Chapter 7

Chapter 7Production, Inputs, and Cost: Building Blocks for Supply Analysis TRUE/FALSE

1.

The short run is that period during which there are no fixed commitments. commitments. ANS: LOC: TOP:

2.

The long long run is a period long long enough enough so that one one of the firm’s firm’s commitments commitments ends. ANS: LOC: TOP:

3.

F PTS: 1 DIF: Moderate NAT: Analytic The Study of economics, and definitions in economics Short-Run Vs. Long-Run Costs: What Makes an Input Variable?

Variable Variable costs costs increase increase when output output rises. rises. ANS: LOC: TOP:

8.

F PTS: 1 DIF: Easy NAT: Analytic The Study of economics, and definitions in economics Short-Run Vs. Long-Run Costs: What Makes an Input Variable?

Fixed cost increases increases when output output rises. rises. ANS: LOC: TOP:

7.

T PTS: 1 DIF: Easy NAT: Analytic The Study of economics, and definitions in economics Short-Run Vs. Long-Run Costs: What Makes an Input Variable?

In the the short short run the firm has no more more than than one fixed fixed input. input. ANS: LOC: TOP:

6.

F PTS: 1 DIF: Easy NAT: Analytic The Study of economics, and definitions in economics Short-Run Vs. Long-Run Costs: What Makes an Input Variable?

In the the short short run the firm has at least least one one fixed fixed input. input. ANS: LOC: TOP:

5.


In the short short run, run, a firm has fixed fixed costs costs but never any variable variable costs. ANS: LOC: TOP:

4.


T PTS: 1 DIF: Easy NAT: Analytic The Study of economics, and definitions in economics Short-Run Vs. Long-Run Costs: What Makes an Input Variable?

In the long run, more costs become become fixed fixed.. ANS: LOC: TOP:


1

9. In the hog farming farming example given in our textbook, textbook, as in most other businesses, businesses, there is only one way to produce output. ANS: LOC: TOP:

F PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

10. Total physical product shows what happens to to the quantity quantity of an output output when the firm changes changes the quantity of an input. ANS: LOC: TOP:

T PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

11. Marginal physical product measures the the increase in total total output that that results from a one-unit increase in in an input. ANS: LOC: TOP:


Analytic

12. Average physical physical product measures the output per unit of input. ANS: LOC: TOP:


Analytic

13. Average physical product product measures the increase in total output that results from a one-unit one-unit increase in an input. ANS: LOC: TOP:

F PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

14. Total physical physical product is maximized if marginal physical product product is zero. zero. ANS: LOC: TOP:

T PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

15. The “law” of diminishing diminishing returns asserts that marginal marginal returns will ultimately diminish diminish when the quantity of one input is increased. ANS: LOC: TOP:


Analytic

16. Marginal revenue product product equals the the marginal physical physical product multiplied multiplied by the quantity demanded. demanded. ANS: LOC: TOP:


Analytic

9. In the hog farming farming example given in our textbook, textbook, as in most other businesses, businesses, there is only one way to produce output. ANS: LOC: TOP:


Analytic

10. Total physical product shows what happens to to the quantity quantity of an output output when the firm changes changes the quantity of an input. ANS: LOC: TOP:


Analytic

11. Marginal physical product measures the the increase in total total output that that results from a one-unit increase in in an input. ANS: LOC: TOP:


Analytic

12. Average physical physical product measures the output per unit of input. ANS: LOC: TOP:


Analytic

13. Average physical product product measures the increase in total output that results from a one-unit one-unit increase in an input. ANS: LOC: TOP:

F PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

14. Total physical physical product is maximized if marginal physical product product is zero. zero. ANS: LOC: TOP:


Analytic

15. The “law” of diminishing diminishing returns asserts that marginal marginal returns will ultimately diminish diminish when the quantity of one input is increased. ANS: LOC: TOP:


Analytic

16. Marginal revenue product product equals the the marginal physical physical product multiplied multiplied by the quantity demanded. demanded. ANS: LOC: TOP:


Analytic

17. The “law” of diminishing diminishing returns rests on the “law” “law” of variable input input proportions. proportions. ANS: LOC: TOP:


Analytic

18. If MRP > P, a firm should use less of that input. ANS: LOC: TOP:

F PTS: 1 DIF: Moderate NAT: Understan Understanding ding and Applying Applying Economic Economic Models Production, Input Choice, and Cost with One Variable Input

Analytic

19. Firms should use a resource resource up to to a point point where MRP = P. ANS: LOC: TOP:

T PTS: 1 DIF: Easy NAT: Understan Understanding ding and Applying Applying Economic Economic Models Production, Input Choice, and Cost with One Variable Input

Analytic

20. When marginal revenue revenue product of an input is less than its price, the producers should use less less of the input. ANS: LOC: TOP:

T PTS: 1 DIF: Moderate NAT: Understan Understanding ding and Applying Applying Economic Economic Models Production, Input Choice, and Cost with One Variable Input

Analytic

21. Production technology technology determines determines the relationship relationship of of total cost cost to outputs. outputs. ANS: LOC: TOP:


Analytic

22. A total product product curve shows the inputs needed needed to produce any any level of output. output. ANS: LOC: TOP:


Analytic

23. A firm will tend tend to select the the least costly input combination combination to produce its output. ANS: LOC: TOP:

T PTS: 1 DIF: Easy NAT: Analytic Costs of productio production n Multiple Input Decisions: The Choice of Optimal Input Combinations

24. Most firms have have very little little flexibility flexibility in their their choice of input proportions. ANS: LOC: TOP:

F PTS: 1 DIF: Moderate NAT: Analytic Efficiency Efficiency and equity equity Multiple Input Decisions: The Choice of Optimal Input Combinations

25. The least costly combination of inputs inputs is influenced influenced by the relative relative prices of inputs. ANS: LOC: TOP:

T PTS: 1 DIF: Moderate NAT: Analytic The Study of economics, and definitions in economics Multiple Input Decisions: The Choice of Optimal Input Combinations

3

26. The rule that states that the marginal revenue product equal to price does not hold when there are more than two inputs. ANS: LOC: TOP:

F PTS: 1 DIF: Difficult NAT: Analytic The Study of economics, and definitions in economics Multiple Input Decisions: The Choice of Optimal Input Combinations

27. If a firm is using optimal input proportions, it is minimizing its costs. ANS: LOC: TOP:

T PTS: 1 DIF: Moderate NAT: Analytic The Study of economics, and definitions in economics Multiple Input Decisions: The Choice of Optimal Input Combinations

28. Cost minimization requires that a firm equate the ratio of marginal products of inputs to the ratio of input prices. ANS: LOC: TOP:

T PTS: 1 DIF: Difficult NAT: Analytic The Study of economics, and definitions in economics Multiple Input Decisions: The Choice of Optimal Input Combinations

29. If MPPa/Pa > MPPb/Pb, then the proportions of these two inputs is optimal. ANS: LOC: TOP:

F PTS: 1 DIF: Easy NAT: Analytic Understanding and Applying Economic Models Multiple Input Decisions: The Choice of Optimal Input Combinations

30. A rise in the price of an input can be expected to lead to a rise in its marginal physical product. ANS: LOC: TOP:

T PTS: 1 DIF: Difficult NAT: Analytic Understanding and Applying Economic Models Multiple Input Decisions: The Choice of Optimal Input Combinations

31. Input choices in the present are always affected by past decisions. ANS: LOC: TOP:

T PTS: 1 DIF: Difficult NAT: Analytic Understanding and Applying Economic Models Multiple Input Decisions: The Choice of Optimal Input Combinations

32. Input proportions are usually fixed by technological conditions alone. ANS: LOC: TOP:


33. If the price of one input changes, the firm will change its use of that input only. ANS: LOC: TOP:


34. If the price of one input changes, generally the firm will change its use of both inputs. ANS: LOC: TOP:

T PTS: 1 DIF: Difficult NAT: Analytic The Study of economics, and definitions in economics Multiple Input Decisions: The Choice of Optimal Input Combinations

