Chapter 7

Suppose a chair manufacturer finds that the marginal rate of technical substitution​ (MRTS) of capital for labor in her production process is substantially less than the ratio of the wage rate for​ assembly-line labor​ (w) to the rental rate on machinery​ (r). How should she alter her use of labor and capital to minimize the cost of​ production? Holding output​ constant, the chair manufacturer should use less/more labor and less/more capital.

less; more

(18) Refer to the figure at right. Which point on the graph shows the optimal combination of​ inputs? A. Point B B. Point​ D, when the production process is capital intensive C. Point​ A, when the production process is capital intensive D. All three​ points, A,​ B, and D are optimal.

A

A firm that has positive accounting profit does not necessarily have positive economic profit. This statement is A. true because economic costs will be greater than accounting costs if implicit costs exist. B. true because economic costs will be greater than accounting costs if sunk costs exist. C. falsefalse because economic costs will be greater than accounting costs if explicit costs exist. D. false because economic costs will be greater than accounting costs if depreciation exists. E. false because accounting costs will be greater than economic costs if implicit costs exist.

A

In a​ short-run production​ process, the marginal cost is rising and the average variable cost is falling as output is increased.​ Thus, A. marginal cost is below average variable cost. B. marginal cost is above average variable cost. C. marginal cost is below average fixed cost. D. average fixed cost is constant.

A

The owner of a small retail store does her own accounting work. How would you measure the opportunity cost of her​ work? The opportunity cost of the​ owner's accounting work is A. the monetary amount that her time would have been worth in its next best use. B. the difference between what she would have paid an accountant to do the work and the monetary value of her time. C. the difference between the monetary value of her time and the monetary amount that her time would have been worth in its next best use. D. the monetary amount that she would have paid an accountant to do the work. E. the explicit cost of the​ work, which is zero since she does it herself.

A

Which of the following costs always declines as output​ increases? A. Average fixed cost B. Average variable cost C. Marginal cost D. Average cost E. Fixed cost

A

Which of the following is an example of a sunk​ cost? A. The amount a company originally paid for specialized equipment for a plant. B. The opportunity cost of a company​ owner's time. C. The amount for which a company could rent equipment it owns to another company. D. The amount a company pays for labor to produce its product.

A

(31) Refer to the figure at right. Which level of output is produced at the minimum possible cost per​ unit? A. q1 B. q2 C. q3 D. All of the above

B

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 A. the ratio of the amount of chemicals used to the amount of labor used equals the ratio of the marginal product of chemicals to the marginal product of labor. B. the production of an additional unit of dynamite costs the same regardless of whether chemicals or labor are used. C. the ratio of the amount of chemicals used to the amount of labor used equals the ratio of the price of chemicals to the wage rate. D. the marginal products of chemicals and labor are equal. E. none of the above.

B

A​ firm's long-run average cost​ (LAC) curve is downward sloping. Each​ short-run average cost​ (SAC) curve will be tangent to the LAC curve at A. the minimum point on the SAC curve. B. a point to the left of the minimum of the SAC curve. C. the minimum point of the LAC curve. D. a point to the right of the minimum of the SAC curve.

B

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 variable cost. B. a fixed cost. C. an implicit cost. D. a sunk cost. E. an opportunity cost.

B

Please explain whether the following statements are true or false. If the owner of a business pays himself no​ salary, then the accounting cost is​ zero, but the economic cost is positive. This statement is A. true because economic costs include opportunity costs such as expenditures that cannot be recovered. B. true because economic costs include opportunity costs such as the value of the business​ owner's time. C. false because economic costs include explicit costs. D. false because accounting costs include opportunity costs such as the value of the business​ owner's time. E. false because economic costs include the same costs as accounting costs.

B

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? A. A temporary worker who is paid by the hour B. A salaried manager who has a​ three-year employment contract C. An hourly employee D. None of the above

B

A firm uses 80 hours of labor and 6 units of capital to produce​ 10,000 gadgets per day.​ Labor's marginal product is 4 gadgets per hour and the marginal product of capital is 20 gadgets per unit. Each unit of labor costs​ $8 per hour and each unit of capital costs​ $50 per unit. If the firm wants to continue producing​ 10,000 gadgets per day at the lowest possible​ cost, it should A. use less of both inputs. B. continue using 80 hours of labor and 6 units of capital. C. use more labor and less capital. D. use more capital and less labor.

C

A​ firm's expansion path is A. a curve that makes the marginal product of the last unit of each input equal for each output. B. the​ firm's production function. C. a curve that shows the​ least-cost combination of inputs needed to produce each level of output for given input prices. D. none of the above.

C

Fixed costs are fixed with respect to changes in A. capital expenditure. B. time. C. output. D. wages.

C

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

C

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." A. I only. B. Neither I nor II. C. II only. D. Both I and II.

C

Which of the following statements is true regarding the differences between economic and accounting​ costs? A. Economic costs include implied costs only. B. Accounting costs include all implicit and explicit costs. C. Accounting costs include only explicit costs. D. Accountants consider only implicit costs when calculating costs.

