Graded Assignment #7

In the long-run, firms can vary _________. A All inputs B Only capital; changes in labor occur in the short-run C Only labor; changes in capital occur in the short-run D Neither capital or labor. In the long-run, the market determines use of inputs

A (All inputs) (Labor can be changed in relatively short periods of time and therefore can be easily changed in the long-run also. Capital takes longer and is normally thought capable of being increased only in the long-run. The definition of the long-run is that it is a time period long enough that all inputs can be changed.)

In the long-run, marginal cost will be average cost if the firm is experiencing economies of scale. A Below B Above C Equal to D None of the above. Marginal cost is a short-run concept.

A (Below)

See the table below. Suppose the firm has firm size K = 1. If the firm was attempting to minimize average costs with this level of capital, what output level would they choose? A 100 B 200 C 300 D 400

B (200) (This is found by just reading the table. At K = 1, the given output choices show that 200 units of output produce the lowest average cost.)

Suppose that the cost of capital decreases and the firm must now adjust its inputs accordingly. As the firm adjusts, which of the following best describes the effect on inputs? The marginal product of labor will ; the marginal product of machines will. A Increase; decrease B Not change; not change C Increase; increase D Decrease; decrease E Decrease; increase

A (Increase; decrease) (If capital becomes cheaper, the firm will be getting more "bang for its buck" with capital at all levels of output. Thus, the firm will respond by using more capital and less labor. As the firm increases the amount of capital it uses, workers will become more productive as they have more and better tools to work with. The marginal product of labor rises. At the same time, those tools and machinery will be used less intensively since there is now more capital per worker so the marginal product of capital decreases.)

As a firm increases output, long-run average costs typically _________. A Rise, peak, then fall B Fall, hit a minimum, then rise C Increase gradually D Remain constant

B (Fall, hit a minimum, then rise) (This describes the shape of the entire long-run average cost function moving from left to right, illustrating economies of scale, constant returns to scale, and then diseconomies of scale.)

When can diseconomies of scale occur? A In the short-run B In the long-run C When total costs are falling D When average costs are falling

B (In the long-run) (Diseconomies of scale (just like economies of scale) are a long-run phenomenon.)

Suppose a firm doubles its inputs (therefore doubling its total costs as well). If this firm is experiencing diseconomies of scale, then __________. A Output will double B Output will increase, but less than double C Output will remain the same D Output will decrease

B (Output will increase, but less than double) (More inputs lead to more outputs. However, diseconomies of scale implies that average costs are increasing. This means that outputs will grow at a slower rate than inputs.)

Which of the following is NOT one of the reasons a firm might be expected to experience economies of scale? A Specialization of all inputs B Reducing issues with diminishing marginal product of labor C Firms using larger volume equipment D Improved equipment

B (Reducing issues with diminishing marginal product of labor) (Diminishing marginal product of labor is a short-run occurrence when capital is fixed. In the long-run, all inputs are variable.)

Economies of scale happen when increases in output result in _________. A Increasing average costs B Constant average costs C Lower average costs D Lower total costs

C (Lower average costs) (This is on the left side of the long-run average cost function (lower levels of output). Economies of scale means average costs fall when output (and firm size) increases.)

Regarding input choices, how would a firm respond to an increase in the wage rate? A The firm would use less capital. B The firm would use less labor. C The firm would use less labor and more capital. D The firm would use more labor and less capital.

C (The firm would use less labor and more capital.) (This would alter the comparison of the MPL/W and MPK/R ratios. It would mean that the labor is no longer as productive per dollar as it once was. Thus, the firm will use less of the labor and more capital. For any level of output, this will be true.)

An increase in the prices of an input will cause long-run average costs to A Increase B Decrease C Not change. The input is fixed. D Either increase or decrease, depending upon whether variable inputs are substituted.

A (Increase) (Firms were presumably producing in the most efficient way possible given the initial price of inputs. An increase in the price of one of those inputs means that the average cost of any production process is now higher than it was before. Thus, an increase in the price of any input will result in higher average costs. They may use less of that input and more of another, but costs will rise.)

If the long-run average cost curve is horizontal, it implies that the firm is experiencing _________. A Constant returns to scale B Technical efficiency of inputs C Constant total costs D Unchanging levels of production

A (Constant returns to scale) (This is the "middle" section of the long-run average cost curve, where doubling inputs will result in double outputs. Thus, the average costs don't change and the function is horizontal.)

