Full Test Bank Chapter.5 Production and Cost

Student name:__________

1) Always Round Tire has a production function of Q = 300 L ^.75 K ^{. 5}. In the short run, if L = 250 and K = 25, what is the quantity of tires supplied? What happens to the output of tires if L jumps to 300 and then 350? What law does this illustrate?

2) Can a production function with two factors exhibit increasing returns to scale while at the same time have diminishing returns to each factor?

3) The Springfield Bank received 1,500 inquiries following its latest advertisement describing its "establish a Certificate of Deposit (CD)—get a free CD (compact disk)" promotion in the Springfield Shopper, a local newspaper. The most recent similar ad in a similar advertising campaign was in the Brockman Business Newsletter. A local business publication generated 500 inquiries. Each ad in the Springfield Shopper costs $500. Each ad in the Brockman Business Newsletter costs $125. Inquiries from both publications have the same success rate in turning inquiries into sales.
(a) Assuming that additional ads will generate similar response rates, is Springfield Bank running an optimal mix of ads in the Springfield Shopper and the Brockman Business Newsletter? Why or why not?
(b) If you claim that the Springfield Bank is currently running an optimal mix of ads, clearly explain why they are using an optimal mix of ads. If you claim that the Springfield Bank is currently not running an optimal mix of ads, clearly explain how the Springfield Bank can better manage the ads.

4) Currently

where "s" and "a" refer to steel and aluminum, and P_s and P_a refer to the prices of steel and aluminum, and MP_s and MP_a refer to the marginal products of steel and aluminum, respectively, for a firm. Has the firm come up with the right amounts of steel and aluminum, or should it reallocate its resources to make the maximum profit?

5) Currently,

where MP_s and MP_a are the marginal products of steel and aluminum for a company whose production function is Q = s^0.5a^0.5. P_s = P_a = $1 are the prices of steel and aluminum, respectively, and the company has a total budget of $2 to spend on these inputs. If the market price of the output is $3 per unit, then how many units of s and a should the firm hire? What will be its output, revenue, costs, and profits?

6) Always Round Tire has a production function of Q = 300 L ^.75 K ^.5. If Always Round Tire doubles the size of its production facility—increasing L from 250 to 500 and K from 25 to 50 —what happens to the cost of production, even though we do not know the wages of labor or the price of capital?

7) Why do economies of scale and learning curve effects look similar when they are graphed? What different concepts do they represent?

8) For many corporations, a major portion of the cost of production is fixed in the short run. Should these very large fixed costs be ignored when the executives are making output and pricing decisions? Why?

9) Wanda Weeks is tired of running her small machine tool company. She wishes to sell it in order to use her time and money elsewhere. She is currently earning a salary of $85,000 per year and a 10 percent return on her capital investment. She wants to take a job in a bank and invest her capital in a mutual fund. What issues should she look at before making the decision to change careers?

10) Currently, the marginal cost equation for a shoe manufacturing company is given by MC = 10 + 2Q. The market price per pair is $60. How many units should the company produce?

11) Which of the following is true of a production function?

A) It specifies the maximum feasible output that can be produced for given amounts of inputs.
B) It specifies the maximum revenue that a firm can generate by selling its output.
C) It specifies the amount of goods that can be purchased in a market at a given price.
D) It specifies the expenses a firm can incur as a result of a production process.

12) Assume the generic production function Q = f (K, L) displays both decreasing returns to capital (K) and decreasing returns to labor (L). Then

A) this production function will certainly display decreasing returns to scale.
B) this production function will certainly display constant returns to scale.
C) this production function will certainly display increasing returns to scale.
D) this production function may display increasing returns to scale.

13) A production function of the form Q = 150L ^.75 K ^.50 exhibits ________ in the long run.

A) increasing returns to scale
B) decreasing returns to scale
C) constant returns to scale
D) diminishing returns to the variable input

14) A production function of the form Q = 40 L ^.75 K ^.20 exhibits ________ in the long run.

