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## Microeconomics Student Value Edition 8th Edition by Robert Pindyck -Test Bank A+

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Microeconomics Student Value Edition 8th Edition by Robert Pindyck -Test Bank A+

Microeconomics, 8e (Pindyck/Rubinfeld)

Chapter 6 Production

6.1 Firms and Their Production Decisions

1) A production function defines the output that can be produced

1. A) at the lowest cost, given the inputs available.
2. B) for the average firm.
3. C) if the firm is technically efficient.
4. D) in a given time period if no additional inputs are hired.
5. E) as technology changes over time.

Diff: 2

Section: 6.1

2) A production function assumes a given

1. A) technology.
2. B) set of input prices.
3. C) ratio of input prices.
4. D) amount of capital and labor.
5. E) amount of output.

Diff: 1

Section: 6.1

3) A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called

1. A) an isoquant.
2. B) a production possibility curve.
3. C) a production function.
4. D) an isocost function.

Diff: 1

Section: 6.1

4) Use the following two statements to answer this question:

1. Production functions describe what is technically feasible when the firm operates efficiently.
2. The production function shows the least cost method of producing a given level of output.
3. A) Both I and II are true.
4. B) I is true, and II is false.
5. C) I is false, and II is true.
6. D) Both I and II are false.

Diff: 1

Section: 6.1

5) A farmer uses L units of labor and K units of capital to produce Q units of corn using a production function F(K,L). A production plan that uses K’ = L’ = 10 to produce Q’ units of corn where

Q’ < F(10, 10) is said to be

1. A) technically feasible and efficient.
2. B) technically unfeasible and efficient.
3. C) technically feasible and inefficient.
4. D) technically unfeasible and inefficient.
5. E) none of the above

Diff: 2

Section: 6.1

6) Which of the following inputs are variable in the long run?

1. A) labor.
2. B) capital and equipment.
3. C) plant size.
4. D) all of these.

Diff: 1

Section: 6.1

7) The short run is

1. A) less than a year.
2. B) three years.
3. C) however long it takes to produce the planned output.
4. D) a time period in which at least one input is fixed.
5. E) a time period in which at least one set of outputs has been decided upon.

Diff: 1

Section: 6.1

8) Joe owns a small coffee shop, and his production function is q = 3KL where q is total output in cups per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). If Joe’s capital is currently fixed at K=3 machines, what is his short-run production function?

1. A) q = 3L
2. B) q = 3L2
3. C) q = 9L
4. D) q = 3K2

Diff: 1

Section: 6.1

9) 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?

1. A) Q = 10K10L5
2. B) Q = 100KL5
3. C) Q = 100L5
4. D) none of the above

Diff: 1

Section: 6.1

10) 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?

1. A) Firm that makes DVD players.
2. B) Computer chip fabricator
3. C) Flat-screen TV manufacturer
4. D) Nuclear power plant

Diff: 2

Section: 6.1

11) 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:

1. A) technologically efficient.
2. B) technologically inefficient.
3. C) maximized.
4. D) optimal.

Diff: 1

Section: 6.1

12) 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?

1. A) Normative
2. B) Positive
4. D) Executive

Diff: 1

Section: 6.1

13) Which of the following actions is not an example of the production coordination provided by firms?

1. A) Manage production activities of workers
2. B) Pay wages to workers
3. C) Establish industry safety regulations
4. D) Set the production schedule for each week

Diff: 2

Section: 6.1

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

1. A) F(K,L) = 3KL
2. B) F(K,L) = 3K
3. C) F(K,L) = K + L – 1
4. D) F(K,L) = 10(KL)5

Diff: 2

Section: 6.1

15) Ronald’s Outboard Motor Manufacturing plant production function is y(K, L) = 25. Ronald is investigating a new outboard motor manufacturing technique. Ronald believes that if he adopts the new technique, his production function for outboard motors will become: y(K, L) = 36. Given that Ronald uses 4 units of machine hours, sketch his production function with the old technique and the new technique as he increases labor hours. With the new technique, do labor hours contribute more to production?

The slope of the new production function is steeper for all labor uses. This implies the marginal product of labor is higher for the new technique. This means that labor hours are contributing at a higher rate for the new technique.

Diff: 2

Section: 6.1

16) Wally describes himself as a resilient fundamentalist when it comes to making investments in the stock market. At the moment, Wally uses only periodicals from the library when analyzing corporate fundamentals. The number of firms he can analyze in a day is given by the function: y(L) = 2, where L is the number of hours a day he works. Sketch Wally’s total number of firms analyzed as he increases his hours of work. If Wally begins using internet sources to learn about corporate fundamentals, the number of firms he can analyze in a day is given by the function: y(L) = 5 Sketch Wally’s total number of firms analyzed as he increases his hours of work and uses the internet.

Diff: 1

Section: 6.1

6.2 Production with One Variable Input (Labor)

1) Writing total output as Q, change in output as DQ, total labor employment as L, and change in labor employment as DL, the marginal product of labor can be written algebraically as

1. A) DQ ∙ L.
2. B) Q / L.
3. C) ΔL / ΔQ.
4. D) ΔQ / ΔL.

Diff: 1

Section: 6.2

2) The slope of the total product curve is the

1. A) average product.
2. B) slope of a line from the origin to the point.
3. C) marginal product.
4. D) marginal rate of technical substitution.

Diff: 1

Section: 6.2

3) The law of diminishing returns refers to diminishing

1. A) total returns.
2. B) marginal returns.
3. C) average returns.
4. D) all of these.

Diff: 1

Section: 6.2

4) When labor usage is at 12 units, output is 36 units. From this we may infer that

1. A) the marginal product of labor is 3.
2. B) the total product of labor is 1/3.
3. C) the average product of labor is 3.
4. D) none of the above

Diff: 1

Section: 6.2

5) The marginal product of an input is

1. A) total product divided by the amount of the input used to produce this amount of output.
2. B) the addition to total output that adds nothing to total revenue.
3. C) the addition to total output that adds nothing to profit.
4. D) the addition to total output due to the addition of one unit of all other inputs.
5. E) the addition to total output due to the addition of the last unit of an input, holding all other inputs constant.

Diff: 1

Section: 6.2

6) When the average product is decreasing, marginal product

1. A) equals average product.
2. B) is increasing.
3. C) exceeds average product.
4. D) is decreasing.
5. E) is less than average product.

Diff: 2

Section: 6.2

7) Technological improvement

1. A) can hide the presence of diminishing returns.
2. B) can be shown as a shift in the total product curve.
3. C) allows more output to be produced with the same combination of inputs.
4. D) All of the above are true.

Diff: 1

Section: 6.2

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

1. A) Short-run time period
2. B) Shortage of labor
3. C) Law of diminishing resource availability
4. D) Law of diminishing returns

Diff: 1

Section: 6.2

9) The law of diminishing returns assumes that

1. A) there is at least one fixed input.
2. B) all inputs are changed by the same percentage.
4. D) all inputs are held constant.

Diff: 1

Section: 6.2

10) According to the law of diminishing returns

1. A) the total product of an input will eventually be negative.
2. B) the total product of an input will eventually decline.
3. C) the marginal product of an input will eventually be negative.
4. D) the marginal product of an input will eventually decline.
5. E) none of the above

Diff: 1

Section: 6.2

11) Use the following two statements to answer this question:

1. The marginal product of labor is the slope of the line from the origin to the total product curve at that level of labor usage.

II The average product of labor is the slope of the line that is tangent to the total product curve at that level of labor usage.

1. A) Both I and II are true.
2. B) I is true, and II is false.
3. C) I is false, and II is true.
4. D) Both I and II are false.

Diff: 1

Section: 6.2

12) 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

1. A) the average product of labor is always greater that the marginal product of labor
2. B) the average product of labor is always equal to the marginal product of labor
3. C) the average product of labor is always less than the marginal product of labor
4. D) as more labor is used, the average product of labor falls
5. E) there is no unambiguous relationship between labor’s marginal and average products.

Diff: 2

Section: 6.2

13) At a given level of labor employment, knowing the difference between the average product of labor and the marginal product of labor tells you

1. A) whether increasing labor use raises output.
2. B) whether increasing labor use changes the marginal product of labor.
3. C) whether economies of scale exist.
4. D) whether the law of diminishing returns applies.
5. E) how increasing labor use alters the average product of labor.

Diff: 2

Section: 6.2

14) If the law of diminishing returns applies to labor then

1. A) the marginal product of labor must eventually become negative.
2. B) the average product of labor must eventually become negative.
3. C) the marginal product of labor must rise and then fall as employment rises.
4. D) the average product of labor must rise and then fall as employment increases.
5. E) after some level of employment, the marginal product of labor must fall.

Diff: 1

Section: 6.2

15) The law of diminishing returns applies to

1. A) the short run only.
2. B) the long run only.
3. C) both the short and the long run.
4. D) neither the short nor the long run.
5. E) all inputs, with no reference to the time period.

Diff: 1

Section: 6.2

16) The Malthusian dilemma relates to marginal product in that

1. A) starvation can be averted only if marginal product is constant.
2. B) because of diminishing marginal product, the amount of food produced by each additional member of the population increases.
3. C) because of diminishing marginal product, the amount of food produced by each additional member of the population decreases.
4. D) because of diminishing marginal product, the wage falls as the population decreases.
5. E) because of diminishing average product, the population will not have additional capital to work with.

Diff: 2

Section: 6.2

17) Marginal product crosses the horizontal axis (is equal to zero) at the point where

1. A) average product is maximized.
2. B) total product is maximized.
3. C) diminishing returns set in.
4. D) output per worker reaches a maximum.
5. E) All of the above are true.

Diff: 2

Section: 6.2

18) Assume that average product for six workers is fifteen. If the marginal product of the seventh worker is eighteen,

1. A) marginal product is rising.
2. B) marginal product is falling.
3. C) average product is rising.
4. D) average product is falling.

Diff: 2

Section: 6.2

Figure 6.1

19) Refer to Figure 6.1. At point A, the marginal product of labor is

1. A) rising.
2. B) at its minimum.
3. C) at its maximum.
4. D) diminishing.

Diff: 2

Section: 6.2

20) Refer to Figure 6.1. At which point on the total product curve is the average product of labor the highest?

1. A) point A.
2. B) point B.
3. C) point C.
4. D) point D.
5. E) none of the above

Diff: 2

Section: 6.2

21) Refer to Figure 6.1. Which of the following statements is false?

1. A) At point E the marginal product of labor is decreasing.
2. B) At point E the marginal product of labor is negative.
3. C) At point E the average product of labor is decreasing.
4. D) At point E the average product of labor is negative.
5. E) At point E the marginal product of labor is less than the average product of labor.

Diff: 3

Section: 6.2

22) Refer to Figure 6.1. At point C

1. A) the marginal product of labor is greater than the average product of labor.
2. B) the average product of labor is greater than the marginal product of labor.
3. C) the marginal product of labor and the average product of labor are equal.
4. D) the marginal product of labor and the average product of labor are both increasing.
5. E) Both B and D are correct.

Diff: 3

Section: 6.2

23) For consideration of such issues as labor’s productivity growth nationwide, the relevant measure is the

1. A) marginal product of labor.
2. B) average product of labor.
3. C) total product of labor.
4. D) wage.
5. E) cost of capital.

Diff: 2

Section: 6.2

24) The link between the productivity of labor and the standard of living is

1. A) tenuous and changing.
2. B) inverse.
3. C) that over the long run, consumers as a whole can increase their rate of consumption only by increasing labor productivity.
4. D) that over the long run, consumers’ rate of consumption is not related to labor productivity.
5. E) that the productivity of labor grows much more erratically than the standard of living.

Diff: 2

Section: 6.2

25) Which would not increase the productivity of labor?