When a firm gets so large that coordination and management of workers and other inputs becomes costly and difficult, it is experiencing which of the following? A Diseconomies of scale B Diminishing marginal product C Economies of scale D Economies of scope

A (Diseconomies of scale) (This is one of the main causes of diseconomies of scale - increased cost and difficulty managing larger quantities of inputs and outputs.)

Suppose a firm triples its inputs in the long-run, and as a result, output doubles. Which of the following is true? A This firm is experiencing diseconomies of scale. B This firm is experiencing constant returns to scale. C This firm is not using the lowest cost combination of capital and labor. D This firm is growing too fast and reducing profits.

A (This firm is experiencing diseconomies of scale.) (If inputs triple and output only doubles, then average costs are increasing. This is a decreasing returns to scale (diseconomies of scale) situation. Note that if inputs triple, total costs triple. Thus, you could view this as total costs increase and output increases by less, so average costs increase.)

A firm's long-run total cost curve is ________. A Upward sloping B Downward sloping C Horizontal D Any of the above, depending on the industry

A (Upward sloping) (The TOTAL cost function is going to be upward sloping. Any time output levels increase, total costs increase. If total costs were constant or falling, we'd have zero or negative marginal costs, which can't occur in reality.)

Assume a firm is operating in the long-run. At the current level of output, MPL =10 and MPK = 30. Also assume that in this industry, W = 10 and R = 10. Keeping output the same, how can this firm lower production costs? A Use more K and less L B Use more L and less K C The firm is already using the optimal cost-minimizing combination of inputs for this level of output.

A (Use more K and less L) (In this case, (MPL/W) < (MPK/R). This means the firm is getting more output per dollar with capital. Thus, the firm should use more capital inputs and fewer labor inputs.)

For any firm, what is the long-run average cost curve? A A downward sloping line B A function which shows the lowest average cost of producing any output level C The same as the long-run marginal cost curve D Upward sloping at all levels of output

B (A function which shows the lowest average cost of producing any output level) (Think about the definition of the long-run cost curve and how it is found. It is the minimum possible average cost of producing any output level when all inputs can be varied.)

An electric power plant most likely experiences which of the following? A Constant returns to scale B Economies of scale C Diseconomies of scale

B (Economies of scale) (For any given size of power plant, there are likely large fixed costs and smaller marginal costs. This means average costs will fall as output levels increase. A larger plant could supply many more customers without increasing operating costs too much.)

Consider the table below showing different average costs for three different firm sizes across a range of output levels. At a long-run chosen output level of 400, which firm size (amount of capital) would the firm want to use? A K = 1 B K = 2 C K = 3

B (K = 2) (Recall that the firm will want to get the output produced at the lowest possible cost to maximize profits. At output level 400, this occurs with size K = 2.)

The marginal product of labor (MPL) can be defined as which of the following? A The change in output costs when another worker is hired B The change in output level as the result of hiring another worker C The change in the wage rate as the result of hiring another worker D The change in capital productivity when another worker is hired

B (The change in output level as the result of hiring another worker) (This is just viewing the definition of MPL in an intuitive way.)

Once firms have adjusted their hiring, a college-educated worker, whose marginal product is twice that of the typical worker with only a high-school education, should expect that her wages will be which of the following? A More than twice the amount of the high-school graduate B Twice the amount of the high-school graduate C Less than twice that of the high-school graduate D One cannot tell. The college worker may have better alternatives.

B (Twice the amount of the high-school graduate) (Firms will have hired workers in proportions so that their marginal products divided by their wages are equal. Thus, if the marginal products of the college-educated or worker is twice that of the high-school graduate, the wages of the college-educated worker must be twice that of the high-school graduate.)

For the next three questions, the following abbreviations are used. MPL = marginal product of labor. MPK = marginal product of capital. W = wage rate (the cost of a unit of labor). R = rental rate (the cost of a unit of capital). Assume a firm is operating in the long-run. At the current level of output, MPL = 30 and MPK = 50. Also assume that in this industry, W = 5 and R = 10. Keeping output the same, how can this firm lower production costs? A Use more K and less L B Use more L and less K C The firm is already using the optimal cost-minimizing combination of inputs for this level of output.

B (Use more L and less K) (In this case, (MPL/W) > (MPK/R). This means the firm is getting more output per dollar with labor. Thus, the firm should use more labor inputs and fewer capital inputs.)

