labor starts at some level above zero, rises to a maximum, and then eventually falls to zero. Determine whether the following statement is true: When marginal product is equal to average product, total output is maximized. This statement is _______
This statement is false.
Following is information on the production levels of three different firms. Firm A is currently producing at a quantity where it is experiencing increasing returns. Firm B is currently producing at a quantity where it is experiencing diminishing returns. Firm C is currently producing at a quantity where it is experiencing negative returns. If each of the firms adds to its labor force, what will happen to its marginal product of labor? For Firm A, MPL _________________________. For Firm B, MPL _______. For Firm C, MPL _______.
For Firm A, MPL rises if it still experiences increasing returns. For Firm B, MPL falls. For Firm C, MPL falls.
Use the information provided in the table below to answer the question that follows. Technology Units of Capital Number of Employees A 16 8 C 12 12 B 8 20 D 6 24 If the hourly price of labor is $10 and the hourly price of capital is $1, which production technology should be selected? A B C D
A
Related to the Economics in Practice on page 155: Which of the following would be most likely to make it more efficient for delivery trucks to drive more quickly? A. An increase in the hourly wage of truck drivers and a decrease in the cost of gasoline B. An increase in the hourly wage of truck drivers and an increase in the cost of gasoline C. A decrease in the hourly wage of truck drivers and an increase in the cost of gasoline D. A decrease in the hourly wage of truck drivers and a decrease in the cost of gasoline
A. An increase in the hourly wage of truck drivers and a decrease in the cost of gasoline
During the early phases of industrialization, the number of people engaged in agriculture usually drops sharply, even as agricultural output is growing. Given what you know about production technology and production functions, explain this seeming inconsistency. Output increases with less labor because: A. added capital delays how quickly labor's returns become diminishing. B. agricultural production becomes more labor-intensive. C. decreased capital increases agricultural output. D. added capital decreases the productivity of labor. E. using less labor increases production capacity.
A. added capital delays how quickly labor's returns become diminishing.
Related to the Economics in Practice on page 155: You own a truck and use it to deliver merchandise to retailers and hire a driver to make such deliveries. The speed at which you instruct the driver to drive depends on: A. the driver's wage and the price of gasoline. B. the driver's wage only. C. neither the driver's wage nor the price of gasoline. D. the price of gasoline only.
A. the driver's wage and the price of gasoline.
Perfectly competitive firms must make all of the following decisions excpet A. what price to charge for their output. B. how much output to supply. C. which production technology to use. D. how much of each input to demand.
A. what price to charge for their output.
You own a building that has four possible uses: a tailor shop, a pharmacy, a sports bar, and an antique mall. The building's value in each use is $4,000; $6,000; $8,000; and $10,000, respectively. You decide to open a sports bar. The opportunity cost of using this building for a sports bar is A. $10,000, the value if you rented the building to someone else to use as an antique mall. B. $4,000, the value if the building is used as a tailor shop. C. $6,000, the value if the building is used as a pharmacy. D. $20,000, the sum of the values if the building is used for a tailor shop, a pharmacy, or an antique mall.
A. $10,000, the value if you rented the building to someone else to use as an antique mall.
Upon graduating with an accounting degree, you open your own accounting firm of which you and your assistant are the only employees. To start the firm you passed on a job offer with a large accounting firm that offered you a salary of $50,000 annually. Last year you earned a total revenue of $120,000. Rent and supplies last year were $50,000. Your assistant's salary is $30,000 annually. Your annual economic profit is A. −$10,000. B. $20,000. C. $40,000. D. $70,000.
A. −$10,000.
Technology 1 Technology 2 Technology 3 Daily Output K L K L K L 100 3 7 4 5 5 4 150 3 10 4 7 5 5 200 4 11 5 8 6 6 250 5 13 6 10 7 8 Suppose the firm is operating in a high-wage country, where capital cost is $80 per unit per day and labor cost is $60 per worker per day. For each level of output, which technology is cheapest? At 100 units of output, ? is the least expensive. At 150 units of output, ? is the least expensive. At 200 units of output, ? is the least expensive. At 250 units of output, ? is the least expensive. Now suppose the firm is operating in a low-wage country, where capital cost is $100 per unit per day but labor cost is only $40 per unit per day. At 150 units of output, ? is the least expensive. Suppose the firm moves from a low-wage to a high-wage country but its level of output remains constant at 150 units per day. Total employment will decrease by ? workers.
At 100 units of output, technology 2 is the least expensive. At 150 units of output, technology 3 is the least expensive. At 200 units of output, technology 3 is the least expensive. At 250 units of output, technology 3 is the least expensive. At 150 units of output, technology 2 is the least expensive. Total employment will decrease by 2 workers.
When Burger Barn hires one worker, 20 customers can be served in an hour. When Burger Barn hires two workers, 50 customers can be served in an hour. The marginal product of the second worker is __________ customers served per hour. A. 15 B. 30 C. 40 D. 67.5
B. 30
Costs of production are determined A. only by the technologies that are available. B. by the technologies that are available and by input prices. C. only by the input prices that are available. D. by the technologies that are available and by the demand for the output.