1. A) An increase in the size of the labor force
2. B) An increase in the quality of capital
3. C) An increase in the quantity of capital
4. D) An increase in technology
5. E) An increase in the efficiency of energy

Diff: 2

Section: 6.2

26) One of the factors contributing to the fact that labor productivity is higher in the U.S. than in the People’s Republic of China is

1. A) China’s larger stock of capital.
2. B) the higher capital/labor ratio in China.
3. C) the higher capital/labor ratio in the U.S.
4. D) China’s smaller stock of fossil fuels.
5. E) the fact that much labor in the U.S. is in management.

Diff: 2

Section: 6.2

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

1. A) Average product cuts marginal product from above, at the maximum point of marginal product.
2. B) Average product cuts marginal product from below, at the maximum point of marginal product.
3. C) Marginal product cuts average product from above, at the maximum point of average product.
4. D) Marginal product cuts average product from below, at the maximum point of average product.
5. E) Average and marginal product do not intersect.

Diff: 3

Section: 6.2

28) Consider the following statements when answering this question;

1. Suppose a semiconductor chip factory uses a technology where the average product of labor is constant for all employment levels. This technology obeys the law of diminishing returns.
2. Suppose a semiconductor chip factory uses a technology where the marginal product of labor rises, then is constant and finally falls as employment increases. This technology obeys the law of diminishing returns.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) Both I and II are true.
6. D) Both I and II are false.

Diff: 3

Section: 6.2

29) Consider the following statements when answering this question;

1. Whenever the marginal product of labor curve is a downward sloping curve, the average product of labor curve is also a downward sloping curve that lies above the marginal product of labor curve.
2. If a firm uses only labor to produce, and the production function is given by a straight line, then the marginal product of labor always equals the average product of labor as labor employment expands.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) Both I and II are true.
6. D) Both I and II are false.

Diff: 3

Section: 6.2

30) 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. Three employees can generate an average product of 4 cars per person in each hour, and five employees can generate an average product of 3 cars per person in each hour. What is the marginal product of labor as you increase the labor from three to five employees?

1. A) MP = 3 cars
2. B) MP = 1.5 cars
3. C) MP = 15 cars
4. D) MP = -1 cars

Diff: 3

Section: 6.2

31) 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?

1. A) AP = 3 cars per worker
2. B) AP = 5 cars per worker
3. C) AP = 4 cars per worker
4. D) We do not have enough information to answer this question.

Diff: 1

Section: 6.2

32) An important factor that contributes to labor productivity growth is:

1. A) growth in the capital stock.
2. B) technological change.
3. C) the standard of living.
4. D) A and B only
5. E) A, B, and C are correct.

Diff: 1

Section: 6.2

33) 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?

1. A) AP = 5
2. B) AP = 5K
3. C) AP = 5L
4. D) AP = 5K/L

Diff: 2

Section: 6.2

34) 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 marginal product of labor?

1. A) MP = 5
2. B) MP = 5K
3. C) MP = 5L
4. D) MP = 5K/L

Diff: 2

Section: 6.2

35) 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). The average product of labor and the marginal product of labor are both equal to AP = MP = 5K. Does labor exhibit diminishing marginal returns in this case?

1. A) Yes, if capital also exhibits diminishing marginal returns.
2. B) Yes, this is true for all values of K.
3. C) No, the marginal product of labor is constant (for a given K).
4. D) No, the marginal product of labor is increasing (for a given K).

Diff: 2

Section: 6.2

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

1. A) input prices have fallen over time.
2. B) crop prices have risen over time.
3. C) Malthus was wrong about the diminishing returns to labor in agriculture.
4. D) technological improvements have increased our ability to produce food over time.

Diff: 2

Section: 6.2

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

1. A) Government policies have shifted the health care production function downward over time.
2. B) Consumer incomes have increased, which allows consumers to purchase more health care.
3. C) The US health care system is relatively inefficient compared to other countries.
4. D) Demand for health care in the US has increased, so health care production occurs at a higher point on the total product curve than in other countries.

Diff: 2

Section: 6.2

38) As an economy recovers from a recession, the observed level of labor productivity tends to decline. Why?

1. A) The total product remains the same during the recovery, but the number of workers declines.
2. B) The total product increases during the recovery, but the number of workers declines.
3. C) The marginal product of labor declines as new workers enter the expanding work force.
4. D) The marginal product of labor increases at a slower rate than the decline in employment.

Diff: 2

Section: 6.2

39) Complete the following table:

Diff: 1

Section: 6.2

40) Complete the following table:

Diff: 2

Section: 6.2

41) A bakery operating in the short run has found that when the level of employment in its baking room was increased from 4 to 10, in increments of one, its corresponding levels of production of bread were 110, 115, 122, 127, 130, 132, and 133.

1. Calculate the marginal product of labor.
2. Explain whether this production function exhibits diminishing marginal productivity of labor.

 L TP MP 4 110 5 5 115 7 6 122 5 7 127 3 8 130 2 9 132 1 10 133

This production function does exhibit diminishing returns to labor. Inputs of labor of 7 and greater units produce diminishing marginal returns, because the MP of labor is decreasing in this input range.

Diff: 1

Section: 6.2

42) The production function of pizzas for One Guy’s Pizza shop is y(K, L) = 4. K represents the number of ovens One Guy’s Pizza uses and is fixed in the short-run at 4 ovens. L represents the number of labor hours One Guy’s Pizza employees and is variable in the short and long-run. Fill in the empty columns in the table below.

 Pizzas K L MPL (L, K) = MPK (K, L) = 4 1 4 4 4 9 4 16

 Pizzas K L MPL (L, K) = MPK (K, L) = 8 4 1 4 1 16 4 4 2 2 24 4 9 3 32 4 16 1 4

Diff: 1

Section: 6.2

43) The production function for Cogswell Cogs is y(K, L) = . K represents the number of robot hours used in the production process while L represents the number of labor hours. The marginal productivity of a labor hour is MPL = Fill in the empty columns in the table below. Use the information in the table to sketch Cogswell’s marginal product of labor curve while robot hours are fixed at 9.

 Output Robot Hours Labor Hours MPL = 9 8 9 27 9 64 9 125

 Output Robot Hours Labor Hours MPL = 6 9 8 0.25 9 9 27 0.11 12 9 64 0.063 15 9 125 0.04

A sketch of the marginal product of labor is

Diff: 2

Section: 6.2

44) Tad’s Baitshop currently uses no computers in determining inventory. The number of items that can be inventoried in a day is given by y(L) = , where L is the number of labor hours used. If Tad purchases a computer to be used for inventory purposes, the number of items that can be inventoried in a day becomes y(L) = 2. Use the information in the table below to sketch Tad’s marginal product of labor curves before and after the use of the computer for inventory purposes.

 Old Quantity Inventoried New Quantity Inventoried L Old MP of labor New MP of labor 2 4 4 0.25 0.5 4 8 16 0.125 0.25 5 10 25 0.10 0.20

Diff: 1

Section: 6.2

45) Trisha’s Fashion Boutique production function for dresses is y(K, L) = K1/2L1/3, where K is the number of sewing machines and L is the amount of labor hours employed. Trisha pays \$15 per labor hour and sells each dress for \$87.50. Also, Trisha currently has 4 sewing machines. Fill in the table below. How many units of labor will Trisha employ before the value of the marginal product of labor is less than the cost of a labor hour?

 y L MPL = \$87.50(MPL) 1 20 40 60 80

 y L MPL = \$87.50(MPL) 2 1 0.666667 58.33333 5.428835 20 0.245602 21.49018 6.839904 40 0.194935 17.05677 7.829735 60 0.170291 14.90046 8.617739 80 0.15472 13.53797

As the above table illustrates, when Trisha moves from employing 40 labor hours to 60 labor hours, the value of the marginal product of labor falls under the marginal cost of labor at \$15.

Diff: 2

Section: 6.2

46) Sarah’s Pretzel Plant produces pretzels according to the function y(K, L) = 100. K is the number of ovens, and L is the number of labor hours Sarah uses to produce her pretzels. At the moment, Sarah uses 9 ovens. Also, she plans to hire 64 labor hours. Sarah can sell each unit of pretzels produced for \$3.50. Fill in the table below. If Sarah increased her use of labor hours to 65, would the value of the marginal product of labor exceed the wage rate of \$8.50?

 y(9, L) L MPL = \$3.50 * MPL 64 65

 y(9, L) L MPL = \$3.50 * MPL 1,200 64 6.25 \$21.88 1,206.22 65 6.19 \$21.66

If Sarah uses 65 hours of labor, the value of the marginal product of the 65th labor hour exceeds the \$8.50 cost of labor. This suggests that if Sarah goes beyond 64 units of labor hours, her profits will be higher.

Diff: 2

Section: 6.2

47) Laura’s Internet Services firm can design computer systems according to the function y(K, L) = , where K is the amount of gigabyte storage she has available and L is the amount of labor hours she employs. Currently, Laura has 125 gigabytes of storage. Sketch the change in the marginal product of labor curve for Laura’s firm for values of L= 1, 2, 3, 4, and 5, if she increases her gigabyte storage capacity to 216.

Answer: We can approximate the change in the marginal product of labor as indicated in the following table. The marginal product of labor has increased when Laura added additional storage capacity.

A sketch of the marginal product of labor is

Diff: 2

Section: 6.2

6.3 Production with Two Variable Inputs

1) An isoquant

1. A) must be linear.
2. B) cannot have a negative slope.
3. C) is a curve that shows all the combinations of inputs that yield the same total output.
4. D) is a curve that shows the maximum total output as a function of the level of labor input.
5. E) is a curve that shows all possible output levels that can be produced at the same cost.

Diff: 1

Section: 6.3

2) If we take the production function and hold the level of output constant, allowing the amounts of capital and labor to vary, the curve that is traced out is called:

1. A) the total product.
2. B) an isoquant.
3. C) the average product.
4. D) the marginal product.
5. E) none of the above

Diff: 1

Section: 6.3

3) Use the following two statements to answer this question:

1. Isoquants cannot cross one another.
2. An isoquant that is twice the distance from the origin represents twice the level of output.
3. A) Both I and II are true.
4. B) I is true, and II is false.
5. C) I is false, and II is true.
6. D) Both I and II are false.

Diff: 2

Section: 6.3

4) A firm uses two factors of production. Irrespective of how much of each factor is used, both factors always have positive marginal products which imply that

1. A) isoquants are relevant only in the long run
2. B) isoquants have negative slope
3. C) isoquants are convex
4. D) isoquants can become vertical or horizontal
5. E) none of the above

Diff: 3

Section: 6.3

5) Use the following statements to answer this question.

1. The numerical labels attached to indifference curves are meaningful only in an ordinal way.
2. The numerical labels attached to isoquants are meaningful only in an ordinal way.
3. A) both I and II are true.
4. B) I is true, and II is false.
5. C) I is false, and II is true.
6. D) both I and II are false.

Diff: 1

Section: 6.3

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

1. A) isoquant curve.
2. B) isocost curve.
3. C) production function.
4. D) production possibilities frontier.

Diff: 1

Section: 6.3

7) Two isoquants, which represent different output levels but are derived from the same production function, cannot cross because

1. A) isoquants represent different utility levels
2. B) this would violate a technical efficiency condition
3. C) isoquants are downward sloping
4. D) additional inputs will not be used by profit maximizing firms if those inputs decrease output
5. E) Both B and D are true.

Diff: 3

Section: 6.3

8) An upward sloping isoquant

1. A) can be derived from a production function with one input
2. B) can be derived from a production function that uses more than one input where reductions in the use of any input always reduces output
3. C) cannot be derived from a production function when a firm is assumed to maximize profits
4. D) can be derived whenever one input to production is available at zero cost to the firm
5. E) none of the above

Diff: 2

Section: 6.3

9) Use the following two statements to answer this question:

1. If the marginal product of labor is zero, the total product of labor is at its maximum.

II If the marginal product of labor is at its maximum, the average product of labor is falling.