35. A total cost curve shows the largest amount of a product a firm can produce with a minimum cost. ANS: LOC: TOP:

F PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

36. The marginal cost curve shows the per-unit cost associated with various levels of output. ANS: LOC: TOP:

F PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

37. The average cost curve shows the total cost divided by quantity produced for various levels of output. ANS: LOC: TOP:

T PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

38. Total fixed cost falls as output expands. ANS: LOC: TOP:


Analytic

39. The average fixed cost curve increases as output increases. ANS: LOC: TOP:


Analytic

40. The average total cost curve of a firm is U-shaped. ANS: LOC: TOP:


Analytic

41. The principal determinants of total and average cost curves are the firm’s technology and the prices of its inputs. ANS: LOC: TOP:

T PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

42. The firm’s average cost curve is the result of cost minimization in the use of fixed inputs. ANS: LOC: TOP:

F PTS: 1 DIF: Difficult NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

5

Analytic

43. For most industries, average costs decrease indefinitely as output expands. ANS: LOC: TOP:

F PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

44. Cost curves in the long run differ from cost curves in the short run. ANS: LOC: TOP:


Analytic

45. The short-run average cost curve shows the lowest possible average cost corresponding to each output level, assuming that all inputs are variable. ANS: LOC: TOP:


Analytic

46. Economies of scale are also called increasing returns to scale. ANS: LOC: TOP:

T PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Economies of Scale

Analytic

47. If significant economies of scale are present, large firms will be much more efficient producers than small firms. ANS: LOC:

T PTS: 1 DIF: Moderate Gains from trade, specialization and trade

NAT: TOP:

Analytic Economies of Scale

48. Economies of scale lead to declining long-run average cost curves. ANS: LOC:

T PTS: 1 DIF: Reading and interpreting graphs

Easy

NAT: TOP:


49. The law of diminishing marginal returns is the same as increasing returns to scale. ANS: LOC: TOP:

F PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Economies of Scale

Analytic

50. The different points on a cost curve represent alternative production possibilities in the same time period. ANS: LOC: TOP:

T PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Economies of Scale

Analytic

51. The behavior of historical cost curves says nothing about the cost advantages or disadvantages of a single large firm. ANS: LOC: TOP:

T PTS: 1 DIF: Difficult NAT: The Study of economics, and definitions in economics Economies of Scale

Analytic

52. A production indifference curve shows all combinations of input quantities capable of producing a given quantity of output. ANS: LOC: TOP:

T PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Appendix: Production Indifference Curves

Analytic

53. Higher production indifference curves correspond to larger amounts of one input in relation to a second input. ANS: LOC: TOP:

F PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Appendix: Production Indifference Curves

Analytic

54. Production indifference curves generally have a positive slope. ANS: LOC: TOP:

F PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Appendix: Production Indifference Curves

Analytic

55. Product indifference curves bow inward toward the origin because of diminishing returns to substitution of inputs. ANS: LOC: TOP:

T PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Appendix: Production Indifference Curves

Analytic

56. The expansion path of product indifference curves shows the cost-minimizing combination of inputs. ANS: LOC: TOP:


Analytic

57. Production indifference curves show the combination of inputs that produce a given output. ANS: LOC: TOP:


Analytic

58. Firms choose the highest indifference curve they can obtain given the lowest possible budget line. ANS: LOC: TOP:


Analytic

59. A change in input prices will change the location of the budget line. ANS: LOC: TOP:


7

Analytic

60. A change in input prices has no impact on the budget line. ANS: LOC: TOP:

F PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Appendix: Production Indifference Curves

Analytic

61. A change in one input price will cause the slope of the budget line to change. ANS: LOC: TOP:


Analytic

MULTIPLE CHOICE

1.

The short run is the time period during which a. all of the firm’s costs are fixed. b the value of the firm’s assets starts to decay. . c. the firm can adjust all inputs freely. d some of the firm’s input decisions are constrained by previous commitments. . ANS: LOC: TOP:

2.

In the long run, a. all of the firm’s input quantities are variable. b the firm can vary the quantities of some but not all inputs. . c. managers become less efficient. d the total cost of producing any given level of output is greater than or equal to the short. run total cost of producing that level of output. ANS: LOC: TOP:

3.

A PTS: 1 DIF: Moderate NAT: Analytic The Study of economics, and definitions in economics Short-Run Vs. Long-Run Costs: What Makes an Input Variable?

In the short run, a. all of the firm’s input quantities, including plant size, become adjustable. b firms are not constrained by past decisions. . c. firms have relatively little opportunity to change production processes. d all of the firm’s current commitments come to an end. . ANS: LOC: TOP:

4.

D PTS: 1 DIF: Easy NAT: Analytic The Study of economics, and definitions in economics Short-Run Vs. Long-Run Costs: What Makes an Input Variable?

C PTS: 1 DIF: Moderate NAT: Analytic The Study of economics, and definitions in economics Short-Run Vs. Long-Run Costs: What Makes an Input Variable?

Some costs cannot be varied no matter how long the period in question. These are called a. overheads. b total costs. .

c. d .

fixed costs. variable costs,

ANS: LOC: TOP:

C PTS: 1 DIF: Moderate NAT: Analytic The Study of economics, and definitions in economics Short-Run Vs. Long-Run Costs: What Makes an Input Variable?

9

5.

Which of the following observations is true? a. In the long run, more costs become variable. b Fixed costs can be completely varied if the time period is sufficient. . c. Fixed costs arise when some types of inputs can be bought only in big batches. d Variable costs arise when inputs have a large productive capacity. . ANS: LOC: TOP:

6.

In a. b . c. d .

which case will the transition from short run to long run involve the shortest chronological time? a service that provides temporary secretaries to companies an automobile factory a farm an electric utility

ANS: LOC: TOP: 7.

B PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

The total physical product of an input is the same thing as its a. total revenue product. b marginal physical product times output. . c. output. d total consumer’s surplus. . ANS: LOC: TOP:

9.


The case of production with a single variable input is analogous to a. changing the use of land, labor, and capital in production by a constant absolute amount. b a controlled laboratory experiment in which the scientist permits one variable to change . at a time. c. changing the use of land, labor, and capital in production by a constant percentage. d specialization in one particular product by a company. . ANS: LOC: TOP:

8.


C PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

Which of the following experiments will yield observations that would allow one to calculate the marginal physical product of labor? a. increase the number of lumberjacks with chain saws and observe the change in output of cut trees b increase the number of workers on an assembly line and record the change in output . c. Both a and b are correct.

d .

Neither a nor b are correct.

ANS: LOC: TOP:

B PTS: 1 DIF: Moderate NAT: Understanding and Applying Economic Models Production, Input Choice, and Cost with One Variable Input

11

Analytic

10. Marginal physical product can tell a producer a. at what point to stop adding inputs to the production process. b how much profit will be made at each level of production. . c. how much the last input added to the total amount of revenue. d how much the last input added to the total amount of production. . ANS: LOC: TOP:

D PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

Table 7-1

Workers 1 2 3 4 5

Toys 5 12 22 30 35

11. In Table 7-1, the marginal physical product of labor after the addition of the fourth worker is a. 8. b 7. . c. 10. d 5. . ANS: LOC: TOP:

A PTS: 1 DIF: Easy NAT: Understanding and Applying Economic Models Production, Input Choice, and Cost with One Variable Input

Analytic

12. In Table 7-1, the average physical product after five workers are hired is a. 5. b 6. . c. 7. d 8. . ANS: LOC: TOP:

C PTS: 1 DIF: Easy NAT: Understanding and Applying Economic Models Production, Input Choice, and Cost with One Variable Input

Analytic

13. In Table 7-1, the marginal physical product begins to diminish with the addition of the a. second worker. b third worker. . c. fourth worker. d Marginal returns never diminish in Table 7-1. . ANS: LOC:

C PTS: 1 DIF: Reading and interpreting graphs

Moderate

NAT:

Analytic

TOP:

Production, Input Choice, and Cost with One Variable Input

13

14. The marginal physical product of an input is the a. addition to output from using one more unit of an input. b extra amount of an input needed to produce one additional unit of output. . c. change in average physical product, given a change in the quantity of an input. d slope of the production indifference curve for an output made using the input. . ANS: LOC: TOP:

A PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

15. In which zone does the total physical product reach it maximum value? a. Increasing marginal return b Negative marginal return . c. Diminishing marginal return d Decreasing total physical product . ANS: LOC: TOP:


Analytic

Table 7-2

Plastic (in pounds) Widgets

5 14

6 17

7 19

16. Table 7-2 contains information on widget production. The marginal physical product of the sixth pound of plastic is ____. a. (19/7) - (17/6) b 1/3 . c. 2 d 3 . ANS: LOC: TOP:

D PTS: 1 DIF: Moderate NAT: Understanding and Applying Economic Models Production, Input Choice, and Cost with One Variable Input

Analytic

17. Table 7-2 contains information on widget production. The average physical product of the seventh pound of plastic is calculated as ____. a. 9/25 b 2 . c. 25/9 d 19/7 . ANS: LOC: TOP:

D PTS: 1 DIF: Moderate NAT: Understanding and Applying Economic Models Production, Input Choice, and Cost with One Variable Input

Analytic

18. A total product curve shows the a. aggregate output of many firms in an industry. b amount of product consumers will take off the market. . c. maximum amount of product that it is technically possible to produce. d relationship between units of inputs and total product or total output. . ANS: LOC: TOP:

D PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

15

Analytic

John Amaker owns orange groves and hires pickers for a two-week period as shown in Table 7-3. Table 7-3

Pickers 1 2 3 4 5 6 7 8 9 19. In a. b . c. d . e.

Table 7-3, diminishing returns set in with picker 3. 4. 5. 6. 9.

ANS: LOC: TOP: 20. In a. b . c. d . e.

Oranges Picked 1,000 2,000 3,000 3,900 4,700 5,400 6,000 6,200 6,000

B PTS: 1 DIF: Moderate NAT: Reading and interpreting graphs Production, Input Choice, and Cost with One Variable Input

Analytic

Table 7-3, negative returns set in with picker 6. 7. 8. 9. 5.

ANS: LOC: TOP:

D PTS: 1 DIF: Moderate NAT: Reading and interpreting graphs Production, Input Choice, and Cost with One Variable Input

Figure 7-1

Analytic

21. Of the graphs in Figure 7-1, which best represents marginal physical product? a. 1 b 2 . c. 3 d 4 . ANS: LOC: TOP:

B PTS: 1 DIF: Moderate NAT: Reading and interpreting graphs Production, Input Choice, and Cost with One Variable Input

Analytic

22. In Figure 7-1, which graph best represents total physical product with diminishing returns? a. 1 b 2 . c. 3 d 4 . ANS: LOC: TOP:

A PTS: 1 DIF: Moderate NAT: Reading and interpreting graphs Production, Input Choice, and Cost with One Variable Input

Analytic

23. USX, a steel company, reduced the number of man-hours required to produce a ton of steel from 10.8 in 1982 to 3.8 in 1990, thereby eliminating 55,000 jobs. Technically, this rise in productivity means the a. marginal product of labor increased. b average product of labor increased. . c. average product of capital fell. d marginal product of capital fell. . ANS: LOC: TOP:

B PTS: 1 DIF: Difficult NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

24. The “law” of diminishing returns is also referred to as a. the “law” of diminishing returns to scale. b the “law” of variable input proportions. . c. diminishing average physical product. d the “law” of decreasing cost. . ANS: LOC: TOP:


Analytic

25. The “law” of diminishing returns a. is deduced from the basic biochemical relationship of agricultural theory. b was constructed as the basis of observation during experiments on the impact of fertilizer . on output in the 1930s. c. is based on regular observations of input-output relationships over the last two centuries. d is borrowed from physical laws related to conversion of matter and energy.

17

. ANS: LOC: TOP:

C PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

26. Which of the following statements is equivalent to the law of diminishing marginal returns? a. A stitch in time saves nine. b You can’t make an omelet without breaking eggs. . c. Too many cooks spoil the broth. d If you can’t stand the heat, get out of the kitchen. . ANS: LOC: TOP:


Reflective

27. The marginal revenue product of an hour of labor used in steel production is equal to a. its marginal physical product times the hourly wage rate. b its marginal physical product times the price of steel. . c. the hourly wage rate. d its marginal physical product divided by the price of steel. . ANS: LOC: TOP:

B PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

28. When the marginal revenue product of an input is less than its price, the a. producer should expand the use of that input. b price of the input will automatically rise in a free market. . c. producer should reduce the use of that input. d marginal physical product of that input must be below its average physical product. . ANS: LOC: TOP:


Analytic

29. In August 1988, the Los Angeles Kings hired Wayne Gretzky for $15 million in cash. The hockey team’s decision must have been based on the expectation that a. Gretzky’s opportunity cost will exceed $15 million. b Gretzky’s marginal revenue product will equal or exceed $15 m illion. . c. the team’s total revenue will equal $15 million. d Gretzky’s marginal revenue product will rise in the long run. . ANS: LOC: TOP:


Analytic

30. Marginal revenue product is the a. additional revenue from one additional dollar increase in price. b change in the revenue product resulting from one additional unit of input. . c. additional revenue from one additional unit of input. d change in revenue resulting in one additional dollar in price.

19

. ANS: LOC: TOP:


Analytic

31. Which of the following will not lead to increase in the marginal revenue product? a. MPP increases without any changes in the price. b Price of the product increases without any changes in MPP. . c. MPP and price of the product increases. d MPP remains the same and price of the product falls. . ANS: LOC: TOP:

D PTS: 1 DIF: Easy NAT: Costs of production Production, Input Choice, and Cost with One Variable Input

Analytic

32. If the firm’s marginal physical product is 8, and its handicrafts sell for $70, at a labor cost of $150, the firm is operating a. short of an optimal input point. b at the optimum input point. . c. beyond the optimum input point. d There isn’t enough information to determine if the input point is optimal. . ANS: LOC: TOP:

A PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

33. Which of the following equations defines marginal revenue product? a. MRP = P times Q. b MRP = total cost. . c. MRP = total revenue minus total cost. d MRP = MPP times price of the product. . ANS: LOC: TOP:

D PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Production, Input Choice, and Cost with One Variable Input

Analytic

34. The rule for the optimal use of any input says that a. when MRP is less than price, it pays to expand resource use. b when MRP is greater than price, it pays to expand resource use. . c. when MRP equals price, resource use should be cut back. d resources should be used only if MRP exceeds price. . ANS: LOC: TOP:


35. The optimal level of resource use comes when a. MRP exceeds input price. b MRP is less than input price. . c. MRP equals input price. d use of the resource exhausts the producer’s funds.

21

Analytic

. ANS: LOC: TOP:


Analytic

36. Which of the following indicates an input is being overused relative to the optimal level? a. MRP = P of input. b MRP > P of input. . c. MRP < P of input. d MPP < P of output. . ANS: LOC: TOP:


Analytic

37. The optimum quantity of an input occurs when a. diminishing returns set in. b marginal revenue product equals input price. . c. marginal physical product equals input price. d marginal revenue product equals output price. . ANS: LOC: TOP:


Analytic

38. Which of the following is the correct statement of the marginal rule for optimal input proportions? The input proportion is optimal when a. Pa = Pb. b MPPa = MPPb. . c. Pa × MPPa = Pb × MPPb. d Pa/Pb = MPPa/MPPb. . ANS: LOC: TOP:

D PTS: 1 DIF: Difficult NAT: Understanding and Applying Economic Models Production, Input Choice, and Cost with One Variable Input

Analytic

39. A firm practices input substitution when it a. retrains Joe the welder as a painter and Pat the painter as a welder. b buys extra machines for its workers to use. . c. allows fixed cost to become variable. d replaces unskilled labor with automated machinery. . ANS: LOC: TOP:

D PTS: 1 DIF: Moderate NAT: Analytic Understanding and Applying Economic Models Multiple Input Decisions: The Choice of Optimal Input Combinations

40. Determining the optimal choice of input combinations generally does not involve a. substitution of one input for another. b fixing the level of technology in the long run. . c. minimizing cost, given the prices of inputs. d assessing the productivity of various inputs.