B. by the technologies that are available and by input prices.
Total revenue minus total cost is equal to A. the rate of return. B. profit. C. marginal revenue. D. net cost.
B. profit.
If the product derived from the last dollar spent on labor is greater than the product derived from the last dollar spent on capital, then the firm A. should use less labor and more capital to minimize costs. B. should use more labor and less capital to minimize costs. C. is minimizing costs. D. should increase the price paid to labor and decrease the price paid to capital to minimize costs.
B. should use more labor and less capital to minimize costs.
Consider a firm that uses capital and labor as inputs and sells 20,000 units of output per year at the going market price of $15. Also assume that total labor costs to the firm are $240,500 annually. Assume further that the total capital stock of the firm is currently worth $400,000, that the return available to investors with comparable risks is 9 percent annually, and that there is no depreciation. Is this a profitable firm? Explain your answer. A. The firm is profitable because profit equals $300,000. B. The firm is profitable because profit equals $23,500. C. The firm is profitable because profit equals $59,500. D. The firm is not profitable because profit equals $23,500. E. The firm is not profitable because profit equals $−340,500.
B. The firm is profitable because profit equals $23,500.
[Related to the Economics in Practice] A supply chain is a specific order of steps taken by a company to get its product or service to the public. Supply chain management involves managing the flows of goods and services by linking production, shipment, and distribution. Two of the primary goals for businesses using supply chain management are to streamline costs and increase the speed of getting products to consumers. Each year, Gartner, a global research firm, publishes its "Supply Chain Top 25," identifying the companies that it believes best demonstrate leadership in applying supply chain management to drive business results. The four companies in the 2018 "Master's" category, which identifies companies with sustained leadership for the past 10 years, are Apple, Procter & Gamble, Amazon, and McDonald's. Which of the following describe the types of supply chain practices these companies utilize? (Check all that apply.) A. They avoid real-time adjustments to the supply chain and take a more deliberate approach. B. They embrace new technology throughout the supply chain to lower transaction costs. C. These companies focus on efficient inventory management. D. Top supply chain companies like these are careful to use quality sourcing of materials.
B. They embrace new technology throughout the supply chain to lower transaction costs. C. These companies focus on efficient inventory management. D. Top supply chain companies like these are careful to use quality sourcing of materials. The supply chain practices these companies utilize have resulted in their production being more responsive, causing an increase in efficiency, an increase in competitiveness, and an increase in profitability.
When a firm maximizes total product in the short run, average product is A. zero. B. positive. C. negative. D. Any of the above can be correct.
B. positive.
Refer to the information provided in the figure at right to answer the question that follows. The average product with five workers is A. 1. B. 5. C. 11. D. 2.5.
C. 11.
In the short run, a firm A. can exit an industry and all of its factors of production are variable. B. can enter an industry where positive profits are being earned. C. has at least one fixed factor of production. D. Both B and C are correct.
C. has at least one fixed factor of production.
If labor is a variable input in production, the law of diminishing marginal returns implies that in the short run A. total product is negative. B. labor's marginal product is constant. C. labor's marginal product decreases after a certain point. D. total product is negative after a certain point has been reached.
C. labor's marginal product decreases after a certain point.
A corn producer produces 80 bushels of corn and sells each bushel at $5. The cost of producing each unit bushel is $2. This corn producer's total revenue is ________ and profit if ________. A. $240; $80 B. $400; $160 C. $400; $240 D. $160; $0
C. $400; $240
Inputs Required to Produce a Product Using Alternative Technologies Technology Units of Capital Number of Employees A 8 36 B 12 24 C 16 16 D 24 12 Which technology is the most capital intensive? A B C D
D
Firms have an incentive to substitute labor for capital as the A. price of capital decreases. B. price of labor increases. C. marginal product of labor decreases. D. price of capital increases.
D. price of capital increases.
To determine the optimal method of production for a good or service, a perfectly competitive firm needs to know all of the following except: A. the market price of output. B. the technologies of production that are available to the firm. C. the prices of inputs. D. the prices charged by its rivals.
D. the prices charged by its rivals.
A student who lives on the fifth floor of Bates Hall is assigned to a new room on the eighth floor during her junior year. She has 12 heavy boxes of books and "stuff" to move. What are some of the alternative combinations of capital and labor that might be used to make the move? A. Transport the boxes upstairs using a hand truck—labor-intensive with capital. B. Carry the boxes upstairs—a labor-intensive process. C. Transport the boxes to an elevator using a hand truck—capital-intensive with labor. D. All of the above.
D. All of the above.
After working for 25 years as personal fitness trainers while raising their kids, three sisters cashed in a total of $100,000 in bonds and decided to open a small, neighborhood fitness center. They spent the $100,000 on exercise equipment, advertising, computer equipment, and other furnishings for the business. For the next 3 years, they took in $150,000 in revenue each year, paid themselves $30,000 annually each, and rented a space in a strip mall for $32,000 per year. Before the investment, their $100,000 in bonds were earning interest at a rate of 14 percent. Are they now earning economic profits? Explain your answer. A. They are earning profits of $104,000, which takes into account the $14,000 opportunity cost of their capital. B. They are earning profits of $18,000, which takes into account the $100,000 opportunity cost of their capital. C. They are earning profits of $118,000, which takes into account the opportunity cost of their capital. D. They are earning profits of $14,000, which takes into account the $14,000 opportunity cost of their capital and the $90,000 combined opportunity cost of their own labor.
