ECO 6115 - EXAM 2

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

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

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?

Nuclear power plant

Many mining and mineral extraction processes tend to exhibit increasing returns to scale. Suppose copper mines have increasing returns, and the existing copper mines reduce their capital and labor inputs by 25 percent in response to a global recession. What is the expected impact on copper output?

Output decreases by more than 25 percent.

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?

Positive

Suppose the market demand curve is perfectly elastic in an increasing-cost industry. If an output tax of t per unit is imposed on all producers of the good, what happens to the market equilibrium outcome?

The price paid by buyers does not change and output decrease.

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?

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

Which of the following is true regarding the relationship between returns to scale and economies of scope?

There is no definite relationship between returns to scale and economies of scope.

At the profit-maximizing level of output, what is relationship between the total revenue (TR) and total cost (TC) curves?

They must have the same slope.

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?

We will only use labor in the production process.

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

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 fixed cost.

If input prices are constant, a firm with increasing returns to scale can expect:

costs to go up less than double as output doubles.

If the isoquants in an isoquant map are downward sloping but bowed away from the origin (i.e., concave to the origin), then the production technology violates the assumption of:

diminishing marginal returns.

Two firms, each producing different goods, can achieve a greater output than one firm producing both goods with the same inputs. We can conclude that the production process involves:

diseconomies of scope

An improvement in technology would result in:

downward shifts of MC and increases in output.

Which of the following is the user cost of capital?

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

The cost-output elasticity is used to measure

economies of scale

The production function is: Q = 4L1/2K1/2. Suppose that your firm decides to double its output to 400. To achieve this level of output the firm will have to:

exactly double its inputs

The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced. For 100 cookies, the average total cost is:

falling

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 wil

follow the 45-degree line from the origin.

The long-run supply curve in a constant-cost industry is linear and:

horizontal.

A production function defines the output that can be produced:

if the firm is technically efficient

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.

infinite

An isocost line reveals the

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

When the average product is decreasing, marginal product:

is less than average product.

In the short run, a perfectly competitive profit maximizing firm that has not shut down:

is operating on the upward-sloping portion of its AVC curve.

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

isoquant curve.

If a competitive firm's marginal cost curve is U-shaped, then:

its short-run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short-run average variable cost curve

Generally, economies of scope are present when

joint output is greater from a single firm producing two goods than could be achieved by two different firms each producing a single product (assuming equivalent production inputs in both situations).

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.

labor, capital

Increasing returns to scale in production means:

less than twice as much of all inputs are required to double output.

A variable cost function of the form: VC = 23 + Q + 7Q2 implies a marginal cost curve that is:

linear

Incremental cost is the same concept as ________ cost

marginal

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

marginal cost is below average variable cost.

A logarithmic variable cost function implies that:

marginal cost is increasing at a decreasing rate.

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

marginal cost must be constant and equal to b.

The rate at which one input can be reduced per additional unit of the other input, while holding output constant, is measured by the:

marginal rate of technical substitution.

The law of diminishing returns refers to diminishing:

marginal returns.

Marginal profit is equal to

marginal revenue minus marginal cost

For a given pair of production outputs, the degree of economies of scope:

may increase or decrease with output.

Two soft-drink firms, Fizzle & Sizzle, operate on a river. Fizzle is farther upstream, and gets cleaner water, so its cost of purifying water for use in the soft drinks is lower than Sizzle's by $500,000 yearly, Fizzle and Sizzle:

may or may not be perfect competitors, but their position on the river has nothing to do with it.

Economies of scope refer to:

multiproduct firms.

Suppose the state legislature in your state imposes a state licensing fee of $100 per year to be paid by all firms that file state tax revenue reports. This new business tax:

none of the above

A firm never operates:

on the downward-sloping portion of its AVC curve

In the short run, a perfectly competitive firm earning positive economic profit is:

on the upward-sloping portion of its ATC.

For Figure 6.9 in the book, MRTS = K/(4L) with capital (K) on the vertical axis of the isoquant map. Suppose L=100 hours and K=400 machine hours at the current level of output. How much additional labor is required to maintain output if we reduce capital by one machine hour?

one hour

Fixed costs are fixed with respect to changes in:

output

Marginal profit is negative when:

output exceeds the profit maximizing level.

Marginal profit is negative when

output exceeds the profit-maximizing level.

The demand curve facing a perfectly competitive firm is

perfectly horizontal

Revenue is equal to

price times quantity

Which of the following production functions exhibits constant returns to scale?

q = K + L

If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the:

rate at which the firm can replace capital with labor without changing the output rate.

The marginal rate of technical substitution is equal to the:

ratio of the marginal products of the inputs.

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

rented, even if it was purchased.

The concerns about world food production raised by Malthus have not materialized because:

technological improvements have increased our ability to produce food over time.

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:

technologically inefficient.

The link between the productivity of labor and the standard of living is:

that over the long run, consumers as a whole can increase their rate of consumption only by increasing labor productivity.