1. A) Both I and II are true.
2. B) I is true, and II is false.
3. C) I is false, and II is true.
4. D) Both I and II are false.

Diff: 2

Section: 6.3

10) As we move downward along a typical isoquant, the slope of the isoquant

1. A) becomes flatter.
2. B) becomes steeper.
3. C) remains constant.
4. D) becomes linear.

Diff: 1

Section: 6.3

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

1. A) marginal rate of substitution.
2. B) marginal rate of technical substitution.
3. C) slope of the isocost curve.
4. D) average product of the input.

Diff: 1

Section: 6.3

12) 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

1. A) rate at which the firm can replace capital with labor without changing the output rate.
2. B) average rate at which the firm can replace capital with labor without changing the output rate.
3. C) marginal product of labor.
4. D) marginal product of capital.

Diff: 1

Section: 6.3

13) The marginal rate of technical substitution is equal to the

1. A) slope of the total product curve.
2. B) change in output minus the change in labor.
3. C) change in output divided by the change in labor.
4. D) ratio of the marginal products of the inputs.

Diff: 1

Section: 6.3

14) If the isoquants are straight lines, then

1. A) inputs have fixed costs at all use rates.
2. B) the marginal rate of technical substitution of inputs is constant.
3. C) only one combination of inputs is possible.
4. D) there are constant returns to scale.

Diff: 1

Section: 6.3

15) A production function in which the inputs are perfectly substitutable would have isoquants that are

1. A) convex to the origin.
2. B) L-shaped.
3. C) linear.
4. D) concave to the origin.

Diff: 1

Section: 6.3

16) An examination of the production isoquants in the diagram below reveals that:

1. A) capital and labor must be used in fixed proportions.
2. B) capital and labor are perfectly substitutable.
3. C) except at the corners of the isoquants the MRTS is constant.
4. D) Both B and C are correct.
5. E) none of the above

Diff: 1

Section: 6.3

17) An examination of the production isoquants in the diagram below reveals that:

1. A) capital and labor will be used in fixed proportions.
2. B) capital and labor are perfectly substitutable.
3. C) the MRTS is constant.
4. D) Both B and C are correct.
5. E) none of the above

Diff: 1

Section: 6.3

18) The diagram below shows an isoquant for the production of wheat.

Which point has the highest marginal productivity of labor?

1. A) Point A
2. B) Point B
3. C) Point C
4. D) Point D

Diff: 1

Section: 6.3

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

1. A) The fact that inputs have positive marginal product
2. B) The fact that inputs have diminishing marginal product
3. C) The fact that input prices are positive
4. D) The fact that more of either input increases output
5. E) The fact that there are diminishing returns to inputs

Diff: 2

Section: 6.3

20) The marginal rate of technical substitution is equal to:

1. A) the absolute value of the slope of an isoquant.
2. B) the ratio of the marginal products of the inputs.
3. C) the ratio of the prices of the inputs.
4. D) all of the above
5. E) A and B only

Diff: 2

Section: 6.3

21) A firm’s marginal product of labor is 4 and its marginal product of capital is 5. If the firm adds one unit of labor, but does not want its output quantity to change, the firm should

1. A) use five fewer units of capital.
2. B) use 0.8 fewer units of capital.
3. C) use 1.25 fewer units of capital.
4. D) add 1.25 units of capital.

Diff: 2

Section: 6.3

22) A straight-line isoquant

1. A) is impossible.
2. B) would indicate that the firm could switch from one output to another costlessly.
3. C) would indicate that the firm could not switch from one output to another.
4. D) would indicate that capital and labor cannot be substituted for each other in production.
5. E) would indicate that capital and labor are perfect substitutes in production.

Diff: 2

Section: 6.3

23) An L-shaped isoquant

1. A) is impossible.
2. B) would indicate that the firm could switch from one output to another costlessly.
3. C) would indicate that the firm could not switch from one output to another.
4. D) would indicate that capital and labor cannot be substituted for each other in production.
5. E) would indicate that capital and labor are perfect substitutes in production.

Diff: 2

Section: 6.3

24) 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:

1. A) technical efficiency.
2. B) free disposal.
3. C) diminishing marginal returns.
4. D) positive average product.

Diff: 2

Section: 6.3

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

1. A) zero or one.
2. B) always zero.
3. C) always one.
4. D) zero or undefined.

Diff: 2

Section: 6.3

26) 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.

1. A) labor, capital
2. B) capital, labor
3. C) concrete, gravel
4. D) none of the above

Diff: 2

Section: 6.3

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

1. A) Clerical staff and computers
2. B) Airplanes and pilots
3. C) Horse-drawn carriages and carriage drivers
4. D) all of the above

Diff: 2

Section: 6.3

28) You are currently using three printing presses and five employees to print 100 sales manuals per hour. If the MRTS at this point is 0.5 (capital is on the vertical axis of the isoquant map), then you would be willing to exchange ________ employees for one more printing press in order to maintain current output.

1. A) zero
2. B) one
3. C) two
4. D) three

Diff: 1

Section: 6.3

29) 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?

1. A) One hour
2. B) Two hours
3. C) Three hours
4. D) Four hours

Diff: 2

Section: 6.3

30) Suppose the production of long-distance airline flights is described by a fixed proportion production process in which three crew members (i.e., labor) are required for each aircraft (i.e., capital). If the airline operates with four crew members per plane, then we know that:

1. A) the production process violates diminishing margin returns.
2. B) production at this point is technically inefficient.
3. C) the isoquants for this production process are upward sloping.
4. D) the airline will have negative profits.

Diff: 2

Section: 6.3

31) 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?

1. A) Shift upward
2. B) Shift downward
3. C) Shift rightward
4. D) Shift leftward

Diff: 2

Section: 6.3

32) You are given the following table for a production process which has two variable outputs.

1. Sketch the isoquants corresponding to the following output levels: 60, 70, 85, 95, 105, and 115. What returns to scale does the production function exhibit? What can be said of the MRTS?
2. Analyze the marginal productivity of labor and capital for the production function.

It is possible to construct isoquants for the following rates of output: 60, 70, 85, 95, 105, and 115. Linear isoquants indicate that the MRTS is constant. Returns to scale can be determined by examining the main diagonal (i.e., 1L, 1K, 2L, 2K, etc). With move from 1L, 1K to 2L, 2K, output rises from 35 to 70, which is double. We conclude as we move from 1L, 1K to 2L, 2K, that there are constant returns to scale. As we move from 2L, 2K to 3L, 3K, input has been increased 1 1/2 times. Output rises from 70 to 95, a 1.36 proportional increase. From 2L, 2K to 3L, 3K, the production function exhibits decreasing returns to scale. It can be demonstrated that the function exhibits decreasing returns for the remaining input combinations.

The production function exhibits decreasing marginal product of capital or labor initially and then constant marginal productivity from thereafter. This can be seen by holding one input constant and increasing the other input. For example, hold capital constant at three units. The MPs of labor are 70, 15, and then 10, 10, 10. Next, hold labor constant at four units. The MPs of capital are 85, 10, and 10, 10, 10.

Diff: 2

Section: 6.3

33) The production function for Spacely Sprockets is y(K, L) = . K represents the number of robot hours used in the production process while L represents the number of labor hours. Using the information in the table below, sketch representative Isoquants for Spacely’s production process.

 output K L 10 100 1 10 10 10 10 5 20 10 2 50

Diff: 1

Section: 6.3

6.4 Returns to Scale

1) According to the diagram below, where each isoquant’s output level is marked to the right of the isoquant, production is characterized by

1. A) decreasing returns to scale.
2. B) constant returns to scale.
3. C) increasing returns to scale.
4. D) increasing, constant and decreasing returns to scale.

Diff: 1

Section: 6.4

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

1. A) decreasing returns to scale.
2. B) constant returns to scale.
3. C) increasing returns to scale.
4. D) negative returns to scale.

Diff: 1

Section: 6.4

3) Increasing returns to scale in production means

1. A) more than 10% as much of all inputs are required to increase output 10%.
2. B) less than twice as much of all inputs are required to double output.
3. C) more than twice as much of only one input is required to double output.
4. D) isoquants must be linear.

Diff: 1

Section: 6.4

4) With increasing returns to scale, isoquants for unit increases in output become

1. A) farther and farther apart.
2. B) closer and closer together.
3. C) the same distance apart.
4. D) none of these.

Diff: 1

Section: 6.4

5) Use the following two statements to answer this question:

1. “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.

1. A) Both I and II are true.
2. B) I is true, and II is false.
3. C) I is false, and II is true.
4. D) Both I and II are false.

Diff: 3

Section: 6.4

Figure 6.2

6) Refer to Figure 6.2. The situation pictured is one of

1. A) constant returns to scale, because the line through the origin is linear.
2. B) decreasing returns to scale, because the isoquants are convex.
3. C) decreasing returns to scale, because doubling inputs results in less than double the amount of output.
4. D) increasing returns to scale, because the isoquants are convex.
5. E) increasing returns to scale, because doubling inputs results in more than double the amount of output.

Diff: 2

Section: 6.4

7) The situation pictured in Figure 6.2

1. A) is one of increasing marginal returns to labor.
2. B) is one of increasing marginal returns to capital.
3. C) is consistent with diminishing marginal product.
4. D) contradicts the law of diminishing marginal product.
5. E) shows decreasing returns to scale.

Diff: 3

Section: 6.4

Figure 6.3

8) Refer to Figure 6.3. The situation pictured is one of

1. A) constant returns to scale, because the line through the origin is linear.
2. B) decreasing returns to scale, because the isoquants are convex.
3. C) decreasing returns to scale, because doubling inputs results in less than double the amount of output.
4. D) increasing returns to scale, because the isoquants are convex.
5. E) increasing returns to scale, because doubling inputs results in more than double the amount of output.

Diff: 2

Section: 6.4

9) The situation pictured in Figure 6.3

1. A) is one of increasing marginal returns to labor.
2. B) is one of increasing marginal returns to capital.
3. C) is not consistent with diminishing marginal product of labor or capital.
4. D) shows constant returns to scale.
5. E) shows diminishing marginal products of labor and capital.

Diff: 2

Section: 6.4

10) A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function C = L0.5M0.75. This production function exhibits

1. A) decreasing returns to scale for all output levels
2. B) constant returns to scale for all output levels
3. C) increasing returns to scale for all output levels
4. D) no clear pattern of returns to scale

Diff: 3

Section: 6.4

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

1. A) costs to double as output doubles.
2. B) costs to more than double as output doubles.
3. C) costs to go up less than double as output doubles.
4. D) to hire more and more labor for a given amount of capital, since marginal product increases.
5. E) to never reach the point where the marginal product of labor is equal to the wage.

Diff: 3

Section: 6.4

12) A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function C = L0.5 + M0.75. This production function exhibits

1. A) decreasing returns to scale for all output levels.
2. B) constant returns to scale for all output levels.
3. C) increasing returns to scale for all output levels.
4. D) no clear pattern of returns to scale.

Diff: 3

Section: 6.4

13) Consider the following statements when answering this question;

1. If a technology exhibits diminishing returns then it also exhibits decreasing return to scale.
2. If a technology exhibits decreasing returns to scale then it also exhibits diminishing returns.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) Both I and II are true.
6. D) Both I and II are false.

Diff: 3

Section: 6.4

14) 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.

1. A) increasing, decreasing
2. B) increasing, constant
3. C) constant, decreasing
4. D) constant, increasing

Diff: 2

Section: 6.4

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

1. A) Increasing returns to scale with constant input prices
2. B) Constant returns to scale with constant input prices
3. C) Constant returns to scale with rising input prices (perhaps because the firm is not a price-taker in the input markets)
4. D) all of the above

Diff: 2

Section: 6.4

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

1. A) q = KL
2. B) q = KL5
3. C) q = K + L
4. D) q = log(KL)

Diff: 2

Section: 6.4

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

1. A) Yes, this is an important short-run characteristic of production functions.
2. B) Yes, returns to scale determine the diminishing marginal returns of the inputs.
3. C) No, returns to scale is a property of the consumer’s utility function.
4. D) No, we cannot change all of the production inputs in the short run.