Which of the following is an example of long-run decision for a firm? A A grocery hires a new deli manager B A university hires a new president C A car manufacturer builds a new factory D A tech company hires ten new interns

C (A car manufacturer builds a new factory) (Think about the choices firms are assumed to have in the short-run and long-run. In the short-run, at least one input, usually capital, is fixed. In the long-run, all inputs are variable.)

At a bakery, which of the following operating characteristics might result in economies of scale? A Each oven requires one worker attending to it. B Two ovens can produce twice as many cakes as one oven. C A giant mixing container costs twice as much to operate as a small one but can mix 6 times as much dough daily. D Each cake produced uses the same amount of ingredients.

C (A giant mixing container costs twice as much to operate as a small one but can mix 6 times as much dough daily.) (You're looking here for an example that specifically shows average costs falling when more output is produced. The larger mixing container increases output by 6 times but only doubles costs, so it lowers the average cost.)

For a firm, the short-run is defined as being __________. A A period of time less than one year B A period of time less than one month C A period of time in which at least one of the firm's inputs is unchangeable D A period of time in which all the firm's inputs are variable

C (A period of time in which at least one of the firm's inputs is unchangeable) (Think about the choices firms are assumed to have in the short-run and long-run. In the short-run, at least one input, usually capital, is fixed. In the long-run, all inputs are variable.)

What is true about the long-run for a firm? A At least one input cannot be changed B The firm only uses one of either capital or labor, whichever is cheapest C All inputs can be changed D No inputs can be changed

C (All inputs can be changed) (Think about the choices firms are assumed to have in the short-run and long-run. In the short-run, at least one input, usually capital, is fixed. In the long-run, all inputs are variable.)

A long-run average cost curve that rises through all levels of possible outputs represents which effect? A The law of diminishing marginal returns B Economies of scale C Diseconomies of scale D None of the above

C (Diseconomies of scale) (Diseconomies of scale means that if all inputs are doubled, output will be less than doubled. Thus, the cost will increase as the scale of the firm increases.)

When a firm is experiencing economies of scale, the long-run average cost curve is _________. A Upward sloping B Horizontal C Downward sloping D At its minimum

C (Downward sloping) (This is the left side of the typical long-run average cost function, where we see the downward slope.)

See the table below. At a long-run chosen output level of 500, which firm size (amount of capital) would the firm want to use? A K = 1 B K = 2 C K = 3C K = 3

C (K = 3) (Recall that the firm will want to get the output produced at the lowest possible cost to maximize profits. At output level 500, this occurs with size K = 3.)

What is the main source of diseconomies of scale? A Physical capital breaking more often with large output levels B Specialization of capital and labor C Limited ability to manage and coordinate larger amounts of inputs D Workers getting fatigued

C (Limited ability to manage and coordinate larger amounts of inputs) (Since management has limited effectiveness, more management may be needed to oversee larger operations. . This management certainly has costs, but it might not necessarily increase output by very much! This can increase average costs.)

Assume the following data. The marginal product of labor is 300 washed cars per day. The daily wage is $120. If the marginal product of machines that would wash cars is 400 per day and the rent for the machines is $160, what will the firm do? A Rent more machines, because their marginal products are higher B Hire more workers, because they cost less per day C Not change the number of machines or workers D Expand both the number of machines and workers

C (Not change the number of machines or workers) (The additional output per dollar spent on both resources is the same. Thus, the firm cannot reduce its costs or expand its output by switching from one resource to another.)

Suppose that the cost of all inputs (both labor and capital) decreases. What will happen to the long-run cost curve? The curve will _____, illustrating that _______. A Shift right; there are no diseconomies of scale B Shift downward; economies of scale now occur at more output levels C Shift downward; any level of output can now be produced at a lower average cost D Shift upward; the firm will increase costs by spending money elsewhere

C (Shift downward; any level of output can now be produced at a lower average cost) (With lower costs, output can be achieved at lower costs.)

Assume a firm is operating in the long-run. At the current level of output, MPL = 60 and MPK = 600. Also assume that in this industry, W = 20 and R = 200. Keeping output the same, how can this firm lower production costs? A Use more K and less L B Use more L and less K C The firm is already using the optimal cost-minimizing combination of inputs for this level of output.

C (The firm is already using the optimal cost-minimizing combination of inputs for this level of output.) (In this case, (MPL/W) = (MPK/R). This means the firm is using the optimal amount (cost-minimizing combination) of capital and labor inputs for this level of output.)