C

(19) Refer to the figure at right. Which of the following changes causes the move from A to​ B? A. The quantity to be produced B. The budget of the producer C. The productivity of inputs D. The price of one of the inputs

D

(22) Refer to the figure at right. The expansion path in the figure leads to the construction of A. a​ long-run average total cost curve. B. a​ short-run marginal cost curve. C. a​ long-run marginal cost curve. D. a​ long-run total cost curve.

D

(29) Refer to the figure at right. An increase in production from q1 to q2 A. uses less inputs in the long run. B. uses more capital in the short run. C. costs the same in the short run or in the long run. D. is more costly in the short run than in the long run.

D

Assume that the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or​ decreasing? Explain. If the marginal cost of production is greater than the average variable cost of​ production, then A. average variable cost is rising because marginal cost and average variable cost are equal. B. average variable cost could be rising or falling because marginal cost and average variable cost are unrelated. C. average variable cost is rising because the cost of the last unit produced is adding to total variable cost. D. average variable cost is rising because the cost of the last unit produced is adding more to total variable cost than previous units did on average. E. average variable cost is falling because the cost of the last unit produced is adding less to total variable cost than previous units did on average.

D

At the optimum combination of two​ inputs, A. the marginal rate of technical substitution equals the ratio of input prices. B. the slopes of the isoquant and isocost curves are equal. C. costs are minimized for the production of a given output. D. all of the above. E. A and C only.

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

D

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. A. I is​ true, and II is false. B. I is​ false, and II is true. C. I and II are both false. D. I and II are both true.

D

How does a change in the price of one input change the​ firm's long-run expansion​ path? If the price of an input​ changes, then the A. isoquants will shift in a parallel​ fashion, and the firm will substitute away from the relatively more expensive input, pivoting the expansion path toward the axis of the relatively more expensive input. B. slope of the isocost lines will​ change, and the firm will substitute toward the relatively cheaper input​, pivoting the expansion path toward the axis of the relatively more expensive input. C. isocost lines will shift in a parallel​ fashion, and the firm will substitute away from both​ inputs, shifting the expansion path in a parallel fashion. D. slope of the isocost lines will​ change, and the firm will substitute away from the relatively more expensive input​, pivoting the expansion path toward the axis of the relatively cheaper input. E. slope of the isoquants will​ change, and the firm will substitute toward the relatively cheaper input​, pivoting the expansion path toward the axis of the relatively more expensive input.

D

If a firm hires a currently unemployed​ worker, the opportunity cost of utilizing the​ worker's services is zero. This statement is A. true because the​ worker's time otherwise has no value. B. false because the​ worker's new wages are an implicit cost. C. true because the​ worker's new wages are a sunk cost. D. false because the​ worker's time otherwise spent in leisure activities has value. E. false because the​ worker's time otherwise spent in unpaid household work has no value.

D

Which of the following is NOT an expression for the​ cost-minimizing combination of​ inputs? A. MPL / MPK = w/r B. MRTS = w/r C. MPL/w = MPk/r D. MRTS = MPL/MPK E. None of the above

D

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 A. the firm could produce 3 more units of output if it increased its use of labor by one unit​ (holding capital​ constant). B. if it used one more unit of both capital and​ labor, the firm could produce 3 more units of output. C. the firm could produce 3 more units of output if it increased its use of capital by one unit​ (holding labor​ constant). D. the marginal product of labor is 3 times the marginal product of capital. E. if the firm reduced its capital stock by one​ unit, it would have to hire 3 more workers to maintain its current level of output.

D

Assume that the marginal cost​ (MC) of production is increasing. Can you determine whether the average variable cost​ (AVC) is increasing or​ decreasing? Explain. A. MC and AVC are unrelated because MC depends on marginal inputs and AVC depends on variable inputs. B. If MC is increasing​, then AVC must be increasing because MC equals the change in total variable cost. C. Even if MC is increasing​, AVC will be increasing because total variable cost​ (TVC) increases with output. D. Regardless of whether MC is increasing​, AVC could be increasing or decreasing depending on whether MC is positive or negative. E. Regardless of whether MC is increasing​, AVC could be increasing or decreasing depending on whether MC is greater than or less than AVC.

E

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? A. Fixed cost B. Average fixed cost C. Total cost D. Variable cost E. Carolyn can determine all of the above costs given the information provided.

E

If a firm enjoys economies of scale up to a certain output​ level, and cost then increases proportionally with​ output, what can you say about the shape of the​ long-run average cost​ curve? The​ long-run average cost curve A. is decreasing. B. is increasing. C. is​ U-shaped. D. is horizontal. E. decreases initially and then is horizontal.

E

Which of the following situations is NOT​ possible? A. SAC and LAC are both increasing for some output levels. B. SAC and LAC are both decreasing for some output levels. C. SAC is decreasing but LAC is increasing for some output levels. D. SAC is increasing but LAC is decreasing for some output levels. E. All of the above are possible.

E