Diff: 2

Section: 6.4

18) Use the following statements to answer this question:

1. We cannot measure the returns to scale for a fixed-proportion production function.
2. Production functions with inputs that are perfect substitutes always exhibit constant returns to scale.
3. A) I and II are true.
4. B) I is true and II is false.
5. C) II is true and I is false.
6. D) I and II are false.

Diff: 2

Section: 6.4

19) 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?

1. A) Yes, the marginal products of labor and capital are known to be positive at all levels of output in the U.S. carpet industry, which implies continued increasing returns to scale.
2. B) Yes, increasing returns are always observed in other countries that produce carpeting on large scale.
3. C) No, the authors predict that returns to scale in carpet production will likely decline at some point.
4. D) The authors do not provide any comments on this issue.

Diff: 2

Section: 6.4

20) Why do firms tend to experience decreasing returns to scale at high levels of output?

1. A) Firms face more problems with coordinating tasks and communications among managers and workers at very high levels of output.
2. B) Government tax policy tends to discourage large-scale production operations.
3. C) Firms face fewer problems with inventory management and marketing as output reaches very high levels.
4. D) Firms tend to use more capital and less labor at higher levels of output.

Diff: 2

Section: 6.4

21) 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?

1. A) Output increases by less than 25 percent
2. B) Output decreases by less than 25 percent
3. C) Output decreases by exactly 25 percent
4. D) Output decreases by more than 25 percent

Diff: 2

Section: 6.4

22) Bridget’s Brewery production function is given by y(K, L) = 2, where K is the number of vats she uses and L is the number of labor hours. Does this production process exhibit increasing, constant or decreasing returns to scale? Holding the number of vats constant at 4, is the marginal product of labor increasing, constant or decreasing as more labor is used?

Answer: Since y(1.1K, 1.1L) = 2 = 1.1(2) = 1.1y(K, L), we know the production process exhibits constant returns to scale. Holding the number of vats constant at 4 will still result in a downward sloping marginal product of labor curve. That is the marginal product of labor decreases as more labor is used.

Diff: 2

Section: 6.4

23) Michael’s Dairy farm production function is given by y(K, L) = 2 , where K is the number of machine milkers and L is the amount of labor hours he uses. Does this production function exhibit increasing, constant or decreasing returns to scale? Holding the number of machine milkers constant at 16, is the marginal product of labor increasing, constant or decreasing as more labor is used?

Answer: Since y(1.1K, 1.1L) = 2 = (2 ) < (1.1)y(K, L), we know the production process exhibits decreasing returns to scale. Holding the number of machine milkers constant at 16 will still result in a downward sloping marginal product of labor curve. That is, the marginal product of labor decreases as more labor is used.

Diff: 2

Section: 6.4

24) Leann’s Telecommunication firm production function is given by y(K, L) = 200, where K is the number of internet servers and L is the number of labor hours she uses. Does this production function exhibit increasing, constant or decreasing returns to scale? Holding the number of internet servers constant at 8, is the marginal product of labor increasing, constant or decreasing as more labor is used?

Answer: Since y(1.1K, 1.1L) = 200 = (200) > 1.1y(K, L), we know the production process exhibits increasing returns to scale. Holding the number of internet servers constant at 8 will still result in a downward sloping marginal product of labor curve. That is, the marginal product of labor decreases as more labor is used.

Diff: 2

Section: 6.4

25) Homer’s boat manufacturing plant production function is y(K, L) = where K is the number of hydraulic lifts and L is the number of labor hours he employs. Does this production function exhibit increasing, decreasing or constant returns to scale? At the moment, Homer uses 20,000 labor hours and 50 hydraulic lifts. Suppose that Homer can use any amount of either input without affecting the market costs of the inputs. If Homer increased his use of labor hours and hydraulic lifts by 10%, how much would his production increase? Increasing the use of both inputs by 10% will result in Homer’s costs increasing by exactly 10%. If Homer increases his use of all inputs by 10%, what will increase more, his production or his costs? Given that Homer can sell as many boats as he produces for \$75,000, does his profits go up by 10% with a 10% increase in input use?

Answer: Since y(1.1K, 1.1L) = = () < 1.1y(K, L), we know the production process exhibits decreasing returns to scale. Increasing input use by 10% will result in production increasing by less than 10%. According to the equation above, output would increase by about 6.9%. Since Homer can sell as many boats as he likes for \$75,000, we know that Homer’s revenue increases by 6.9%. Since costs go up by a larger amount than revenue, Homer’s profits will not increase by 10%. This can be shown as follows:

= TR(L, K) – (1.1)TC(L, K) < (1.1){TR(L, K) – TC(L, K)} = (1.1).

Diff: 3

Section: 6.4

26) Marge’s Hair Salon production function is y(K, L) = where K is the number of hair dryers and L is the number of labor hours she employs. Does this production function exhibit increasing, decreasing, or constant returns to scale? At the moment, Marge uses 16 labor hours and 16 hair dryers. Suppose that Marge can use any amount of either input without affecting the market costs of the inputs. If Marge increased her use of labor hours and hair dryers by 10%, how much would her production increase? Increasing the use of both inputs by 10% will result in Marge’s costs increasing by exactly 10%. If Marge increases her use of all inputs by 10%, what will increase more, her production or her costs? Given that Marge earns \$12.50 for each unit produced, do her profits go up or down when she increases her input use by 10%?

Answer: Since y(1.1K, 1.1L) = = (1.1)() = 1.1y(K, L), we know the production process exhibits constant returns to scale. Increasing input use by 10% will result in production increasing by 10%. According to the equation above, output would increase by 10%. Since Marge can sell as many units as she likes for \$12.50, we know that Marge’s revenue increase by 10%. Since costs go up by the same amount as revenue, Marge’s profits go up by 10%.

= (1.1) TR(L, K) – (1.1)TC(L, K) = (1.1){TR(L, K) – TC(L, K)} = (1.1).

Diff: 2

Section: 6.4

27) Apu’s Squishy production function is y(K, L) = K where K is the number of squishy machines and L is the number of labor hours he employs. Does this production function exhibit increasing, decreasing or constant returns to scale? At the moment, Apu uses 2 squishy machines and 4 labor hours. Suppose that Apu can use any amount of either input without affecting the market costs of the inputs. If Apu increased his use of labor hours and squishy machines by 100%, how much would his production increase? Increasing the use of both inputs by 100% will result in Apu’s costs increasing by exactly 100%. If Apu increases his use of all inputs by 100%, what will increase more his production or his costs? Given that Apu can sell as many squishies as he produces for \$1.00, do his profits go up or down when he increases his input use by 100%?

Answer: Since y(2K, 2L) = (2K) = (K) > 2y(K, L), we know the production process exhibits increasing returns to scale. Increasing input use by 100% will result in production increasing by more than 100%. Since Apu can sell as many units as he likes for \$1.00, we know that Apu’s revenue increases by more than 100%. Since costs go up by only 100%, Apu’s profits go up by more than 100%. This can be shown as follows:

= TR(L, K) – (2)TC(L, K) > (2){TR(L, K) – TC(L, K)} = (2).

Diff: 2

Section: 6.4

Microeconomics, 8e (Pindyck/Rubinfeld)

Chapter 7 The Cost of Production

7.1 Measuring Cost: Which Costs Matter?

1) 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?

1. A) Fly Right.
2. B) Fly by Night.
3. C) Neither, the costs are identical.
4. D) Neither, Fly by Night has lower costs at small output levels and Fly Right has lower costs at high output levels.

Diff: 1

Section: 7.1

2) 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?

1. A) Yes.
2. B) No.
3. C) It depends on what the rate of inflation was between 1985 and 1992.
4. D) It depends on what the rate of interest was.

Diff: 2

Section: 7.1

3) 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?

1. A) Sell to ABC Corporation.
2. B) Farm the land for another year and sell to XYZ Corporation.
3. C) Accept either offer as they are equivalent.
4. D) Reject both offers.

Diff: 2

Section: 7.1

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

1. A) Accounting costs include all implicit and explicit costs.
2. B) Economic costs include implied costs only.
3. C) Accountants consider only implicit costs when calculating costs.
4. D) Accounting costs include only explicit costs.

Diff: 1

Section: 7.1

5) Constantine purchased 100 shares of IBM stock several years ago for \$150 per share. The price of these shares has fallen to \$55 per share. Constantine’s investment strategy is “buy low, sell high.” Therefore, he will not sell his IBM stock until the price rises above \$150 per share. If he sells at a price lower than \$150 per share he will have “bought high and sold low.” Constantine’s decision:

1. A) is correct and shows a solid command of the nature of opportunity cost.
2. B) is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold.
3. C) is incorrect because when the price of a stock falls, the law of demand states that he should buy more shares.
4. D) is incorrect because it treats the price of the shares as an explicit cost.

Diff: 2

Section: 7.1

6) 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

1. A) a fixed cost.
2. B) a variable cost.
3. C) an implicit cost.
4. D) an opportunity cost.
5. E) a sunk cost.

Diff: 1

Section: 7.1

7) Prospective sunk costs

1. A) are relevant to economic decision-making.
2. B) are considered as investment decisions.
3. C) rise as output rises.
4. D) do not occur when output equals zero.

Diff: 2

Section: 7.1

8) Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making?

1. “Even though I hate my MBA classes, I can’t quit because I’ve spent so much money on tuition.”
2. “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.”
3. A) I only
4. B) II only
5. C) Both I and II
6. D) Neither I nor II

Diff: 3

Section: 7.1

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

1. A) the accountant’s fees.
2. B) the corporate taxes on profits .
3. C) the opportunity costs of the factors of production that the firm owns.
4. D) the sunk costs incurred by the firm.
5. E) the explicit costs of the firm.

Diff: 2

Section: 7.1

10) Consider the following statements when answering this question.

1. Increases in the rate of income tax decrease the opportunity cost of attending college.
2. The introduction of distance learning, which enables students to watch lectures at home, decreases the opportunity cost of attending college.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) I and II are both true.
6. D) I and II are both false.

Diff: 1

Section: 7.1

11) Which of the following statements correctly uses the concept of opportunity cost in decision making?

1. “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.”
2. “Since NASA is running under budget this year, the cost of another space shuttle launch is lower than it otherwise would be.”
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) I and II are both true.
6. D) I and II are both false.

Diff: 3

Section: 7.1

12) Fixed costs are fixed with respect to changes in

1. A) output.
2. B) capital expenditure.
3. C) wages.
4. D) time.

Diff: 1

Section: 7.1

13) Incremental cost is the same concept as ________ cost.

1. A) average
2. B) marginal
3. C) fixed
4. D) variable

Diff: 1

Section: 7.1

14) Which of the following costs always declines as output increases?

1. A) Average cost
2. B) Marginal cost
3. C) Fixed cost
4. D) Average fixed cost
5. E) Average variable cost

Diff: 1

Section: 7.1

15) The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the variable cost?

1. A) 200
2. B) 5Q
3. C) 5
4. D) 5 + (200/Q)
5. E) none of the above

Diff: 1

Section: 7.1

16) The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the fixed cost?

1. A) 200
2. B) 5Q
3. C) 5
4. D) 5 + (200/Q)
5. E) none of the above

Diff: 1

Section: 7.1

17) The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the marginal cost?

1. A) 200
2. B) 5Q
3. C) 5
4. D) 5 + (200/Q)
5. E) none of the above

Diff: 1

Section: 7.1

18) The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average total cost?