23

. ANS: LOC: TOP:

B PTS: 1 DIF: Moderate NAT: Analytic Understanding and Applying Economic Models Multiple Input Decisions: The Choice of Optimal Input Combinations

41. If the marginal physical product of more labor is twice as high as the marginal physical product of more machinery, a rational firm should a. reduce the labor used and increase the machinery used if labor costs half as much as machinery. b reduce the labor used and increase the machinery used if labor and machinery cost the . same amount. c. reduce the labor used and increase the machinery used only if labor costs more than twice as much as machinery. d reduce the labor used and increase the machinery used only if labor costs exactly twice . as much as machinery. ANS: LOC: TOP:

C PTS: 1 DIF: Difficult NAT: Analytic Efficiency and equity Multiple Input Decisions: The Choice of Optimal Input Combinations

42. At a given level of wheat output, one more unit of labor would produce 10 extra bushels, and one more unit of seed would produce 30 extra bushels. A unit of labor costs $6, and a unit of seed costs $12. The farmer should a. produce less wheat. b buy only seed. . c. buy more seed and less labor. d buy less seed and more labor. . ANS: LOC: TOP:

C PTS: 1 DIF: Moderate NAT: Analytic The Study of economics, and definitions in economics Multiple Input Decisions: The Choice of Optimal Input Combinations

43. A firm is operating with an optimal combination of inputs. Suddenly the price of one input rises. The firm should a. buy less of that input and more of the other input. b change its input mix so that the marginal physical product of the input whose price has . risen falls and the marginal physical product of the other input rises. c. buy less of whichever input now has the highest money price and more of the other input. d reduce its output. . ANS: LOC: TOP:

A PTS: 1 DIF: Easy NAT: Analytic The Study of economics, and definitions in economics Multiple Input Decisions: The Choice of Optimal Input Combinations

44. A firm’s optimal input proportions may change if a. input prices change. b the relative marginal productivities of the inputs change. . c. the firm’s optimal output level changes. d All of the above are correct. . ANS: LOC: TOP:

D PTS: 1 DIF: Easy NAT: Reflective The Study of economics, and definitions in economics Multiple Input Decisions: The Choice of Optimal Input Combinations

25

45. A firm uses two two inputs, A and and B. At its optimal optimal choice of input input proportions, proportions, a. MRP of A = MRP of B. b P of A/P of B = MRP M RP of A/MRP of B. . c. MPP of A = MPP of B. d All of the above are correct. . ANS: LOC: TOP:

B PTS: 1 DIF: Moderate NAT: Analytic Understan Understanding ding and Applying Applying Economic Economic Models Multiple Input Decisions: The Choice of Optimal Input Combinations

46. Where should a producer stop devoting devoting more of his his spending on labor if initially initially the MRP of the additional dollar spent on labor is higher than the M RP of the additional unit spent on tools? a. MRP of additional labor falls below MRP of of additional additional tools. b MRP of additional capital increases above MRP of additional tools. . c. MRP of additional labor becomes equal equal to MRP of additional tools. d MRP of the additional labor falls to zero. . ANS: LOC: TOP:

C PTS: 1 DIF: Moderate NAT: Analytic Understan Understanding ding and Applying Applying Economic Economic Models Multiple Input Decisions: The Choice of Optimal Input Combinations

47. If the MPP of labor labor is 60 and the the price of labor per period is $20, $20, the MPP of machinery machinery is 75 and the price of the machinery per period is $25, in order to achieve optimal input proportions the firm should use a. more labor labor and less machinery. machinery. b more machinery and less labor. . c. more labor labor with with the the same same amount amount of machin machinery. ery. d the current combination. . ANS: LOC: TOP:

D PTS: 1 DIF: Difficult NA NAT: Analytic The Study of economics, and definitions in economics Multiple Input Decisions: The Choice of Optimal Input Combinations

48. The firm can calculate all points on on its total total cost curve if it knows a. its productio production n function. function. b the prices of inputs and of output. . c. its average cost at its optimal output level. d the prices of inputs and its production function. . ANS: LOC: TOP:

D PTS: 1 DIF: Moderate NAT: Analytic The Study of economics, and definitions in economics Multiple Input Decisions: The Choice of Optimal Input Combinations

Table 7-4

6 5 4

346 316 282

490 448 400

600 548 480

692 632 564

775 705 632

846 77 5 69 2

CAPITAL

3 2 1 0

245 200 141 1

346 282 200 2

423 346 245 3 LABOR

27

490 400 282 4

548 600 448 490 316 346 5 6

49. Table 7-4 shows shows a production relationship. Assuming Assuming the capital stock is fixed at three units and the cost per day of labor is $65, what is the most labor that it is efficient to hire if the product price is $1 per unit? a. 2 b 3 . c. 4 d 5 . ANS: LOC: TOP:

C PTS: 1 DIF: Difficult NA NAT: Analytic Costs of productio production n Multiple Input Decisions: The Choice of Optimal Input Combinations

50. Table 7-4 shows shows a production relationship. The cost of one day of labor is $65 and the product price is $1 per unit. How much will the labor input increase if the capital stock were increased from 3 to 4? a. from from 3 to 4 b from 4 to 5 . c. from from 4 to 6 d stays the same . ANS: LOC: TOP:

B PTS: 1 DIF: Difficult NA NAT: Analytic Understan Understanding ding and Applying Applying Economic Economic Models Multiple Input Decisions: The Choice of Optimal Input Combinations

51. The production production relationship relationship in Table Table 7-4 indicates indicates a process process characterized by a. decreasing decreasing returns returns to scale. scale. b constant returns to scale. . c. increasin increasing g returns returns to scale. scale. d increasing then decreasing returns to scale. . ANS: LOC: TOP:

B PTS: 1 DIF: Difficult NA NAT: Analytic Reading Reading and interpret interpreting ing graphs graphs Multiple Input Decisions: The Choice of Optimal Input Combinations

52. Table 7-4 shows shows a production relationship. Assuming Assuming the labor input is fixed at 4, what will be the optimum capital input assuming an output price of $1 and a $90-per-day cost for one unit of capital? a. 1 b 2 . c. 3 d 4 . ANS: LOC: TOP:

C PTS: 1 DIF: Difficult NA NAT: Analytic Costs of productio production n Multiple Input Decisions: The Choice of Optimal Input Combinations

53. To determine determine total total cost, cost, the businessperson must know know a. input input quanti quantity ty and output output price. price. b output quantity and output price. .

c. d .

output quantity and input price. input quantity and input price.

ANS: LOC:

D PTS: 1 Costs of production

DIF: TOP:

Easy NAT: Analytic Cost and Its Dependence on Output

29

54. Marginal cost a. is the increase in total cost resulting from production of one additional unit of output. b is the cost of the marginal unit of output. . c. and the average cost curve are U-shaped. d All of the above are correct. . ANS: LOC: TOP:

D PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

55. On Naomi’s pig farm, Naomi hires all the labor used, grows all the grain fed to the pigs, and owns the barn. The costs used to calculate the total cost curve include a. only the cost of labor. b only the cost of labor and the cost of grain, which is completely consumed in the period . in which it is grown. c. only the variable cost of growing grain. d the cost of labor, the cost of growing grain, and the opportunity cost of the barn. . ANS: LOC:

D PTS: 1 Costs of production

DIF: TOP:

Easy NAT: Analytic Cost and Its Dependence on Output

56. A factory produces 1,000 radios a year, AVC = $10 and TFC = $5,000. The factory’s TC a. equals $15. b equals $5,005. . c. equals $15,000. d cannot be determined from the information given. . ANS: LOC: TOP:

C PTS: 1 DIF: Moderate Understanding and Applying Economic Models Cost and Its Dependence on Output

NAT:

Analytic

57. Marginal cost is the a. change in total cost resulting from the purchase of one more unit of the variable input. b change in total cost resulting from the production of one more unit of output. . c. difference between total fixed cost and total variable cost. d difference between total cost and total expenditure. . ANS: LOC: TOP:

B PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

58. Where marginal cost is less than average cost, a. opportunity cost must have been excluded from the calculation of marginal cost. b marginal cost must be falling. . c. marginal cost must be rising. d marginal cost may be rising, falling, or constant. .