A) increasing returns to scale
B) decreasing returns to scale
C) constant returns to scale
D) diminishing returns to the variable input

15) Suppose the production function faced by the firm is Q = A ^1/3 B ^1/3. If the firm increases the use of both inputs by 1 percent, output will increase by

A) 2 percent.
B) more than 10 percent.
C) 0 percent.
D) less than 1 percent.

16) Diminishing marginal returns occur when

A) one input is increased and the others are held constant.
B) all inputs are increased.
C) one input is decreased while the other is increased.
D) all inputs are decreased.

17) Refer to the table and determine which of the following answers is correct.

A) The missing values are MP _L (L = 2) = 45, MP _L (L = 3) = 29, AP _L (L = 2) = 35, and AP _L (L = 4) = 28.
B) The missing values are MP _L (L = 2) = 35, MP _L (L = 3) = 33, AP _L (L = 2) = 35, and AP _L (L = 4) = 28.
C) The missing values are MP _L (L = 2) = 45, MP _L (L = 3) = 29, AP _L (L = 2) = 45, and AP _L (L = 4) = 13.
D) The missing values are MP _L (L = 2) = 45, MP _L (L = 3) = 29, AP _L (L = 2) = 35, and AP _L (L = 4) = 13.

18) The marginal product curve of input Y shows

A) how the quantity of output produced changes for each amount of input Y, whether or not all other inputs are held constant.
B) how the quantity of output produced changes for each amount of input Y, holding all other inputs constant.
C) how the average quantity of output produced varies with input Y, whether or not all other inputs are held constant.
D) how the average quantity of output produced varies with input Y, holding all other inputs constant.

19) Assume your company produces good X using only two inputs, capital (K) and labor (L). Also, assume L is measured on the vertical axis and K on the horizontal one. If the prices of inputs are P _K = $30 and P _L = 15, and your company is behaving efficiently, what is the slope of the isoquant at the current input mix?

A) -2
B) -1/2
C) 2
D) 1/2

20) Assume SeatComfy Inc. manufactures table and chairs with the following total cost function, TC = 10,000 + 10Q + 0.1Q ², where Q = quantity of chairs produced. If SeatComfy can sell as many chairs as it wishes at the current market price of $45, how many chairs should it produce to maximize its short-run profits?

A) 350
B) 700
C) 175
D) 45

21) Refer to Figure 5.1. Observe the three isoquants depicted and determine which of the following statements is true.

A) K and L are substitutes in each of the three cases.
B) K and L are substitutes in cases (1) and (2).
C) K and L are substitutes in cases (2) and (3).
D) K and L are substitutes in cases (1) and (3).

22) Isoquants from fixed-proportion production functions are

A) downward sloping.
B) shaped as right angles.
C) upward sloping.
D) shaped as horizontal lines.

23) The curve showing all the combinations of inputs that can be purchased with a given outlay of funds is called a(n)

A) total cost curve.
B) isocost.
C) isoquant.
D) production function.

24) Bob owns an auto parts firm. He uses a combination of steel and aluminum to produce his auto parts. All of the following combinations will finish the task on time. Steel costs $15 per unit and the aluminum costs $50 per unit. What combination of steel and aluminum should he use?

A) 10 units of steel and 10 units of aluminum
B) 12 units of steel and 8 units of aluminum
C) 15 units of steel and 7 units of aluminum
D) 20 units of steel and 6 units of aluminum

25) In general, which of the following implies that a marginal cost curve will eventually increase as a firm produces more output?

A) profit maximizing behavior by the firm
B) a production function displaying increasing returns to scale
C) the law of diminishing returns
D) the law of equimarginal returns

26) If the generic production function Q = f (K, L) displays increasing returns to scale, the value of K is fixed in the short run, and the prices of all inputs are held constant, then

A) the short-run average cost curve must be strictly decreasing.
B) the long-run average cost curve must be strictly decreasing.
C) the short-run and the long-run average cost curves will coincide.
D) the long-run average cost curve must be strictly increasing.

27) If the price of a variable input increases, then

A) the total cost curve will shift up.
B) the average total cost curve will shift down.
C) the marginal cost curve will shift down.
D) the fixed cost curve will shift up.