1. A) 500
2. B) 5Q
3. C) 5
4. D) 5 + (200/Q)
5. E) none of the above

Diff: 1

Section: 7.1

19) The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average fixed cost?

1. A) 500
2. B) 5Q
3. C) 5
4. D) 5 + (200/Q)
5. E) none of the above

Diff: 1

Section: 7.1

20) 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?

1. A) total cost
2. B) average fixed cost
3. C) fixed cost
4. D) variable cost
5. E) Carolyn can determine all of the above costs given the information provided.

Diff: 2

Section: 7.1

Scenario 7.1:

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.

21) Refer to Scenario 7.1. The total cost to produce 100 cookies is

1. A) \$0.10
2. B) \$0.25
3. C) \$25.00
4. D) \$100.00
5. E) indeterminate

Diff: 1

Section: 7.1

22) Refer to Scenario 7.1. The total cost to produce 50 cookies is

1. A) \$20
2. B) \$25
3. C) \$50
4. D) \$60
5. E) indeterminate

Diff: 3

Section: 7.1

23) Refer to Scenario 7.1. For 100 cookies, the average total cost is

1. A) falling.
2. B) rising.
3. C) neither rising nor falling.
4. D) less than average fixed cost.

Diff: 2

Section: 7.1

24) Refer to Scenario 7.1. Which piece of information would NOT be helpful in calculating the marginal cost of the 75th unit of output?

1. A) The total cost of 75 units
2. B) The total cost of 74 units
3. C) The variable cost of 75 units
4. D) The variable cost of 74 units
5. E) The firm’s fixed cost

Diff: 1

Section: 7.1

25) Jim left his previous job as a sales manager and started his own sales consulting business. He previously earned \$70,000 per year, but he now pays himself \$25,000 per year while he is building the new business. What is the economic cost of the time he contributes to the new business?

1. A) \$25,000 per year
2. B) zero
3. C) \$70,000 per year
4. D) \$45,000 per year

Diff: 2

Section: 7.1

26) 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?

1. A) An hourly employee
2. B) A temporary worker who is paid by the hour
3. C) A salaried manager who has a three-year employment contract
4. D) none of the above

Diff: 2

Section: 7.1

27) Your firm owns an old truck that is used to make local deliveries. The truck is fully depreciated and only costs \$1.20 per hour to operate, but you could rent it to another firm for \$15.00 per hour. What is the opportunity cost of operating this truck in your business?

1. A) \$1.20 per hour
2. B) \$15.00 per hour
3. C) \$16.20 per hour
4. D) Less than \$1.20 per hour

Diff: 2

Section: 7.1

28) From Example 7.2, most pizza restaurants have large fixed costs and relatively low variable costs. What does this tell us about the average variable cost (AVC) of producing pizza?

1. A) AVC is relatively low
2. B) AVC is relatively high
3. C) AVC is high for low quantities but declines quickly
4. D) AVC is increasing for all quantity levels

Diff: 2

Section: 7.1

29) Complete the following table:

Total Variable Fixed Marginal

Output Cost Cost Cost Cost

0 50

1 60

2 75

3 100

4 150

5 225

6 400

Total Variable Fixed Marginal

Output Cost Cost Cost Cost

0 50 0 50 –

1 60 10 50 10

2 75 25 50 15

3 100 50 50 25

4 150 100 50 50

5 225 175 50 75

6 400 350 50 175

Diff: 1

Section: 7.1

30) Complete the following table:

Total Variable Fixed Marginal

Output Cost Cost Cost Cost

0 60

1 10

2 90

3 100

4 80

5 180

6 50

Total Variable Fixed Marginal

Output Cost Cost Cost Cost

0 60 0 60 –

1 70 10 60 10

2 90 30 60 20

3 110 50 60 20

4 140 80 60 30

5 180 120 60 40

6 230 170 60 50

Diff: 2

Section: 7.1

31) Complete the following table (round each answer to the nearest whole number):

Total Variable Fixed Marginal Average Avg. Var. Avg. Fixed

Output Cost Cost Cost Cost Cost Cost Cost

0 30

1 35

2 60

3 110

4 200

5 320

6 600

Total Variable Fixed Marginal Average Avg. Var. Avg. Fixed

Output Cost Cost Cost Cost Cost Cost Cost

0 30 0 30 – – – –

1 35 5 30 5 35 5 30

2 60 30 30 25 30 15 15

3 110 80 30 50 37 27 10

4 200 170 30 90 50 43 8

5 320 290 30 120 64 58 6

6 600 570 30 280 100 95 5

Diff: 1

Section: 7.1

32) Complete the following table (round each answer to the nearest whole number):

Total Variable Fixed Marginal Average Avg. Var. Avg. Fixed

Output Cost Cost Cost Cost Cost Cost Cost

0

1 5

2 30

3 13

4 105 10

5 110

6 50

Total Variable Fixed Marginal Average Avg. Var. Avg. Fixed

Output Cost Cost Cost Cost Cost Cost Cost

0 40 0 40 – – – –

1 45 5 40 5 45 5 40

2 60 20 40 15 30 10 20

3 79 40 40 19 26 13 13

4 105 65 40 26 26 16 10

5 150 110 40 45 30 22 8

6 200 160 40 50 33 27 7

Diff: 2

Section: 7.1

7.2 Cost in the Short Run

1) Use the following two statements to answer this question:

1. The average cost curve and the average variable cost curve reach their minima at the same level of output.
2. The average cost curve and the marginal cost curve reach their minima at the same level of output.
3. A) Both I and II are true.
4. B) I is true, and II is false.
5. C) I is false, and II is true.
6. D) Both I and II are false.

Diff: 3

Section: 7.2

2) Use the following two statements to answer this question:

1. 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.
2. 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.
3. A) Both I and II are true.
4. B) I is true, and II is false.
5. C) I is false, and II is true.
6. D) Both I and II are false.

Diff: 2

Section: 7.2

3) Use the following two statements to answer this question:

1. 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.

1. A) Both I and II are true.
2. B) I is true, and II is false.
3. C) I is false, and II is true.
4. D) Both I and II are false.

Diff: 2

Section: 7.2

4) For any given level of output:

1. A) marginal cost must be greater than average cost.
2. B) average variable cost must be greater than average fixed cost.
3. C) average fixed cost must be greater than average variable cost.
4. D) fixed cost must be greater than variable cost.
5. E) None of the above is necessarily correct.

Diff: 3

Section: 7.2

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

1. A) average fixed cost is constant.
2. B) marginal cost is above average variable cost.
3. C) marginal cost is below average fixed cost.
4. D) marginal cost is below average variable cost.

Diff: 2

Section: 7.2

6) 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

1. A) below average total cost.
2. B) above average total cost.
3. C) between the average variable and average total cost curves.
4. D) below average fixed cost.

Diff: 2

Section: 7.2

7) Which of the following relationships is NOT valid?

1. A) Rising marginal cost implies that average total cost is also rising.
2. B) When marginal cost is below average total cost, the latter is falling.
3. C) When marginal cost is above average variable cost, AVC is rising.
4. D) none of the above

Diff: 3

Section: 7.2

Figure 7.1

8) Refer to Figure 7.1. The diagram above contains ________ cost curves.

1. A) short run
2. B) intermediate run
3. C) long run
4. D) both short run and long run.

Diff: 1

Section: 7.2

9) Refer to Figure 7.1. At output level Q1

1. A) marginal cost is falling.
2. B) average total cost is falling.
3. C) average variable cost is less than average fixed cost.
4. D) marginal cost is less than average total cost.
5. E) all of the above

Diff: 2

Section: 7.2

10) Refer to Figure 7.1. At output level Q2

1. A) average fixed cost is increasing.
2. B) average variable cost equals average fixed cost.
3. C) marginal cost is negative.
4. D) average total cost is negative.
5. E) none of the above

Diff: 1

Section: 7.2

11) Refer to Figure 7.1. At output level Q3

1. A) average fixed cost reaches its minimum.
2. B) average total cost reaches its minimum.
3. C) average variable cost reaches its minimum.
4. D) marginal cost reaches its minimum.
5. E) all of the above

Diff: 2

Section: 7.2

12) Refer to Figure 7.1. At what level of output does average total cost equal marginal cost?

1. A) Q2
2. B) Q3
3. C) Q4
4. D) Q5
5. E) none of the above

Diff: 2

Section: 7.2

13) Refer to Figure 7.1. At what level of output are average total cost, average cost, average fixed cost and marginal cost increasing?

1. A) Q2
2. B) Q3
3. C) Q4
4. D) Q5
5. E) none of the above

Diff: 2

Section: 7.2

14) Which always increase(s) as output increases?

1. A) Marginal Cost only
2. B) Fixed Cost only
3. C) Total Cost only
4. D) Variable Cost only
5. E) Total Cost and Variable Cost

Diff: 1

Section: 7.2

15) Consider the following statements when answering this question;

1. A firm’s marginal cost curve does not depend on the level of fixed costs.
2. As output increases the difference between a firm’s average total cost and average variable cost curves cannot rise.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) I and II are both true.
6. D) I and II are both false.

Diff: 3

Section: 7.2

16) Consider the following statements when answering this question

1. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then the marginal costs of production are constant too.
2. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then short-run average total costs cannot rise as output rises.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) I and II are both true.
6. D) I and II are both false.

Diff: 3

Section: 7.2

17) Consider the following statements when answering this question

1. 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.
2. 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.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) I and II are both true.
6. D) I and II are both false.

Diff: 3

Section: 7.2

18) Consider the following statements when answering this question

1. Whenever a firm’s average variable costs are falling as output rises, marginal costs must be falling too.
2. Whenever a firm’s average total costs are rising as output rises, average variable costs must be rising too.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) I and II are both true.
6. D) I and II are both false.

Diff: 3

Section: 7.2

19) Consider the following statements when answering this question

1. The marginal cost curve intersects the average total cost and average variable cost curves at their minimum values.
2. When a firm has positive fixed costs, the output level associated with minimum average variable costs is less than the output associated with minimum average total costs.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) I and II are both true.
6. D) I and II are both false.

Diff: 3

Section: 7.2

20) 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.

1. A) infinite
2. B) zero
3. C) highly elastic
4. D) less than the average variable cost

Diff: 2

Section: 7.2

21) In the short run, suppose average total cost is a straight line and marginal cost is positive and constant. Then, we know that fixed costs must:

1. A) be declining with output.
2. B) be positive.
3. C) equal zero.
4. D) We do not have enough information to answer this question.

Diff: 3

Section: 7.2

22) In the short run, suppose average total cost is a straight line and marginal cost is positive and constant. Then, we know that:

1. A) marginal cost is less than average total cost.
2. B) average total cost is positive and constant.
3. C) average total cost equals marginal cost.
4. D) A and B are correct.
5. E) B and C are correct.

Diff: 3

Section: 7.2

23) From Equation (7.1) in the book, the short-run marginal cost of production is MC = w/MPL. Based on this equation, which of the following statements is NOT true?

1. A) If the marginal product of labor is constant, then MC is constant.
2. B) If the marginal product of labor is a concave curve, then the MC curve is also concave.
3. C) If the marginal product of labor is a concave curve, then the MC curve is U-shaped.
4. D) MC increases as the marginal product of labor declines.

Diff: 2

Section: 7.2

24) 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?

1. A) Shifts upward
2. B) Shifts downward
3. C) Shifts leftward
4. D) Shifts rightward

Diff: 2

Section: 7.2

25) Trisha believes the production of a dress requires 4 labor hours and 2 machine hours to produce. If Trisha decides to operate in the short run, she must spend \$500 to lease her business space. Also, a labor hour costs \$15 and a machine hour costs \$35. What is Trisha’s cost of production as a function of dresses produced?

Answer: Since the production of a dress requires spending \$60 for labor and \$70 for machine hours, Trisha’s cost function is: C(q) = 130q + 500.