ANS: LOC: TOP:

D PTS: 1 DIF: Difficult NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

31

Analytic

Figure 7-2

Output

59. In a. b . c. d .

Figure 7-2 at an output of 500, marginal cost equals 10. 20. 30. 40.

ANS: LOC: TOP: 60. In a. b . c. d .

B PTS: 1 DIF: Reading and interpreting graphs Cost and Its Dependence on Output

Moderate

NAT:

Analytic

NAT:

Analytic

Figure 7-2, average cost at 500 units of output equals 4,000. 200. 8. 6.

ANS: LOC: TOP:

C PTS: 1 DIF: Reading and interpreting graphs Cost and Its Dependence on Output

Moderate

61. Al’s Donuts produces about 600 dozen doughnuts daily. If flour prices increase 20 percent a. only marginal cost will shift up. b only marginal cost and average total cost will shift up. . c. marginal cost, average variable cost, and average total cost will shift up. d marginal cost, average total cost, and average fixed cost will shift up. . ANS: LOC: TOP:

C PTS: 1 DIF: Difficult NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

Figure 7-3

62. Government provides many goods and services to the public because they are not provided by free markets. Some economists believe bureaucrats who manage the programs have no interest in maximizing net benefits (profits) but instead maximize the size of a program constrained only by the need to have total benefits exceed total costs. Figure 7-3 shows total benefits and cost curves for a program. What point is the efficient point, and what point will the bureaucrat choose? a. A and B, respectively b B and D, respectively . c. D and C, respectively d D and A, respectively . ANS: LOC: TOP:


Difficult

NAT:

Analytic

Figure 7-4

63. Following a rash of airplane bombs, the airlines have been forced to increase security at a cost of $30 million per year. The number of inspectors and machines does not vary with the number of passengers-the airlines must have sufficient staff available to handle the full-capacity load. Which graph in Figure 7-4 best illustrates the impact of the security expenditures? a. 1 b 2 . c. 3 d 4 .

33

ANS: LOC: TOP:


Difficult

NAT:

Analytic

64. Average cost curves have the same shape as a. total cost curves. b marginal cost curves. . c. total fixed cost curves. d average fixed cost curves. . ANS: LOC: TOP:


Analytic

65. Total fixed cost a. increases as output increases. b declines as output increases. . c. is always zero. d remains constant even if the firm shuts down. . ANS: LOC: TOP:

D PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

66. Which of the following observations is true? a. TFC remains the same irrespective of units of output produced. b TVC remains the same irrespective of units of output produced. . c. TVC falls as the unit of output increases. d AFC increases as output increases further and f urther. . ANS: LOC: TOP:

A PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

67. A roller coaster operator produces thrill-packed rides using electricity and a roller coaster. For the roller coaster operator, electricity is a. an opportunity cost. b a variable cost. . c. a fixed cost. d a sunk cost. . ANS: LOC: TOP:


Figure 7-5

35

Analytic

68. Which of the curves in Figure 7-5 could be a firm’s average fixed cost curve? a. (a) b (b) . c. (c) d (d) . ANS: LOC: TOP:

A PTS: 1 DIF: Reading and interpreting graphs Cost and Its Dependence on Output

Easy

NAT:

Analytic

69. Which of the graphs in Figure 7-5 could be a firm’s total fixed cost curve? a. (a) b (b) . c. (c) d (d) . ANS: LOC: TOP:


Easy

NAT:

Analytic

C PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

70. Which of the following is a fixed cost? a. electricity b worker bonuses . c. mortgage on the building d steel to produce refrigerators . ANS: LOC: TOP:

71. Total fixed cost a. varies with the level of output. b has a downward-sloping curve. . c. has an upward-sloping curve. d is constant at all levels of output. . ANS: LOC: TOP:


Analytic

72. Which of the following is a fixed cost to farmer McDonald? a. gasoline b fertilizer . c. insurance d seed . ANS: LOC:

C PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics

37

Analytic

TOP:

Cost and Its Dependence on Output

73. Which of the following is a variable cost for an airline? a. insurance b property taxes . c. jet fuel d rent of airport space . ANS: LOC: TOP:


Analytic

Figure 7-6

74. Which of the lines in Figure 7-6 represents a typical average fixed cost curve? a. 1 b 2 . c. 3 d 4 . ANS: LOC: TOP:

D PTS: 1 DIF: Reading and interpreting graphs Cost and Its Dependence on Output

Easy

NAT:

Analytic


Analytic

75. Which of the following is correct? a. AC = AFC/Q b AC = AFC + AVC . c. AC = MFC + MVC d TFC + TMC = MFC + MVC . ANS: LOC: TOP:

Figure 7-7

76. In Figure 7-7 at 100 units, AFC equals a. 10. b 100. .

39

c. d .

1,000. 180.

ANS: LOC: TOP:


Difficult

NAT:

Analytic

77. In a. b . c. d .

Figure 7-7 at 100 units, FC equals 1,000. 1,800. 800. 80.



Moderate

NAT:

Analytic

Difficult

NAT:

Analytic

Figure 7-7 at 100 units, AVC equals 8. 800. 100. 1,000.

ANS: LOC: TOP:


Figure 7-8

79. “Overfishing” impairs the ability of fish stock to replenish itself, so the stock of fish declines. Fishermen then attempt to increase output by adding more boats and fishing longer. Which average cost curve in Figure 7-8 depicts the “overfishing” situation? a. 1 b 2 . c. 3 d 4 . ANS: LOC: TOP:


Difficult

NAT:

80. Of the graphs in Figure 7-8, which resembles marginal cost? a. 1 b 2 .

41

Analytic

c. d .

3 4

ANS: LOC: TOP:


Moderate

NAT:

Analytic

81. Of a. b . c. d .

the graphs in Figure 7-8, which represents fixed cost? 1 2 3 4

ANS: LOC: TOP: 82. Of a. b . c. d .


Moderate

NAT:

Analytic

NAT:

Analytic

the graphs in Figure 7-8, which represents total cost? 1 2 3 4

ANS: LOC: TOP:


Moderate

Figure 7-9

83. Of the graphs in Figure 7-9, which represents total fixed cost? a. 1 b 2 . c. 3 d 4 . ANS: LOC: TOP:


Moderate

NAT:

84. Of the graphs in Figure 7-9, which represents average fixed cost? a. 1 b 2 . c. 3 d 4

43

Analytic

. ANS: LOC: TOP:


Moderate

NAT:

Analytic

Figure 7-10

85. In a. b . c. d .

Figure 7-10, the curve B is average fixed cost. average total cost. average variable cost. marginal cost.



Moderate

NAT:

Analytic

Moderate

NAT:

Analytic

Figure 7-10, the curve labeled C is average fixed cost. average total cost. average variable cost. marginal cost.

ANS: LOC: TOP:


87. The typical average cost curve a. continually declines as output increases. b is horizontal. . c. continually increases as output increases. d first declines to a minimum and then increases as output increases. . ANS: LOC: TOP:


88. The average cost curve a. is the vertical summation of the AFC and the AVC curves. b lies below the AVC curve.

45

Analytic

. c. d .

lies below the AFC curve. is the vertical summation of the MC and AVC curves.