28) If a company has significant economies of scale in the long run—assuming a large market —the company will tend to

A) grow larger and have a declining average cost curve.
B) become smaller and have a declining average cost curve.
C) grow larger and have a rising average cost curve.
D) become smaller and have a rising average cost curve.

29) If a company has a cost curve of TC = 300 + 2Q + Q ² and it produces 300 units per day, then its marginal cost is

A) $1.
B) $600.
C) $602.
D) $2.02.

30) If a company has a cost curve of TC = 300 + 2Q + Q ² and it produces 300 units per day, then its average (total) cost is

A) $1.
B) $303.
C) $300.
D) $602.

31) The opportunity cost of any business decision is

A) accounting cost divided by the level of output.
B) the cost per unit of output.
C) the cost of the next best alternative.
D) the cost of doing business in the future.

32) As output expands from 199 to 200 units, total costs rise from $2,985 to $3,000. At this stage, the marginal cost and average cost of production are

A) $1 and $200.
B) $15 and $15.
C) $29.85 and $15.00
D) $1.

33) An independent trucker has to choose one of the four possible combinations of inputs listed below. The two inputs are drivers and machinery. If he buys expensive machinery, then he can hire fewer drivers to deliver the same output. The input combinations are
Method 1: 20 drivers, 10 machines;
Method 2: 50 drivers, 2 machines;
Method 3: 100 drivers, 0 machines;
Method 4: 10 drivers, 12 machines.
Hiring a driver costs $10. Each machine costs $100. Which method should he use?

A) Method 1
B) Method 2
C) Method 3
D) Method 4

34) Refer to the table, which gives cost information for the production of widgets. Some values are missing, however. Which of the following is true?

A) A = 45, E = 40
B) A = 45, E = 10
C) A = 75, E = 40
D) A = 75, E = 10

35) A firm that produces widgets must pay a fixed cost of $150. It costs an additional $30 for every widget that they produce. If the market price is $40, how many widgets does the firm have to sell so that it does not incur a loss?

A) 1
B) 5
C) 10
D) 15

36) A firm produces 10 widgets that they sell for $15 each. The average variable cost for the production of 10 widgets is $13/unit. The fixed cost for this firm equals $20. What is the value of this firm's profits?

A) - $20
B) - $2
C) 0
D) $20

37) A firm's average total cost is minimized at $5 per unit when it produces 10 units. What is the marginal cost when the firm produces 10 units?

A) less than $5 per unit
B) greater than $5 per unit
C) $5 per unit
D) $10 per unit

38) Which of the following statements about the average total cost curve is false?

A) It is initially downward sloping because increases in quantity make the average fixed cost smaller.
B) It eventually becomes upward sloping because the law of diminishing returns sets in.
C) It is always downward sloping because the average fixed costs will always decrease as quantity increases.
D) The marginal cost curve crosses the average total cost curve at the point at which average total cost is minimized.

39) Refer to the graph. On the graph that shows total costs, what is the level of variable costs when 6 units are produced?

A) $50
B) $100
C) $400
D) $500

40) Economies of scale arise when

A) all inputs increase by the same amount.
B) one input increases and the others are held constant.
C) one input increases and the others decrease.
D) all inputs increase at the same rate.

41) The general rule for profit maximization in a firm is to

A) set average cost at its minimum.
B) reduce fixed costs by expanding output.
C) maximize sales revenue.
D) set marginal revenue equal to marginal cost.

42) The ________ represents the additional revenue that comes from using one more unit of input.

A) marginal revenue product
B) economic profit
C) learning curve
D) average revenue product

43) Which of the following is a possible limitation in cost estimation?

A) It is difficult to obtain data on relevant costs from accounting reports that record historical data.
B) It is difficult to get qualified people who can obtain data on costs and can interpret the data.
C) Critics argue that the method used for estimating cost is outdated and does not provide accurate cost estimates.
D) Critics argue that cost estimates do not help managers make efficient decisions.