Diff: 2

Section: 7.2

26) A firm’s total cost function is given by the equation:

TC = 4000 + 5Q + 10Q2.

(1) Write an expression for each of the following cost concepts:

1. Total Fixed Cost
2. Average Fixed Cost
3. Total Variable Cost
4. Average Variable Cost
5. Average Total Cost
6. Marginal Cost

(2) Determine the quantity that minimizes average total cost. Demonstrate that the predicted relationship between marginal cost and average cost holds.

PART (1)

TFC = 4000

AFC =

TVC = TCTFC

TVC = 5Q + 10Q2

AVC = = = 5 + 10Q

ATC = =

MC = 5 + 20Q

PART (2)

ATC is minimized where MC is equal to ATC.

Equating MC to ATC

= 5 + 20Q

4000 +5Q + 102 = 5Q + 20Q2

4000 = 10Q2

Q2 = 400

Q = 20

ATC is minimized at 20 units of output. Up to 20, ATC falls, while beyond 20 ATC rises.

MC should be less than ATC for any quantity less than 20.

For example, let Q = 10:

MC = 5 + 20(10) = 205

ATC = = 505

MC is indeed less than ATC for quantities smaller than 20.

MC should exceed ATC for any quantity greater than 20.

For example, let Q = 25:

MC = 5 + 20(25) = 505

ATC = = 415

MC is indeed greater than ATC for quantities greater than 20.

Diff: 2

Section: 7.2

7.3 Cost in the Long Run

1) In the long run, which of the following is considered a variable cost?

1. A) Expenditures for wages
2. B) Expenditures for research and development
3. C) Expenditures for raw materials
4. D) Expenditures for capital machinery and equipment
5. E) all of the above

Diff: 1

Section: 7.3

2) An isocost line reveals the

1. A) costs of inputs needed to produce along an isoquant.
2. B) costs of inputs needed to produce along an expansion path.
3. C) input combinations that can be purchased with a given outlay of funds.
4. D) output combinations that can be produced with a given outlay of funds.

Diff: 1

Section: 7.3

3) Assume that a firm spends \$500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is \$20 per hour and the rental cost of capital is \$25 per hour, the slope of the isocost curve will be

1. A) 500.
2. B) 25/500.
3. C) -4/5.
4. D) 25/20 or 1.25.

Diff: 1

Section: 7.3

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

1. A) MRTS = MPL/MPK
2. B) MPL/w = MPK/r
3. C) MRTS = w/r
4. D) MPL/MPK= w/r
5. E) none of the above

Diff: 2

Section: 7.3

5) When an isocost line is just tangent to an isoquant, we know that

1. A) output is being produced at minimum cost.
2. B) output is not being produced at minimum cost.
3. C) the two products are being produced at the least input cost to the firm.
4. D) the two products are being produced at the highest input cost to the firm.

Diff: 1

Section: 7.3

6) The total cost of producing a given level of output is

1. A) maximized when a corner solution exists.
2. B) minimized when the ratio of marginal product to input price is equal for all inputs.
3. C) minimized when the marginal products of all inputs are equal.
4. D) minimized when marginal product multiplied by input price is equal for all inputs.

Diff: 1

Section: 7.3

7) A firm’s expansion path is

1. A) the firm’s production function.
2. B) a curve that makes the marginal product of the last unit of each input equal for each output.
3. C) a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices.
4. D) none of the above

Diff: 1

Section: 7.3

8) The curve in the diagram is called

1. A) the income-consumption curve.
2. B) the long-run total cost curve.
3. C) the expansion path.
4. D) the price-consumption curve.
5. E) none of the above

Diff: 1

Section: 7.3

9) At the optimum combination of two inputs,

1. A) the slopes of the isoquant and isocost curves are equal.
2. B) costs are minimized for the production of a given output.
3. C) the marginal rate of technical substitution equals the ratio of input prices.
4. D) all of the above
5. E) A and C only

Diff: 2

Section: 7.3

10) Suppose that the price of labor (PL) is \$10 and the price of capital (PK) is \$20. What is the equation of the isocost line corresponding to a total cost of \$100?

1. A) PL+ 20PK
2. B) 100 = 10L + 20K
3. C) 100 = 30(L+K)
4. D) 100 + 30 (PL+ PK)
5. E) none of the above

Diff: 2

Section: 7.3

11) 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

1. A) the firm could produce 3 more units of output if it increased its use of capital by one unit (holding labor constant).
2. B) the firm could produce 3 more units of output if it increased its use of labor by one unit (holding capital constant).
3. C) 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.
4. D) if it used one more unit of both capital and labor, the firm could produce 3 more units of output.
5. E) the marginal product of labor is 3 times the marginal product of capital.

Diff: 2

Section: 7.3

12) A firm employs 100 workers at a wage rate of \$10 per hour, and 50 units of capital at a rate of \$21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm

1. A) is producing its current output level at the minimum cost.
2. B) could reduce the cost of producing its current output level by employing more capital and less labor.
3. C) could reduce the cost of producing its current output level by employing more labor and less capital.
4. D) could increase its output at no extra cost by employing more capital and less labor.
5. E) Both B and D are true.

Diff: 2

Section: 7.3

13) An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in a river. Use the following two statements to answer this question:

1. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent.
2. The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees.
3. A) Both I and II are true.
4. B) I is true, and II is false.
5. C) I is false, and II is true.
6. D) Both I and II are false.

Diff: 2

Section: 7.3

14) 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

1. A) the marginal products of chemicals and labor are equal
2. B) 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
3. 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
4. D) the production of an additional unit of dynamite costs the same regardless of whether chemicals or labor are used
5. E) none of the above

Diff: 3

Section: 7.3

15) 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

1. A) the amount of waste water used before the tax was imposed.
2. B) the cost to the firm of using waste water before the tax was put in place.
3. C) the rental rate of machinery.
4. D) the marginal product of waste water only.
5. E) the ratio of the marginal product of waste water to the marginal product of machinery.

Diff: 2

Section: 7.3

16) Consider the following statements when answering this question.

1. With convex isoquants, a firm’s expansion path cannot be negatively sloped.
2. 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.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) Both I and II are true.
6. D) Both I and II are false.

Diff: 3

Section: 7.3

17) 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 will:

1. A) increase at a decreasing rate because we will substitute capital for labor as the business grow.
2. B) follow the 45-degree line from the origin.
3. C) not be defined.
4. D) be a vertical line.

Diff: 2

Section: 7.3

18) Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). If the wage rate paid to the pilots increases relative to the rental rate of capital for the airplanes, then:

1. A) the optimal capital-labor ratio should increase.
2. B) the optimal capital-labor ratio should decrease.
3. C) the optimal capital-labor ratio remains the same.
4. D) We do not have enough information to answer this question.

Diff: 2

Section: 7.3

19) 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?

1. A) We will only use labor in the production process
2. B) We will only use capital in the production process
3. C) We will use equal amounts of capital and labor
4. D) The optimal capital-labor ratio is 0.75-to-1.

Diff: 2

Section: 7.3

20) 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?

1. A) The firm will only use the input with lower cost
2. B) The firm will use equal amounts of the two inputs, even if one of the inputs has a lower cost
3. C) The firm will only use the input with higher cost
4. D) The firm cannot achieve a profit maximizing level of output under these circumstances

Diff: 2

Section: 7.3

21) Acme Container Corporation produces egg cartons that are sold to egg distributors. Acme has estimated this production function for its egg carton division:

Q = 25L0.6K0.4,

where Q = output measured in one thousand carton lots, L = labor measured in person hours, and K = capital measured in machine hours. Acme currently pays a wage of \$10 per hour and considers the relevant rental price for capital to be \$25 per hour. Determine the optimal capital-labor ratio that Acme should use in the egg carton division.

MPL = .6(25) L-0.4K0.4 = 15

MPK = .4(25) L0.6K-0.6= 10

MRTS =

MRTS = = 1.5 ∙

MRTS = 1.5

Equate MRTS to .

1.5 =

1.5 = 0.4

1.5K = 0.4L; K=0.266L

Diff: 2

Section: 7.3

22) A fast food restaurant currently pays \$5 per hour for servers and \$50 per hour to rent ovens and other kitchen machinery. The restaurant uses seven hours of server time per unit of machinery time. Determine whether the restaurant is minimizing its cost of production when the ratio of marginal products (capital to labor) is 12. If not, what adjustments are called for to improve the efficiency in resource use?

Answer: If the firm is minimizing its costs of production, then the MRTS will equal a ratio of prices of inputs.

The ratio of prices = = 10 and the MRTS of capital for labor = 12.

Since these two ratios are not equal, the firm should change the mix of inputs. To increase efficiency in the use of inputs, the firm should use more capital and use less labor to make the ratios equal.

Diff: 2

Section: 7.3

23) Davy Metal Company produces brass fittings. Davy’s engineers estimate the production function represented below as relevant for their long-run capital-labor decisions.

Q = 500L0.6K0.8,

where Q = annual output measured in pounds,

L = labor measured in person hours,

K = capital measured in machine hours.

The marginal products of labor and capital are:

MPL = 300L-0.4K0.8 MPK = 400L0.6K-0.2

Davy’s employees are relatively highly skilled and earn \$15 per hour. The firm estimates a rental charge of \$50 per hour on capital. Davy forecasts annual costs of \$500,000 per year, measured in real dollars.

1. Determine the firm’s optimal capital-labor ratio, given the information above.
2. How much capital and labor should the firm employ, given the \$500,000 budget? Calculate the firm’s output.
3. Davy is currently negotiating with a newly organized union. The firm’s personnel manager indicates that the wage may rise to \$22.50 under the proposed union contract. Analyze the effect of the higher union wage on the optimal capital-labor ratio and the firm’s employment of capital and labor. What will happen to the firm’s output?

MPL = 300 L-0.4K0.8 = 300

MPK = 400 L0.6K-0.2 = 400

MRTS = = 0.75

MRTS = 0.75

Equate MRTS to = .

0.75 =

0.75 = 0.3

= 0.4; K=0.4L

C = 500,000

C = wL + rK

500,000 = 15L + 50K

K = 0.4L from optimal ratio

500,000 = 15L + 50(0.4L)

500,000 = 15L + 20L

500,000 = 35L

L = 14,285.71 or 14,286 hours

Substitute to solve for K.

500,000 = 15(14286) + 50K

500,000 = 214,290 + 50K

285,710 = 50K

K = 5714.20

or K = 5714

Q = 500(14,286)0.6(5,714)0.8

Q = 157,568,191

c.

MRTS = 0.75

New = = 0.45

Equating MRTS to = .

0.75 = 0.75

= 0.6

K = 0.6L

Substitute into C:

500,000 = 22.50L + 50K

K = 0.60L

500,000 = 22.50L + 50(0.6L)

500,000 = 22.50L + 30L

500,000 = 52.50L

L = 9,523.8 or 9,524

L fell from 14,286 to 9,524. Substitute to solve for K.

500,000 = 22.50(9,524) + 50K

285,710 = 50K

K = 5,714.20 or 5,714

K remains constant.

Q = 500(9524)0.6(5714)0.8

Q = 123,541,771.8

Output fell from 157,568,202.5 to 123,541,771.8.

Diff: 3

Section: 7.3

24) The Longheel Press produces memo pads in its local shop. The company can rent its equipment and hire workers at competitive rates. Equipment needed for this operation can be rented at \$52 per hour, and labor can be hired at \$12 per worker hour. The company has allocated \$150,000 for the initial run of memo pads. The production function using available technology can be expressed as:

Q = 0.25K0.25L0.75,

where Q represents memo pads (boxes per hour), K denotes capital input (units per hour), and L denotes labor input (units of worker time per hour). The marginal products of labor and capital are as follows:

MPL = (0.75)(0.25)K0.25L-0.25

MPK = (0.25)(0.25)K-0.75L0.75

1. Construct the isocost equation.
2. Determine the appropriate input mix to get the greatest output for an outlay of \$150,000 for a production run of memo pads. Also, compute the level of output.
3. Explain what would happen in the short run (keeping capital fixed) to the appropriate input mix if production were changed to 1,500 units per hour. Would the input combination be different in the long run? If so, how would it change? Explain.

a.