ANS: LOC: TOP:

A PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

Figure 7-11

89. Figure 7-11 shows an average cost curve with points on it that correspond to three quantity levels. Which of the following statements must be wrong? a. The firm’s technology may show increasing marginal returns as production increases from A to B. b The firm may have positive fixed costs. . c. As production expands from A to B to C, the firm may become increasingly difficult to manage efficiently. d The firm’s average fixed cost may rise as production increases from B to C. . ANS: LOC: TOP:


Difficult

NAT:

Analytic

90. Average cost curves decline because a. fixed cost is spread out over larger amounts of production. b it becomes cheaper to produce an infinite amount of goods. . c. additional units of production are inferior. d variable costs increase with each additional amount of production. . ANS: LOC: TOP:

A PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

91. Which of the following formulas defines average cost? a. AC = TC/Q b AC = MRP = MFC . c. AC = MPP/Q d AC = TC - Q . ANS: LOC: TOP:


47

Analytic

92. A firm’s AC will eventually begin to rise because a. managers’ salaries rise with output. b bottlenecks may be reached for some inputs. . c. MFC begins to rise near capacity. d the range of negative returns is reached. . ANS: LOC: TOP:

B PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

93. In the typical AC curve, the downward-sloping part is attributable to a. spreading fixed costs over larger outputs and increasing returns to the variable inputs. b declining administrative costs as output increases. . c. falling fixed costs. d rising total product. . ANS: LOC: TOP:


Analytic

Table 7-5

Stereos produced Total cost (in $)

0 200

1 325

2 410

3 475

4 550

5 660

6 825

94. Table 7-5 shows short-run total cost figures for a stereo manufacturer. The manufacturer’s short-run fixed cost is a. 0. b $75. . c. $200. d $400. . ANS: LOC: TOP:


Easy

NAT:

Analytic

95. Table 7-5 shows short-run total cost figures for a stereo manufacturer. The short-run average variable cost of producing five stereos is a. $92. b $110. . c. $132. d $460. . ANS: LOC: TOP:


Difficult

NAT:

Analytic

96. Table 7-5 shows short-run total cost figures for a stereo manufacturer. At what output level does short-run average total cost reach a minimum? a. 2 b 3 . c. 4 d 5 . ANS: LOC:

D PTS: 1 DIF: Reading and interpreting graphs

Easy TOP:

49

NAT: Analytic Cost and Its Dependence on Output

97. If a firm has a U-shaped long-run average cost curve, a. its fixed cost rises as output rises. b it must have increasing returns to scale at low levels of production and decreasing returns . to scale at high levels of production. c. it must have increasing returns to each input at low levels of production and decreasing returns to each input at high levels of production. d the firm can maximize its output by operating at the point of minimum long-run average . cost. ANS: LOC: TOP:


Reflective

Figure 7-12

98. Which of the graphs in Figure 7-12 shows a marginal physical product curve that exhibits first increasing, and then diminishing, marginal returns to sunlight? a. (a) b (b) . c. (c) d (d) . ANS: LOC: TOP:


Figure 7-13

Easy

NAT:

Analytic

99. Figure 7-13 shows the average total cost curves of four firms that produce milk. Some of the dairies are more productive. AR = P is the long-run price of milk. How many of these dairies will remain in the industry in the long run? a. all of them b only 2 . c. only 3 d cannot determine with information given . ANS: LOC: TOP:


Moderate

NAT:

Analytic

100. AC is lower in the long run than in the short run because a. prices often fall, allowing savings on purchases. b inputs can be combined more efficiently in the long run. . c. over time the prices of all inputs tend to decrease. d AFC falls with output over all ranges of output. . ANS: LOC: TOP:


Analytic

101. Everything else equal, the AC curve will shift downward if a. input prices rise. b input MPPs rise. . c. output rises. d output falls. . ANS: LOC: TOP:

B PTS: 1 DIF: Difficult NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

102. Everything else equal, the AC curve will shift when a. the price of the product rises. b technical change raises the MPP of one input. . c. output is increased. d increasing returns to scale are present. . ANS: LOC: TOP:

B PTS: 1 DIF: Difficult NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

103. One reason why critics argue that large firms should not be broken up is that in some cases a. large firms have a concentration of economic power. b large firms are less-efficient producers. . c. many smaller firms would be less-efficient producers.

51

d .

there is no economic reason to break up large firms that may have some control over the market.

ANS: LOC: TOP:


Analytic

104. The long-run average cost curve a. is a composite of short-run AC curves. b shows the lowest possible short-run AC corresponding to each output level. . c. depends on the firm’s planning horizon. d All of the above are correct. . ANS: LOC: TOP:

D PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Cost and Its Dependence on Output

Analytic

Table 7-6

Number of ovens Labor hours used Loaves of Bread Produced

2 1 20

2 2 34

2 3 55

2 4 70

2 5 82

2 6 91

2 7 94

2 8 92

105. Table 7-6 shows a baker’s daily production relationship for bread. Diminishing returns to labor begin when the baker goes from a. one hour of labor to two hours of labor. b three hours of labor to four hours of labor. . c. six hours of labor to seven hours of labor. d seven hours of labor to eight hours of labor. . ANS: LOC:

B PTS: 1 DIF: Reading and interpreting graphs

Moderate

NAT: TOP:


106. A firm uses workers and seed to grow lettuce. Its lettuce output rises from 100 tons to 200 tons when the number of workers increases from 25 to 75. Its production process shows a. decreasing returns to scale. b diminishing returns to labor. . c. increasing long-run average cost. d decreasing short-run average variable cost. . ANS: LOC: TOP:

B PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Economies of Scale

Reflective

107. If economies of scale exist for a particular production relationship, long-run average costs will a. rise. b fall. . c. first rise and then fall. d be unaffected since there is no direct relationship between the two. . ANS: LOC: TOP:


Analytic

108. Whether or not a production process shows economies of scale depends on

53

a. b . c. d .

the number of inputs used. technology. technology and input prices. technology and output prices.

ANS: LOC: TOP:

B PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Economies of Scale

Analytic

109. When economies of scale exist, a. production costs per unit increase as output expands. b production costs per unit decline as output expands. . c. total production costs decrease. d total production costs increase. . ANS: LOC: TOP:


Analytic

110. When economies of scale are present, a. costs per unit decline as output expands. b the government feels responsible for breaking up the firm. . c. firms always make handsome profits. d costs fall as the size of the product is increased. . ANS: LOC: TOP:

A PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Economies of Scale

Analytic

111. Economies of scale a. require inputs’ MPP to fall as output increases (everything else equal). b pertain to the long run only. . c. refer to increased output generalized by an increase in the quantity of a single input. d imply that the AC curve will fall continuously as output increases in the short run. . ANS: LOC: TOP:

B PTS: 1 DIF: Difficult NAT: The Study of economics, and definitions in economics Economies of Scale

Analytic

112. A firm’s production process shows constant returns to scale. It can produce 5,000 widgets at a total cost of $2,500 and 10,000 widgets at an average cost of a. $5,000. b $5. . c. $2. d 50¢. . ANS: LOC: TOP:

D PTS: 1 DIF: Moderate Understanding and Applying Economic Models Economies of Scale

113. Economies of scale is another term for a. increasing returns to scale. b constant returns to scale. . c. increasing marginal physical productivity. d decreasing returns to scale.

55

NAT:

Analytic

. ANS: LOC: TOP:


Analytic

114. If a a. b . c. d .

firm has increasing returns to scale at all levels of output, the slope of its long-run total cost curve is always negative. slopes of its short-run average cost curves are always negative. slope of its long-run average cost curve is always negative. slope of its production function is always negative.

ANS: LOC: TOP:

C PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Economies of Scale

Analytic

115. If doubling the quantity of inputs more than doubles the quantity of outputs, the firm is experiencing a. increasing returns to scale. b decreasing returns to scale. . c. constant returns to scale. d increasing costs per unit of output. . ANS: LOC: TOP: 116. If a a. b . c. d .


Analytic

firm increases inputs by 15 percent and output increases by 12.5 percent, the firm is experiencing increasing returns to scale. decreasing returns to scale. constant returns to scale. increasing costs per unit of output.

ANS: LOC: TOP:


Analytic

117. If in some range of production average cost is falling, the firm is experiencing a. increasing returns to scale. b decreasing returns to scale. . c. constant returns to scale. d increasing costs per unit of output. . ANS: LOC: TOP:


Analytic

118. If in some production range average cost is rising, the firm is experiencing a. increasing returns to scale. b decreasing returns to scale. . c. constant returns to scale. d increasing costs per unit of output. .