The marginal product of an input is:

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

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:

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

Refer to Figure 8.4.2 above. When the farmer's profit is maximized, total cost equals:

$.6226

The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced. The total cost to produce 50 cookies is.

$20

The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced. The total cost to produce 50 cookies is:

$20

The production function is: Q = 4L1/2K1/2. What is the total cost of producing 200 units of output?

1000

Suppose the long-run cost function is C = 2q2. What is the cost-output elasticity for this case?

2

Refer to Figure 8.4.2. The figure describes the cost and revenue structure of a perfectly competitive coffee farm, on a per-unit basis. What is the profit maximizing number of sacks when the price of coffee in the market is $380 dollars?

22 sacks

The production function for earthquake detectors (Q) is given as follows: Q = 4K1/2L1/2 where K is the amount of capital employed and L is the amount of labor employed. The price of capital, PK, is $18 and the price of labor, PL, is $2. What is the marginal cost of the 60th earthquake detector?

3

The production function for earthquake detectors (Q) is given as follows: Q = 4K1/2L1/2 where K is the amount of capital employed and L is the amount of labor employed. The price of capital, PK, is $18 and the price of labor, PL, is $2. Suppose that you receive an order for 60 earthquake detectors. How much labor will you use to minimize the cost of 60 earthquake detectors?

45

The production function is: Q = 4L1/2K1/2. When Q = 200, what is the marginal cost?

5

Short-run supply curves for perfectly competitive firms tend to be upward sloping because:

A and B are correct.

You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. As you increased the number of employees hired per hour from three to five, your total output increased by 5 cars to 15 cars per hour. What is the average product of labor at the new levels of labor?

AP = 3 cars per worker

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). What is the average product of labor?

AP = 5K

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

Accounting costs include only explicit costs.

Which of the following situations is NOT possible?

All of the above are possible

What happens in a perfectly competitive industry when economic profit is greater than zero?

All of the above may occur.

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.

Both I and II are false

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

Establish industry safety regulations

Use the following two statements to answer this question: I. "Decreasing returns to scale" and "diminishing returns to a factor of production" are two phrases that mean the same thing. II Diminishing returns to all factors of production implies decreasing returns to scale.

Both I and II are false.

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

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 determine the slope of the short-run marginal cost curve, whereas returns to scale determine the slope of the long-run marginal cost curve.

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.

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.

Both I and II are true.

Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery?

Bubba adds grilled chicken sandwiches to the menu.

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?

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

The production function for earthquake detectors (Q) is given as follows: Q = 4K1/2L1/2 where K is the amount of capital employed and L is the amount of labor employed. The price of capital, PK, is $18 and the price of labor, PL, is $2. This production function is an example of which of the following types of production functions?

Cobb-Douglas

Which scenario below would lead to lower profits as we double the inputs used by the firm?

Constant returns to scale with rising input prices (perhaps because the firm is not a price-taker in the input markets)

Which of the following statements does not explain why US health care expenditures are higher than in other countries?

Government policies have shifted the health care production function downward over time.

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 the marketing department is running under budget this year, the cost of another sales promotion is lower than it otherwise would be."

I and II are both false.

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.

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.

I and II are both true.

Use the following statements to answer this question: I. An increase in the firm's fixed costs will also shift the firm's short-run supply curve to the left. II. An increase in the firm's fixed costs will not shift the firm's short-run supply curve to the right or left, but it may alter how much of the marginal cost curve is used to form the short-run supply curve.

I and II are false.

Use the following statements to answer this question: I. We cannot measure the returns to scale for a fixed-proportion production function. II. Production functions with inputs that are perfect substitutes always exhibit constant returns to scale.

I and II are false.

Use the following statements to answer this question: I. The firm's decision to produce zero output when the price is less than the average variable cost of production is known as the shutdown rule. II. The firm's supply decision is to generate zero output for all prices below the minimum AVC.

I and II are 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.

I is false, and II is true.

Use the following statements to answer this question: I. Under perfect competition, an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input) also shifts the average variable cost curve upward. II. Under perfect competition, an upward shift in the marginal cost curve (perhaps due to a higher price for a variable input) reduces firm output but may increase firm profits.

I is true and II is false

Consider the following statements when answering this question: I. In the long-run equilibrium of a perfectly competitive market, a firm's producer surplus equals the sum of the economic rents earned on its inputs to production. II. In the long-run equilibrium of a perfectly competitive market, the amount of economic profit earned can differ across firms, but not the amount of producer surplus.

I is true, and II is false

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.

I is true, and II is false.

Consider the following statements when answering this question: I. Increases in the demand for a good, which is produced by a competitive industry, will raise the short-run market price. II. Increases in the demand for a good, which is produced by a competitive industry, will raise the long-run market price.

I is true, and II is false.

Use the following two statements to answer this question: I. Isoquants cannot cross one another. II. An isoquant that is twice the distance from the origin represents twice the level of output

I is true, and II is false.

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.

I is true, and II is false.

For any given level of output:

None of the above is necessarily correct.