I = wL + rK

150,000 = 12L + 52K

The appropriate input mix occurs where the

MPL = (0.75)(0.25)K0.25L-0.25

MPK = (0.25)(0.25)K-0.75L0.75

=

= K = =

Thus, for each unit of K used, 13 units of labor are used. The total amount of labor used per time period is

150,000 = 12L + 52(L/13)

= 12L + 4L

= 16L

= 9,375

The amount of capital used per time period is

K = L/13 = 9375/13 = 721.15.

The output rate is

Q = 0.25 (K0.25) (L0.25)

= 0.25(721.15)0.25(9375)0.75

= 0.25(5.182)(952.749)

= 1,234.29 boxes per hour.

If production were increased to 1,500 units per time period, it would have to be accomplished with more labor and not more capital, since capital is fixed. This level of production in the short run would be more expensive than producing this rate of output in the long run, because both labor and capital could be adjusted in the long run for the most efficient input combination.

Diff: 3

Section: 7.3

25) A paper company dumps nondegradable waste into a river that flows by the firm’s plant. The firm estimates its production function to be:

Q = 6KW,

where Q = annual paper production measured in pounds, K = machine hours of capital, and W = gallons of polluted water dumped into the river per year. The marginal products of capital and labor are given as follows:

MPK = 6W MPW = 6K

The firm currently faces no environmental regulation in dumping waste into the river. Without regulation, it costs the firm \$7.50 per gallon dumped. The firm estimates a \$30 per hour rental rate on capital. The operating budget for capital and waste water is \$300,000 per year.

1. Determine the firm’s optimal ratio of waste water to capital.
2. Given the firm’s \$300,000 budget, how much capital and waste water should the firm employ? How much output will the firm produce?
3. The state environmental protection agency plans to impose a \$7.50 effluent fee for each gallon that is dumped. Assuming that the firm intends to maintain its pre-fee output, how much capital and waste water should the firm employ? How much will the firm pay in effluent fees? What happens to the firm’s cost as a result of the effluent fee?

a.

MPW = 6K

MPK = 6W

MRTS = =

Rate of water charge to price of capital:

= = .25

Equating MRTS to ratio of input prices

= 0.25, K = 0.25W

b.

C = PWW + PKK

300,000 = 7.50W + 30K

Recall K = 0.25W

300,000 = 7.5W + 30(0.25W)

300,000 = 7.5W + 7.5W

W = 20,000 gallons

K = 0.25W

K = 0.25(20,000)

K = 5000

Q = 6(5000)(20,000)

Q = 600,000,000

PW becomes \$15 (7.50 previous cost + effluent fees).

Ratio of input price is

= = 0.5

MRTS =

Hold Q constant at 600,000,000

Q = 6KW

K = 0.5W

600,000,000 = 6(0.5W)(W)

600,000,000 = 3W2

200,000,000 = W2

W = 14,142.13 or W = 14,142

K = 0.5(14,142)

K = 7071

Water usage falls from 20,000 to 14,142 while capital rises from 5000 to 7071.

Effluent fee is 7.5 × 7071 = \$53,032.5

Cost prior to effluent fee was \$300,000 (from isocost level)

Cost after effluent fee is

C = PWW + PKK

where PW = 15 (including fee)

PK = 30

C = 15(14142) + 30(7071)

C = 212,130 + 213,130

C = \$424,260

Cost rises from \$300,000 to \$424,260.

Diff: 3

Section: 7.3

7.4 Long-Run versus Short-Run Cost Curves

1) Assume that a firm’s production process is subject to increasing returns to scale over a broad range of outputs. Long-run average costs over this output will tend to

1. A) increase.
2. B) decline.
3. C) remain constant.
4. D) fall to a minimum and then rise.

Diff: 1

Section: 7.4

2) 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?

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

Diff: 2

Section: 7.4

3) The LAC and LMC curves in the diagram below are consistent with a production function that exhibits

1. A) decreasing returns to scale.
2. B) constant returns to scale.
3. C) increasing returns to scale.
4. D) increasing returns to scale for small levels of output, then constant returns to scale, and eventually decreasing returns to scale as output increases.
5. E) decreasing returns to scale for small levels of output, then constant returns to scale, and eventually increasing returns to scale as output increases.

Diff: 2

Section: 7.4

4) The cost-output elasticity equals 1.4. This implies that:

1. A) there are neither economies nor diseconomies of scale.
2. B) there are economies of scale.
3. C) there are diseconomies of scale.
4. D) marginal cost is less than average cost.

Diff: 2

Section: 7.4

5) The cost-output elasticity is used to measure:

1. A) economies of scope.
2. B) economies of scale.
3. C) the curvature in the fixed cost curve.
4. D) steepness of the production function.

Diff: 2

Section: 7.4

6) Use the following two statements to answer this question:

1. Increasing returns to scale cause economies of scale.
2. Economies of scale cause increasing returns to scale.
3. A) Both I and II are true.
4. B) I is true, and II is false.
5. C) I is false, and II is true.
6. D) Both I and II are false.

Diff: 3

Section: 7.4

7) At the current level of output, long-run marginal cost is \$50 and long-run average cost is \$75. This implies that:

1. A) there are neither economies nor diseconomies of scale.
2. B) there are economies of scale.
3. C) there are diseconomies of scale.
4. D) the cost-output elasticity is greater than one.

Diff: 3

Section: 7.4

8) The cost-output elasticity is used to measure

1. A) input substitution flexibility.
2. B) the slope of the firm’s expansion path.
3. C) the slope of long-run average cost.
4. D) the slope of long-run marginal cost.
5. E) economies of scale.

Diff: 1

Section: 7.4

9) The cost-output elasticity can be written and calculated as

1. A) MC/AC.
2. B) AC/MC.
3. C) (AC)(MC).
4. D) (AC)2(MC).
5. E) (AC)(MC)2.

Diff: 1

Section: 7.4

10) When there are economies of scale,

1. A) MC > AC, so cost-output elasticity is greater than AC.
2. B) MC < AC, so cost-output elasticity is less than AC.
3. C) MC < AC, so cost-output elasticity is greater than 1.
4. D) MC < AC, so cost-output elasticity is less than 1.
5. E) long-run marginal cost is declining.

Diff: 1

Section: 7.4

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

1. A) diminishing returns apply in the short run.
2. B) returns to scale only exist in the long run.
3. C) opportunity costs are taken into account in the short run.
4. D) there are at least as many possibilities for substitution between factors of production in the long run as in the short run.
5. E) none of the above

Diff: 2

Section: 7.4

12) Consider the following statements when answering this question.

1. A technology with increasing returns to scale will generate a long-run average cost curve that has economies of scale.
2. Diminishing returns determines the slope of the short-run marginal cost curve, whereas returns to scale determine the slope of the long-run marginal cost curve.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) Both I and II are true.
6. D) Both I and II are false.

Diff: 2

Section: 7.4

13) To model the input decisions for a production system, we plot labor on the horizontal axis and capital on the vertical axis. In the short run, labor is a variable input and capital is fixed. The short-run expansion path for this production system is:

1. A) a vertical line.
2. B) a horizontal line.
3. C) equal to the 45-degree line from the origin.
4. D) not defined.

Diff: 2

Section: 7.4

14) Use the following statements to answer this question:

1. The long-run average cost (LAC) curve is the envelope of the short-run average cost (SAC) curves.
2. The long-run marginal cost (LMC) curve is the envelope of the short-run marginal cost (SMC) curves.
3. A) I and II are true.
4. B) I is true and II is false.
5. C) II is true and I is false.
6. D) I and II are false.

Diff: 1

Section: 7.4

15) Which of the following situations is NOT possible?

1. A) SAC and LAC are both increasing for some output levels.
2. B) SAC is increasing but LAC is decreasing for some output levels.
3. C) SAC is decreasing but LAC is increasing for some output levels.
4. D) SAC and LAC are both decreasing for some output levels.
5. E) All of the above are possible.

Diff: 2

Section: 7.4

16) Suppose the long-run cost function is C = 3q. What is the cost-output elasticity for this case?

1. A) 1
2. B) 3
3. C) 1/3
4. D) 2

Diff: 2

Section: 7.4

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

1. A) 1
2. B) 2
3. C) 1/2
4. D) 4

Diff: 2

Section: 7.4

18) One Guy’s short-run cost function is: C(q, K) = + 0.25K, where q is the number of pizzas produced and K is the number of ovens. Currently, One Guy’s is leasing 4 ovens in the short run. Calculate the average cost of producing 10 pizzas. The manager of One Guy’s is considering leasing

5 additional ovens. If One Guy’s adds 5 more ovens, what is the average total cost of producing

10 pizzas?

Answer: With 4 ovens, the average cost per pizza is: ATC(10, 4) = = = 1.43. If One Guy’s leases an additional 5 ovens, the average cost per pizza is:

ATC(10, 9) = = = 0.82. Adding 5 ovens will decrease the average cost of producing 10 pizzas.

Diff: 2

Section: 7.4

19) Ronald’s Outboard Motor Manufacturing plant has the following short-run cost function:

C(q, A, K) = + 500K, where q is the number of motors produced, K is the number of machines leased, and A is a productivity factor of technology. Currently, A is 25 and Ronald uses 20 machines. Ronald is investigating a new production technique. If he adopts the new technique, the productivity factor will become 36. If Ronald adopts the new technique, what is his average total cost of manufacturing 140 motors? Did the increase in the productivity factor increase or decrease the average total cost of producing 140 motors?

Answer: Initially, Ronald’s average total cost of producing 140 motors is:

ATC(140, 25, 20) = = 88.23. With the new technique, Ronald’s average total cost of producing 140 motors is: ATC(140, 36, 20) = = 79.53. The increase in the productivity factor associated with the new technique decreases the average total cost of producing 140 units by \$8.70 per unit.

Diff: 2

Section: 7.4

20) Cogswell Cogs short-run cost function is: C(q, K) = + 15K, where q is the number of cogs produced and K is the amount of robot hours used. Currently, Cogs uses 16 robot hours to produce

300 cogs. What happens to the average total cost of producing 300 cogs if Cogswell increases robot hours to 25?

Answer: Initially, Cogswell’s average total cost is: ATC(300, 16) = = 16,875.80. If Cogswell increases the use of robot hours to 25, his average total cost is:

ATC(300, 25) = = 8,641.25. Cogswell’s average total cost of producing

300 cogs falls by 49% if he increases his use of robot hours.

Diff: 2

Section: 7.4

21) Homer’s boat manufacturing plant leases 50 hydraulic lifts and produces 25 boats per period. Homer’s short-run cost function is: C(q, K) = 15 + 200K, where q is the number of boats produced and K is the number of hydraulic lifts. Homer’s long-run cost function is:

CLR (q) = 173.5578q10/7. At Homer’s current short-run plant size, calculate Homer’s short-run average total cost of production. If Homer would lease 11 more hydraulic lifts in the short run, will his short-run average total cost of producing 25 boats increase or decrease? Does Homer’s long-run cost function exhibit increasing, constant, or decreasing returns to scale?

Answer: At Homer’s current short-run plant size, Homer’s short-run average total cost of production is: ATC(25, 50) = = 731.46. If Homer leases an additional 11 hydraulic lifts, short-run average total costs become: ATC(25, 61) = = 689.62. We see that Homer’s short-run average total costs decrease if he uses 11 additional hydraulic lifts. Homer’s long-run average costs are: (q) = = = 173.5578q3/7. Since long-run average costs increase as output increases, Homer’s production process has decreasing returns to scale.