57

ANS: LOC: TOP:


Analytic

Figure 7-14

119. Of the long-run AC curves in Figure 7-14, which displays increasing returns to scale for all levels of output? a. 1 b 2 . c. 3 d 4 . ANS: LOC:

A PTS: 1 DIF: Reading and interpreting graphs

Easy

NAT: TOP:


120. A Detroit business advertises, “The more we sell, the lower the price, and the lower the price, the more we sell.” This firm is experiencing a. decreasing returns to scale. b constant returns to scale. . c. increasing returns to scale. d abnormal demand patterns. . ANS: LOC: TOP:


Reflective

121. An airline industry study recently reported, “Evidence is abundant that larger firms are not more efficient or less costly simply because they are larger. In fact, other things equal, the largest carriers tend to have a higher level of unit costs, possibly caused by the difficulties of managing an airline of large size.” This means that a. there are increasing returns to scale in the airline industry. b the airline industry has constant returns to scale. . c. the larger airlines are not profitable. d airlines are experiencing decreasing returns to scale. . ANS: LOC: TOP:

D PTS: 1 DIF: Difficult NAT: The Study of economics, and definitions in economics Economies of Scale

Reflective

122. A cost curve drawn with years on the horizontal axis and costs per unit on the vertical axis would be a(n) a. analytical cost curve. b long-run cost curve.

59

. c. d .

historical cost curve. theoretical cost curve.

ANS: LOC: TOP:

C PTS: 1 DIF: Easy NAT: The Study of economics, and definitions in economics Economies of Scale

Analytic

123. Cost minimization is the process of making optimal use of all of the inputs whose quantities are a. set in the short run. b set in the intermediate run. . c. set in the long run. d variable in the short and long run. . ANS: LOC: TOP:

D PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Economies of Scale

Analytic

124. The major incentive for cost minimization is the a. power of shareholders in the company. b fear of top management by workers. . c. discipline imposed by the market system. d impact on U. S. corporations of taxing by the government. . ANS: LOC: TOP:


Analytic

125. Production indifference curves bow inward toward the graph’s origin because of a. the law of diminishing returns to a single input. b the law of diminishing marginal returns to scale. . c. constant returns to scale. d minimizing costs in the short run. . ANS: LOC: TOP:

A PTS: 1 DIF: Moderate NAT: The Study of economics, and definitions in economics Appendix: Production Indifference Curves

Analytic

126. Production costs for a given output will be minimized when the a. budget line and the product indifference curve meet in the vertical axis. b budget line crosses the product indifference curve. . c. budget line begins to bend back on itself. d product indifference curve and the budget line are tangent. . ANS: LOC: TOP:

D PTS: 1 DIF: Difficult NAT: The Study of economics, and definitions in economics Appendix: Production Indifference Curves

Analytic

127. If on a given product indifference curve a firm is using an insufficient (nonoptimal) amount of one of its inputs a. output will be below optimal. b the MRP of the input will be below its price. . c. costs will not be minimal. d relative input prices need to change.

61

. ANS: LOC: TOP:

C PTS: 1 DIF: Difficult NAT: The Study of economics, and definitions in economics Appendix: Production Indifference Curves

Analytic

Figure 7-15

128. For a firm at equilibrium, at point A in Figure 7-15 a. the price of labor is high relative to the price of machines. b the MPP of labor is greater than the MPP of machines. . c. the MPP of labor is less than at point B. d output is higher than at point B. . ANS: LOC: TOP:

C PTS: 1 DIF: Difficult Reading and interpreting graphs Appendix: Production Indifference Curves

NAT:

Analytic

129. In Figure 7-15, we would expect a move of the budget line from A to B if a. the price of machines falls. b the price of labor falls. . c. output falls. d the product price rises. . ANS: LOC: TOP:

A PTS: 1 DIF: Moderate Reading and interpreting graphs Appendix: Production Indifference Curves

Figure 7-16

63

NAT:

Analytic

130. In Figure 7-16, as we move from A to B, a. the relative price of machines falls. b total cost falls. . c. output increases. d labor becomes less productive relative to capital. . ANS: LOC: TOP:

C PTS: 1 DIF: Moderate Reading and interpreting graphs Appendix: Production Indifference Curves

NAT:

Analytic

Figure 7-17

131. Which of the following statements must be true when a firm makes choices that put it at point A in Figure 7-17? a. The firm is minimizing its cost of producing 100 units of output. b The ratio of the marginal physical products of labor and of land equals the ratio of the . prices of labor and of land. c. The firm first decided how much output to produce and then decided how to produce it. d All of the above are true. . ANS: LOC: TOP:

D PTS: 1 DIF: Moderate Reading and interpreting graphs Appendix: Production Indifference Curves

NAT:

Analytic

ESSAY

1.

Differentiate between the short run and the long run. ANS: The short run is a period of time during which some of the firm’s cost commitments will not have ended. In the short run, firms have relatively little opportunity to change production processes so as to adopt the most efficient way of producing their current outputs, because plant sizes and other input quantities have largely been predetermined by past decisions. The long run is a period of time long enough for all of the firm’s current commitments to come to an end. Over the long run, all inputs, including plant size, become adjustable. PTS: LOC:

1 DIF: Easy NAT: Analytic The Study of economics, and definitions in economics

65

2.

“If it were not for the law of diminishing marginal returns, the world’s wheat could be grown in a flower pot.” Explain. ANS: The law of diminishing returns states that beyond some level of variable input, such as labor, additional amounts of input add diminishing (but not necessarily negative) amounts of output, other inputs held constant. So, holding land constant, additional amounts of labor or fertilizer yield diminishing additional wheat output. If there were no such law, additional amounts of the variable input would yield constant or increasing marginal output, so additional land would never be needed. PTS: LOC:

3.

1 DIF: Moderate NAT: Reflective The Study of economics, and definitions in economics

The following table depicts the production relationship between units of labor and output of pepper on Pietrov’s Pepper Farm. Labor 1 2 3 4 5

Peppers 10 25 45 60 70

Labor 6 7 8 9 10

Peppers 75 77 78 77 75

Graphically show the three zones of production corresponding to increasing, decreasing, and negative marginal product, noting the point of diminishing returns. ANS: Zone 1 shows rising marginal physical product through worker 3 (Figure 7-18). Beyond L = 3, diminishing returns set in. Zone 2, positive but diminishing MPP, ends with L = 8. Beyond L = 8, MPP is negative, representing Zone 3. Figure 7-18

PTS: LOC:

1 DIF: Moderate NAT: Reading and interpreting graphs

Analytic

4.

“A producer wanting to employ optimal quantity of inputs should choose the point where diminishing returns sets in.” True or false? ANS: False. The correct rule is marginal revenue product = input price. It pays to go beyond diminishing returns so long as MRP is at least as great as input P, which normally requires going past the point of diminishing returns. PTS: LOC:

5.

1 DIF: Moderate NAT: Analytic The Study of economics, and definitions in economics

Graph typical total, average, and marginal cost curves and explain how their shapes are influenced by the law of diminishing returns. Graph TC on a separate graph, AC and MC on a second graph. ANS: TC rises slowly at first and then more quickly once diminishing returns set in (Figure 7-19). Marginal cost, which is the slope of total cost, will be positive but decreasing initially; it will increase at the point of diminishing returns. Average cost will fall at first but eventually will increase. The point of increase is at a larger level of output than the point of diminishing returns. Average cost continues to decline beyond the point of diminishing returns because, at least for a while, declining average fixed cost reduces AC by more than diminishing returns increase AC. Figure 7-19

PTS: LOC: 6.