Use the following statements to answer this question: I. The scale economies index is positive if the cost-output elasticity that is greater than one. II. A negative scale economies index indicates the presence of diseconomies of scale.

II is true and I is false.

In a constant-cost industry, price always equals:

LRMC and minimum LRAC

Which of the following ideas were central to the conclusions drawn by Thomas Malthus in his 1798 "Essay on the Principle of Population"?

Law of diminishing returns

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

MRTS = MPL /MPK

What describes the graphical relationship between average product and marginal product?

Marginal product cuts average product from above, at the maximum point of average product.

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.

In Example 6.5 in the book, the authors use the observed production data from the U.S. carpet industry to show that small firms likely have constant returns to scale and that large firms likely have increasing returns to scale. Are returns to scale in this industry likely to continue increasing as these firms become even larger?

No, the authors predict that returns to scale in carpet production will likely decline at some point.

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

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

Which of the following is NOT a necessary condition for long-run equilibrium under perfect competition?

Prices are relatively low.

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?

Q = 100KL0.5

Which of the following relationship is NOT valid?

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?

Sell to ABC Corporation

Joe's Organic Cereal Company produces granola breakfast cereal under a fixed proportion production system in which 22 ounces of cereal are packaged in each cardboard box. However, the plant production manager decides to reduce the amount of cereal per box to 20.5 ounces at the start of the next year. For the isoquant map, cereal is plotted in the vertical axis, and boxes are on the horizontal axis. What happens to the curves in the isoquant map as a result of this change?

Shift downward

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?

Shifts rightward

Which of the following is NOT related to the slope of isoquants?

The fact that input prices are positive

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?

The firm will only use the input with lower cost

The authors explain that a firm earning a zero economic profit in the long run has earned a competitive return on their investment. What do they mean by "competitive" return in this context?

The firm's return is at least as larger as could be earned in another investment

The authors explain that a firm earning a zero economic profit in the long run has earned a competitive return on their investment. What do they mean by "competitive" return in this context?

The firm's return is at least as larger as could be earned in another investment.

An increasing-cost industry is so named because of the positive slope of which curve?

The industry's long-run supply curve

If the law of diminishing returns applies to labor then:

after some level of employment, the marginal product of labor must fall.

A cubic cost function implies:

all of the above

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

all of the above

Which of the following examples represents a fixed-proportion production system with capital and labor inputs?

all of the above

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

all of the above.

Although the long-run equilibrium price of oil is $80 per barrel, some producers have much lower costs because their oil reserves are relatively close to the surface and are easier to extract. If the low-cost producers have a minimum LAC equal to $20 per barrel, then the difference ($60 per barrel) is:

an economic rent due to the scarcity of low-cost oil reserves.

In a constant-cost industry, an increase in demand will be followed by:

an increase in supply that will bring price down to the level it was before the demand shift.

Prospective sunk costs:

are relevant to economic decision-making.

For consideration of such issues as labor's productivity growth nationwide, the relevant measure is the:

average product of labor.

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:

below average total cost.

The production function Q = 4L1/2K1/2 exhibits:

constant returns to scale.

The textbook discusses the carpet industry situated in the southeastern U.S., and the authors indicate that smaller carpet mills have ________ returns to scale while larger mills have ________ returns to scale.

constant, increasing

In a production process, all inputs are increased by 10%; but output increases less than 10%. This means that the firm experiences:

decreasing returns to scale.

An industry analyst observes that in response to a small increase in price, a competitive firm's output sometimes rises a little and sometimes a lot. The best explanation for this finding is that:

the firm's marginal cost curve is horizontal for some ranges of output and rises in steps

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:

the marginal product of labor is 3 times the marginal product of capital.

When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However, when the price rose to $10, the firm produced 100 tons of output. From this we can infer that:

the minimum value of the firm's average variable cost lies between $5 and $10

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

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

If a competitive firm has a U-shaped marginal cost curve then:

the profit-maximizing output is found where MC = MR and MC is increasing.

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:

the ratio of the marginal product of waste water to the marginal product of machinery.

Two soft-drink firms, Fizzle & Sizzle, operate on a river. Fizzle is farther upstream, and gets cleaner water, so its cost of purifying water for use in the soft drinks is lower than Sizzle's by $500,000 yearly. If Fizzle and Sizzle sell the same output at the same price and are otherwise identical, Fizzle's profit will be:

the same as Sizzle's because Fizzle must be assigned an implicit cost of $500,000 yearly for economic rent.

The law of diminishing returns applies to:

the short run only.

At every output level, a firm's short-run average cost (SAC) equals or exceeds its long-run average cost (LAC) because:

there are at least as many possibilities for substitution between factors of production in the long run as in the short run.

When the TR and TC curves have the same slope,

they are the furthest from each other.

Higher input prices result in:

upward shifts of MC and reductions in output.

A straight-line isoquant:

would indicate that capital and labor are perfect substitutes in production.

An L-shaped isoquant:

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

The MRTS for isoquants in a fixed-proportion production function is:

zero or undefined.

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:

ΔQ / ΔL