Suppose an additional worker can handle an additional 10 orders per hour. That will cost $15 per hour. An additional telephone answering machine will handle an additional 20 calls per hour at a cost of $10 per hour. Which of the following is correct? A The firm should increase labor and decrease capital, because labor costs more per hour. B The firm should increase capital and decrease labor, because labor produces less per hour. C The firm should increase capital and decrease labor, because labor produces less per dollar spent. D The firm should increase labor and decrease capital, because labor produces less per dollar spent.

C (The firm should increase capital and decrease labor, because labor produces less per dollar spent.) (When the firm is getting more output per additional dollar with capital, they should use more capital and less labor to produce that level of output.)

See the table below. Suppose the firm chooses a permanent output level of 500 units but remains in firm size K = 2. What is the result of this? A The firm will find a way to lower costs further with this amount of capital. B The firm will certainly go out of business. C The firm will be operating inefficiently at higher costs, therefore not maximizing profits. D The firm will be required to begin producing inferior quality goods.

C (The firm will be operating inefficiently at higher costs, therefore not maximizing profits.) (We generally assume the firm is already using inputs to their fullest ability, so they can't somehow become even more productive. The "wrong" firm size simply means we'll have the wrong amount of inputs with higher costs than necessary to get our output made.)

The amount of time a firm operates with the ability to make long-run decisions is how long? A Between five and ten years B Greater than five years C Greater than two years D Differs by industry

D (Differs by industry) (It's not an arbitrary time—just how long it takes to change inputs. This can be different for different industries. It may take a short time to get another food truck for fast food industries, but take a long time to get a new car manufacturing factory for automobile industries.)

The marginal product of labor is 100 boxes of software and wages are $10 per hour. A machine that does the same work rents for $200 per hour and packages 1000 boxes per hour. If the firm is currently producing the amount it wishes, what should it do? A Expand labor and reduce capital, the marginal product of capital is greater than the marginal product of labor B Expand labor and reduce capital, as capital costs significantly more C Expand capital and reduce labor, as the additional output for each dollar spent is greater for capital than labor D Expand labor and reduce capital, as the additional output for each dollar spent is greater for labor than for capital

D (Expand labor and reduce capital, as the additional output for each dollar spent is greater for labor than for capital) (If the firm is getting more output per dollar with labor, it should use more labor.)

In the long-run, the law of diminishing marginal product is the cause of _________. A Higher wage rates B Decreased firm output C Diseconomies of scale D None of the above

D (None of the above) (The law of diminishing marginal product is just a result we get if we hold one input fixed. It doesn't explain or cause any of the listed factors.)

See the table below. At what long-run output levels would it be best to choose firm size K = 2? A Any output level less than 500 B Output levels between 200 and 400 C Output levels between 300 and 500 D Output levels between 300 and 400

D (Output levels between 300 and 400) (You would want to choose K = 2 only if it provides the lowest cost for your chosen output level. This is true for "mid-range" output levels in our example between 300 and 400 units. Note that there could be actually a wider range than this, but we're not fully certain with the limited output choices detailed in the table.)

Which of the following is an example of a short-run decision for a firm? A Moving into a larger production facility B Moving to a smaller production facility C Getting more trucks to transport goods across the count D Reducing the number of workers at the firm

D (Reducing the number of workers at the firm) (Think about the choices firms are assumed to have in the short-run and long-run. In the short-run, at least one input, usually capital, is fixed. In the long-run, all inputs are variable.)

Assume an additional waiter can increase the number of customers served in a restaurant by 100 customers per day. The waiter will cost the restaurant $50 per day. On the other hand, a new microwave oven will speed the cooking process and allow each customer to be served more quickly. The oven will allow 200 more customers to be served with no additional labor. The oven can be rented for $75 per day. What should the restaurant do? A Hire another waiter, because the waiter is cheaper B Rent a microwave because the expansion in output is greater than the increase resulting from a new waiter C Hire another waiter, because the increase in output per dollar spent is greater than the increase per dollar spent from renting a microwave D Rent a microwave, because the increase in output per dollar spent is greater than the increase in output per dollar spent from hiring another worker

D (Rent a microwave, because the increase in output per dollar spent is greater than the increase in output per dollar spent from hiring another worker) (If you're getting more output per additional dollar with capital, you should hire more capital.)