D. They are earning profits of $14,000, which takes into account the $14,000 opportunity cost of their capital and the $90,000 combined opportunity cost of their own labor.
Assume the total product of two workers is 160 and the total product of three workers is 180. The three worker's average product is ________ while the third worker's marginal product is ________. A. 320; 540 B. 20; 60 C. 20; 26.67 D. 60; 20
D. 60; 20
Refer to the scenario below to answer the question that follows. You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year. Your economic profit last year was A. −$40,000. B. $10,000. C. $30,000. D. −$10,000.
D. −$10,000.
The following table gives total output or total product as a function of labor units used. Labor Total output 0 0 1 40 2 80 3 100 4 110 5 111 Diminishing returns occur when: A. the marginal product of the variable input decreases when additional units are added to the production process. B. the average amount produced by successive units of a variable input is negative. C. the marginal product of the variable input is constant when additional units are added to the production process. D. the average amount produced by successive units of a variable input increases. Does the table indicate a situation of diminishing returns? Explain your answer. A. No, because the marginal product of labor increases as labor increases. B. Yes, because total output decreases with each additional unit of labor. C. No, because total output increases with each additional unit of labor. D. Yes, because the marginal product of labor falls as labor increases.
Diminishing returns occur when: A. the marginal product of the variable input decreases when additional units are added to the production process. Does the table indicate a situation of diminishing returns? Explain your answer. D. Yes, because the marginal product of labor falls as labor increases
A production function shows the least amount that a firm will produce given the amount of labor input. True False
False
Deciding to invest in capital is a short-run decision. True False
False
Firms make decisions with the goal of maximizing total revenue. True False
False
Suppose that widgets can be produced using two different production techniques, A and B. The following table provides the total input requirements for each of five different total output levels. Q = 1 Q = 2 Q = 3 Q = 4 Q = 5 Tech. K L K L K L K L K L A 4 1 6 2 9 4 12 7 11 8 B 1 3 2 5 4 8 5 12 7 15 Assuming that the price of labor (PL) is $2 and the price of capital (PK) is $1, calculate the total cost of production for each of the five levels of output using the optimal (least-cost) technology at each level. To do this, complete the table below by calculating the total cost of production, filling in the missing values using the optimal (least-cost) technology at each level. (Enter your responses as whole numbers.) Q = 1 Q = 2 Q = 3 Q = 4 Q = 5 Total $? $? $? $? $? Cost How many labor hours (units of labor) would be employed at each level of output? How many machine hours (units of capital)? To answer this, complete the table below for the units of labor and units of capital that would be used to produce each level of output. (Enter your responses as whole numbers.) Q = 1 Q = 2 Q = 3 Q = 4 Q = 5 L ? ? ? ? ? K ? ? ? ? ? Graph total cost of production as a function of output. 1.) Using the multipoint curved line drawing tool, graph total cost of production as a function of output. Put cost on the y-axis and output, q, on the x-axis. Label your line 'Total Cost'. Again assume that the optimal technology is used. Note: Carefully follow the instructions above and only draw the required object. Now assume the price of labor (PL) is $1 and the price of capital (PK) is $2. Calculate the total cost of production for each of the five levels of output using the optimal (least-cost) technology at each level. To do this, complete the table below by calculating the total cost of production, filling in the missing values using the optimal (least-cost) technology at each level. (Enter your responses as whole numbers.) Q = 1 Q = 2 Q = 3 Q = 4 Q = 5 Total $? $? $? $? $? Cost How many labor hours (units of labor) would be employed at each level of output? How many machine hours (units of capital)? To answer this, complete the table below for the units of labor and units of capital that would be used to produce each level of output. (Enter your responses as whole numbers.) Q = 1 Q = 2 Q = 3 Q = 4 Q = 5 L ? ? ? ? ? K ? ? ? ? ? Graph total cost of production as a function of output. 1.) Using the multipoint curved line drawing tool, graph total cost of production as a function of output. (Put cost on the y-axis and output, q, on the x-axis.) Label your line 'Total Cost'. Again assume that the optimal technology is used. Note: Carefully follow the instructions above and only draw the required object.
Q = 1 Q = 2 Q = 3 Q = 4 Q = 5 Total $6 $10 $17 $26 $27 Cost Q = 1 Q = 2 Q = 3 Q = 4 Q = 5 L 1 2 4 7 8 K 4 6 9 12 11 Q = 1 Q = 2 Q = 3 Q = 4 Q = 5 Total $5 $9 $16 $22 $29 Cost Q = 1 Q = 2 Q = 3 Q = 4 Q = 5 L 3 5 8 12 15 K 1 2 4 5 7