1 DIF: Easy NAT: Reading and interpreting graphs

Analytic

Aunt Rose owned a dress shop on 81st Street and Broadway in Manhattan, selling limited-edition dresses to wealthy clients. One day, her landlord tripled her rent. What effect would this have on her dress price in the short run, assuming she is following the rules of profit maximization? ANS: Assuming she continues to operate, the higher rent will not affect dress prices in the short run. Rent is unrelated to the production cost of dresses; that is, it is a fixed cost. Only costs that enter into direct costs influence price. Fixed costs do not alter price or output of dresses in short-run profit maximization. PTS: LOC:


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7. How long is the long run? ANS: In the long run, all inputs are variable. This is a different period of time for different firms. For electric power utilities, the long run is likely to be more than 10 years, given the long time it takes to build a generating plant. For a roadside seller of apples, the long run may be very short, as it takes little time to increase the size of the apple cart. PTS: LOC:


8. What is the shape of average cost curve? Provide the reason for that particular shape. ANS: Average cost curve is roughly ‘U’ shaped. It has two reasons. Average cost includes average fixed costs and average variable costs. The first reason pertains to the fixed cost as fixed costs are divided over more products when production expands average cost falls. The second reason relates to changing input proportions. As the firm increases the quantity of one input while keeping other inputs constant, the law of diminishing marginal returns tells us that MPP will first rise. As a result, average costs will decrease. Average cost will increase when the size of the firm increases. PTS:

1

DIF: Moderate

NAT:

Analytic

LOC:

Costs of production

9. “Assuming the long-run average cost curve is U-shaped, a firm will always seek to operate at the lowest point on the long-run average cost curve.” True or false? ANS: False. The optimal point in the long run depends on the demand for the firm’s product. If demand is small, the firm will prefer a relatively small plant and will operate to the left of minimum LRAC. A firm anticipating a large demand may find it optimal to produce beyond minimum LRAC. Later, there will be a tendency to operate at minimum LRAC when a firm faces competition, but there is no such discipline on the firm in this chapter. PTS: LOC:


10. Labor is available at a wage of $10. The last worker hired by Cal’s Corn Farm added 20 ears of corn, which Cal has priced at four ears for $1. What advice would you give Cal? ANS: Don’t hire that last worker. Marginal revenue product, which is MPP the input’s $10 price. PTS:

1

DIF: Moderate

NAT:

Reflective LOC:

×

P, is only $5, which is less than

Efficiency and equity

11. Explain why the long-run average cost is typically U-shaped. ANS: As firms grow, they can take advantage of mass production economies. However, large firms are more difficult to manage. This eventually causes an upturn in average cost even if there continues to be massproduction economies. Note that the long-run shape has nothing to do with diminishing returns, which is a short-run law. PTS:

1

DIF: Easy

NAT:

Analytic

LOC:


12. Peter Piper picks a peck of pickled peppers using 10 units of labor and two pepper-picking machines. The last worker hired picked 100 peppers, and the last machine added 1,000 peppers. If labor can be hired at $5 a pepper picker and machines cost $5,000, what advice do you have for Peter Piper? ANS: Optimal use of two variable inputs calls for equality of MPP/P for all inputs. The last worker added MPP = 100 and cost $5, for a ratio of 20. The last machine added MPP = 1,000 and cost $5,000, for a ratio of 0.2. Peter Piper should substitute more labor in place of machines, since workers are producing far more peppers per dollar of input cost. PTS: LOC:

1 DIF: Moderate NAT: Analytic Understanding and Applying Economic Models

13. If the MRP per dollar is greater for labor than that for tools, a producer should spend more money on labor than originally planned and less on tools. How long can he continue this switch in spending? Why? ANS: By the “law” of diminishing returns, when the producer buys more and more labor time, the initially higher MRP of labor will decline. As he spends less and less on tools, tools will become scarcer and more valuable and their initially lower MRP will rise. So, as the producer transfers more money from tools to labor, the MRPs per dollar for the inputs will get closer and closer to one another, and they will eventually meet. That, then, is when the proportions of spending allocated to the two inputs will have reached the optimal level. At that point, there is no way he can get more for his money by changing the proportions of those inputs that he hires or buys. PTS:

1

DIF: Moderate

NAT:

Analytic

LOC:


14. The United Auto Workers union is largely responsible for the historically high pay of American auto workers by negotiating pay raises above those obtained by workers in other industries. In addition to increasing the pay of auto workers, what other long-run effect would this high pay have on the use of auto workers? ANS: Over the long run, firms will adjust the proportion of labor to capital based on the ratio of MPP to input P. Unless worker productivity increases are at least as great as wage increases, the firm will shift away from labor and toward greater use of capital equipment such as robotics. PTS: LOC:

1 DIF: Difficult NAT: Analytic The Study of economics, and definitions in economics

15. Draw a long-run average cost curve that first exhibits increasing returns to scale (economies of scale), then constant returns to scale, and finally decreasing returns to scale (diseconomies of scale). Label each region. ANS: Initially, LRAC declines as output increases when there are EOS (IRS). LRAC becomes flat when there are CRS. Finally, LRAC rises once DOS (DRS) set in. See Figure 7-20.

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Figure 7-20

PTS: LOC:

1 DIF: Easy NAT: Reading and interpreting graphs

Analytic

16. An investigator challenges in court a hospital wishing to expand. The investigator shows that over time, average hospital size has increased but so has average cost. The investigator concludes that there is no advantage to allowing hospitals to grow larger. Do you accept the investigator’s case? Why? Why not? ANS: The investigator has used time series data, which is not the appropriate way to relate cost to size. Historical costs do not compare large and small f irms at the same point in time. The investigator needs to obtain the cost curve, showing large and small hospitals and their costs in the current year. PTS: LOC:

1 DIF: Difficult NAT: Analytic The Study of economics, and definitions in economics

17. “Optimal input curve analysis is useless. Since firms never know the demand for their product with certainty, they will rarely operate at the optimal input combination.” Agree or disagree? ANS: Disagree. Optimal input analysis is a guide to correct decision making. Firms may not be able to estimate precisely MPP or production functions; a part of business acumen is instinct. Nevertheless, the outcomes should closely resemble the predictions from a model of optimal input usage if the firm is to be successful. PTS: LOC:


18. Give a short concise definition for the following terms and explain their relationship to the study of economics. a. marginal physical product b. marginal revenue product c. law of diminishing returns d economies of scale ANS: a. Marginal physical product is the increase in total output resulting from a one-unit increase in the use of an input, holding other input amounts constant. MPP gives a measure of the productivity of a particular input, which may be used in deciding on the optimal use of the input. b. Marginal revenue product is the additional money revenue that a firm receives when it increases the quantity of some input by one unit and is calculated as MPP times the price per unit of output. The firm determines optimal input where MRP is equal to the price of the input. c. The “law” of diminishing returns holds that as additional units of a variable input are added to a fixed mix of all other inputs, marginal physical product will eventually decline. The diminishing returns play a crucial role in MRP, since the decline in MPP reduces MRP and leads to a definite point beyond which the firm will not expand. d. Economies of scale are experienced by a firm if a doubling of inputs more than doubles output. This tells the firm that long-run average costs are declining. PTS: LOC:

1 DIF: Moderate NAT: Reflective The Study of economics, and definitions in economics

19. The table below gives data on output for a firm in the short run. The firm is able to hire labor and its TPP is given. Compute the APP, MPP, and MRP for labor if the price of the good is fixed at $12 per unit. LABOR 1 2 3 4 5 6 7 8 9 ANS: LABOR 1 2 3 4 5 6 7 8 9 PTS: LOC:

TPP 4 9 15 21 26 30 33 35 36 TPP 4 9 15 21 26 30 33 35 36

APP

MPP

APP 4 4.5 5 5.25 5.2 5 4.71 4.375 4

MPP 4 5 6 6 5 4 3 2 1


71

MRP

MRP $48 60 72 72 60 48 36 24 12

20. Complete the table below by computing the missing numbers from those that are given. Q 0 1 2 3 4 5 6 7 8

Fixed Costs $20

Variable Costs

Average Cost

Marginal Cost $8

$15 $13.67 6 7 42 51 10.125

ANS: Q 0 1 2 3 4 5 6 7 8 PTS: LOC:

Fixed Costs $20

Variable Costs $8 15 21 27 34 42 51 61

Average Cost

Marginal Cost

$28 17.5 13.67 11.75 10.8 10.33 10.143 10.125

$8 7 6 6 7 8 9 10

1 DIF: Difficult NAT: Analytic Understanding and Applying Economic Models

21. A.B. Denson Company had been employing 6 workers and 8 tons of raw materials, using 2,000 square feet of plant space. The firm increased its work force to 12 workers utilizing 16 tons of raw materials in a plant space increased to 4,000 square feet. Total number of units of output increased from 78 to 160. What kind of returns to scale is the firm experiencing? Defend your answer. ANS: Increasing returns to scale. All inputs were doubled and output more than doubled (160/78 = 2.05). PTS: LOC:


22. Are returns to a single input and returns to scale one and the same? Explain. ANS: No. Returns to a single input refers to changes in output when a firm increases one input while holding all other input kept constant. Returns to scale refers to a technical property of production that examines changes in output subsequent to a proportional change in all inputs. PTS:

1

DIF: Easy

NAT:

Analytic

LOC:


Chapter 7

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