Diff: 2

Section: 7.4

22) Marge’s Hair Salon uses 15 hair dryers to produce 10 units of output per period. Marge’s short-run cost function is: C(q, K) = + 12K, where q is the number of units produced and K is the number of hair dryers Marge leases. Marge’s long-run cost function is: CLR (q) = 26.8q. If Marge used 4 fewer hair dryers in the short-run, would short-run average total costs increase or decrease? Does Marge’s long-run cost curve exhibit increasing, constant, or decreasing returns to scale?

Answer: Currently, Marge’s short-run average costs are: SRATC(10, 15) = = 28.00. If Marge uses 4 fewer hair dryers in the short run, her short-run average total costs become: SRATC(10, 11) = = 26.84. If Marge uses 4 fewer dryers and produces 10 units, her short-run average total costs decrease. Marge’s long-run average costs are:

LRAC = = = 26.8. We see that Marge’s long-run average costs are constant. This implies that Marge’s cost curve exhibits constant returns to scale.

Diff: 2

Section: 7.4

23) Apu leases 2 squishy machines to produce 40 squishies in the short run. Apu’s short-run cost function is: C(q, K) = 0.85 + 0.5K, where q is the number of squishies produced and K is the number of squishy machines used. Apu’s long-run cost function is: CLR (q) = 1.13q2/3. If Apu decides to lease 7 squishy machines, what happens to Apu’s short-run average total cost of producing 40 squishies? Does Apu’s long-run cost function exhibit increasing, constant, or decreasing returns to scale?

Answer: With 2 squishy machines, Apu’s short-run average total costs are:

SRATC(40, 2) = = 8.525. If Apu leases 7 squishy machines, his short-run average total costs become: SRATC(40, 7) = = 0.78. Leasing 5 additional squishy machines lowers Apu’s short-run average total cost by 91%. Apu’s long-run average cost curve is: LRAC(q) = . Since Apu’s long-run average costs decrease as output increases, Apu’s cost curve exhibit increasing returns to scale.

Diff: 2

Section: 7.4

7.5 Production with Two Outputs–Economies of Scope

1) Generally, economies of scope are present when

1. A) economies of scale are present in the production of two or more goods.
2. B) economies of scale are constant in the joint production of two products.
3. C) joint output is less from a single firm than could be achieved from two different firms each producing a single product (assuming equivalent production inputs in both situations).
4. D) 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).

Diff: 1

Section: 7.5

2) When a product transformation curve is bowed outward, there are ________ in production.

1. A) economies of scope
2. B) economies of scale
3. C) diseconomies of scope
4. D) diseconomies of scale
5. E) none of the above

Diff: 1

Section: 7.5

3) Economies of scope refer to

1. A) changes in technology.
2. B) the very long run.
3. C) multiproduct firms.
4. D) single product firms that utilize multiple plants.
5. E) short-run economies of scale.

Diff: 1

Section: 7.5

4) A firm produces leather handbags and leather shoes. If there are economies of scope, the product transformation curve between handbags and shoes will be

1. A) a straight line.
2. B) bowed outward (concave).
3. C) bowed inward (convex).
4. D) a rectangle.

Diff: 1

Section: 7.5

5) 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

1. A) diseconomies of scope.
2. B) economies of scale.
3. C) decreasing returns to scale.
4. D) increasing returns to scale.

Diff: 1

Section: 7.5

6) When a product transformation curve for a firm is bowed inward, there are ________ in production.

1. A) economies of scope
2. B) economies of scale
3. C) diseconomies of scope
4. D) diseconomies of scale

Diff: 2

Section: 7.5

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

1. A) A firm experiencing economies of scope must also experience increasing returns to scale.
2. B) Economies of scale and economies of scope must occur together.
3. C) A firm experiencing increasing returns to scale must also experience economies of scope.
4. D) There is no definite relationship between returns to scale and economies of scope.

Diff: 2

Section: 7.5

8) The equation below gives the degree of economies of scope (SC):

SC = (C(Q1) + C(Q2) – C(Q1,Q2)) / C(Q1,Q2)

where C(Q1) is the cost of producing output Q1, C(Q2) is the cost of producing output Q2, and C(Q1,Q2) is the joint cost of producing both outputs. If SC is negative:

1. A) there are neither economies nor diseconomies of scope.
2. B) there are economies of scope.
3. C) there are diseconomies of scope.
4. D) there are both economies and diseconomies of scope.

Diff: 3

Section: 7.5

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

1. A) Bubba adds more varied inputs to burger production.
2. B) Bubba expands burger production, focusing on that one good.
3. C) Bubba contracts burger production.
5. E) Bubba cuts back on the diversity of the menu.

Diff: 2

Section: 7.5

10) Which of the following business combinations likely exhibit economies of scope?

1. A) Banking services for individuals and banking services for other business
2. B) Retail clothing stores and electronic (internet) clothing sales
3. C) Hospitals that perform heart surgery and hospitals that perform cosmetic surgery
4. D) all of the above

Diff: 2

Section: 7.5

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

1. A) is constant across different output levels.
2. B) only increases as the level of output increases.
3. C) may increase or decrease with output.
4. D) will always tend to zero as output becomes very large.

Diff: 3

Section: 7.5

12) Suppose a firm has multiproduct cost function that is additive such that C(q1,q2) = C(q1) + C(q2). What is the degree of economies of scope (SC) for this firm?

1. A) 2
2. B) 1
3. C) Zero
4. D) Negative

Diff: 2

Section: 7.5

13) What is the economies of scope character for a firm that has a straight-line product transformation curve?

1. A) Economies of scope (SC > 0)
2. B) Diseconomies of scope (SC < 0)
3. C) SC = 0
4. D) SC = 1

Diff: 2

Section: 7.5

14) The cost of producing 600 small fiberglass sailboats per year, and the cost of producing sails and fittings necessary to make the boats seaworthy in a single plant, are together \$780,000. If produced in separate plants, the boats would cost \$540,000, and the sails and fittings would cost \$180,000. From this information, what can be learned about (1) economies of scale and (2) economies of scope in the production of sailboats, sails, and fittings? Perform any necessary calculations and explain.

Answer: The above information says nothing about economies of scale. However, one can calculate the degree of economies of scope. Use equation (7.7).

SC =

=

= -0.077

SC is negative but close to zero, there are slight diseconomies of scope.

Diff: 2

Section: 7.5

15) Bridget’s Brewery can jointly produce dry stout and sweet stout. The cost function for joint production is: CD,S( q1, q2) = 6q1 + 8 q2 – 10 q11/3 q21/3, where q1 is the quantity of dry stout and q2 is the quantity of sweet stout that Bridget produces. If the brewery produces dry stout alone, the firm’s cost function is: CD ( q1) = 6 q1. If the brewery produces sweet stout alone, the cost function is:

CS (q2) = 8 q2. Calculate Bridget’s degree of economies of scope if she produces 27 units of dry stout and 64 units of sweet stout.

Answer: SC = = = 0.18. Since the measure is positive, Bridget enjoys economies of scope for dry and sweet stout production.

Diff: 2

Section: 7.5

16) Trisha’s Fashion Boutique can jointly produce evening gowns and formal gowns. The joint cost curve is: CE,F ( q1, q2) = 75 q1 + 125 q2 – 20 q11/2 q21/2, where q1 is the number of evening gowns and q2 is the number of formal gowns Trisha produces. If Trisha produces evening gowns alone, the cost function is: CE ( q1) = 75 q1 . If Trisha produces formal gowns alone, the cost function is:

CF (q2) = 125 q2. Calculate Trisha’s degree of economies of scope if she produces 25 evening gowns and 9 formal gowns.

Answer: SC = = = . Since the measure is positive, Trisha enjoys economies of scope for evening and formal gown production.

Diff: 2

Section: 7.5

17) One Guy’s Pizza jointly produces pizzas and calzones. The joint cost function is:

CP,C( q1, q2) = 4 q1 + 0.8 – 1.5 q11/5 q21/5, where q1 is the number of pizzas and q2 is the number of calzones One Guy’s Pizza produces. If One Guy produces pizzas alone, the cost function is:

CP (q1) = 4 q1. If One Guy produces calzones alone, the cost function is: CC (q2) = 0.8 q2. Calculate One Guy’s degree of economies of scope if they produce 1,024 pizzas and 243 calzones.

Answer: SC = = =0.72. Since the measure is positive, One Guy’s Pizza enjoys economies of scope for pizza and calzone production.

Diff: 2

Section: 7.5

18) Cogswell Cogs can jointly produce cogs or rotors. The joint cost function is:

CC ( q1, q2) = 35 q1 + 12 q2 + 100 q11/3 q21/2, where q1 is the number of cogs and q2 is the number of rotors Cogswell produces. If Cogswell produces cogs alone, the cost function is:

CC ( q1) = 35 q1 . If Cogswell produces rotors alone, the cost function is: CR ( q2) = 12 q2. Calculate Cogswell’s degree of economies of scope if he produces 64 cogs and 16 rotors.

Answer: SC = = = -0.40. Since the measure is negative, Cogswell’s joint production process exhibits diseconomies of scope for cog and rotor production.

Diff: 2

Section: 7.5

7.6 Dynamic Changes in Costs–The Learning Curve

1) Which of the following is NOT a reason for average costs to fall according to the learning curve?

1. A) Workers accomplish tasks more quickly after doing the task a few times.
2. B) Managers schedule more efficiently over time.
3. C) Engineers determine more accurately what tolerances can be used.
4. D) Suppliers may become better able to produce the exact inputs the firm needs.
5. E) Competing firms leave the industry as the learning firm becomes more efficient.

Diff: 2

Section: 7.6

Figure 7.2

2) Refer to Figure 7.2. A movement from A to B in the figure represents

1. A) economies of scale.
2. B) diseconomies of scale.
3. C) learning.
4. D) economies of scope.
5. E) diseconomies of scope.

Diff: 1

Section: 7.6

3) A movement from A to C in Figure 7.2 may represent

1. A) economies of scale.
2. B) diseconomies of scale.
3. C) learning.
4. D) economies of scope.
5. E) diseconomies of scope.

Diff: 1

Section: 7.6

4) The presence of a learning curve may induce a decision maker in a startup firm to choose

1. A) low levels of output to exploit economies of scale.
2. B) high levels of output to exploit economies of scale.
3. C) low levels of output to shift the average cost curve down over time.
4. D) high levels of output to shift the average cost curve down over time.
5. E) to produce more than one output.

Diff: 2

Section: 7.6

5) Consider the following statements when answering this question.

1. Investment in new technology generates learning by doing.
2. Economies of scale cannot shift the long-run average cost curve down, whereas learning by doing can.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) Both I and II are true.
6. D) Both I and II are false.

Diff: 2

Section: 7.6

6) Consider the following statements when answering this question.

1. As Boeing’s production fell 10% to 100 planes last year, learning by doing cannot account for this year’s changes in long-run average costs.
2. Failure to take into account the effects of learning by doing will lead to overestimates of the cost-output elasticity.
3. A) I is true, and II is false.
4. B) I is false, and II is true.
5. C) Both I and II are true.
6. D) Both I and II are false.

Diff: 3

Section: 7.6

7) A group of friends recently started manufacturing specialty T-shirts. The business has grown rapidly, with monthly production up from 50 to 250 in the first 6 months. During this same period, average production cost has been cut in half. The firm’s long-run average cost curve over this range of output

1. A) is downward sloping.
2. B) is upward sloping.
3. C) is horizontal.
4. D) may be any of the above.

Diff: 2

Section: 7.6

8) Use the following two statements to answer this question:

1. A growing firm’s average cost of production will decline over time if output continually expands and economies of scale are present.
2. A firm’s average cost of production can decline over time if learning occurs as cumulative output increases.
3. A) Both I and II are true.
4. B) I is true, and II is false.
5. C) I is false, and II is true.
6. D) Both I and II are false.