Test Questions & Answers Ch.7 Production Inputs and Cost - Microeconomics Principles and Policy 14e | Test Bank by Baumol by William J. Baumol. DOCX document preview.
Indicate whether the statement is true or false. |
1. A production indifference curve describes the input combinations that will produce a given output.
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2. Decreasing returns to scale is strictly a short run phenomenon for firms.
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3. Variable cost changes as the time period under consideration changes.
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4. Fixed cost increases when output rises.
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5. The long run is a period long enough so that one of the firm’s commitments ends.
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6. Economies of scale are also called increasing returns to scale.
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7. The principal determinants of total and average cost curves are the firm’s technology and the prices of its inputs.
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8. The average total cost curve of a firm is U shaped but the average variable cost is not.
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9. Marginal revenue product is the effect of a one-unit increase in an input on the cost of production.
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10. If the price of one input changes, generally the firm will change its use of both inputs.
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11. Marginal physical product measures the increase in total output that results from a one-unit increase in an input.
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12. The short run is that period during which there are no fixed commitments.
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13. If significant economies of scale are present, large firms will be much more efficient producers than small firms.
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14. The “law” of diminishing returns is what happens to marginal returns as all inputs are varied.
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15. The behavior of historical cost curves says nothing about the cost advantages or disadvantages of a single large firm.
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16. A total cost curve shows the largest amount of a product a firm can produce with a minimum cost.
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17. A firm’s budget line shows a given expenditure on production, given the input prices for the production process.
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18. Average physical product measures the increase in total output that results from a one-unit increase in an input.
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19. The long-run average cost curve shows the lowest possible average cost for each output level, given that all inputs are variable.
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20. A rise in the price of an input can be expected to lead to a rise in its marginal physical product.
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21. For most firms, average total costs will decrease initially due to decreasing marginal physical product for the inputs used in the production process
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22. The average fixed cost curve increases as output increases.
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23. Higher production indifference curves correspond to larger amounts of one input in relation to a second input.
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24. Input proportions are usually fixed by technological conditions alone.
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25. Most firms have very little flexibility in their choice of input proportions.
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26. A change in one input price will cause the slope of the firm’s budget line to change.
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27. A change in input prices will change the location of the firm’s budget line.
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28. Firms choose the highest production indifference curve they can obtain given the lowest possible budget line.
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29. If MPPa/Pa = MPPb/Pb, then the firm should increase the usage of both input a and input b.
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30. The firm’s average cost curve is the result of cost minimization in the use of fixed inputs.
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31. In the long run, more costs become fixed
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32. In the short run, the firm has no more than one fixed input.
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33. The short-run average cost curve shows the lowest possible average cost corresponding to each output level, assuming that all inputs are variable.
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34. Economies of scale lead to declining long-run average cost curves.
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35. Total physical product shows what happens to the quantity of a firm’s output when that firm changes the quantity of an input in the production process.
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36. The “law” of diminishing returns rests on the “law” of variable input proportions.
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37. In the short run, a firm has fixed costs but never any variable costs.
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38. Average physical product measures the output per unit of input.
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39. The rule that states that the marginal revenue product equal to price does not hold when there are more than two inputs.
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40. Marginal fixed costs decrease as output increases.
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41. A firm will tend to select the least costly input combination to produce its output.
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42. The law of diminishing marginal returns is the same as increasing returns to scale.
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43. The “law” of diminishing returns asserts that marginal returns will ultimately diminish when the quantity of one input is increased.
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44. Variable costs increase when output rises.
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45. In most businesses, there is only one way to produce output.
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46. If MPPa/Pa > MPPb/Pb, then the proportions of these two inputs is optimal.
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47. The average total cost curve is U shaped in the short run but this is not true for the average total cost curve for the long run.
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48. Marginal revenue product equals the marginal physical product multiplied by the quantity demanded.
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49. If production indifference curves cross, this indicates that there are different ways to produce the same output level.
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50. Input choices in the present are often affected by past decisions.
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51. Total variable costs will initially increase and then begin to decrease as output increases.
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52. The marginal cost curve shows the per-unit cost associated with various levels of output.
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53. For most industries, average costs decrease indefinitely as output expands.
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54. Cost curves in the long run differ from cost curves in the short run.
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55. The different points on a cost curve represent alternative production possibilities in the same time period.
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56. If a firm is using optimal input proportions, it is minimizing its costs.
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57. Production indifference curves show the combination of inputs that produce a given output.
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58. If the price of one input changes, the firm will change its use of that input only.
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59. For most firms, the short run is a one-year period.
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60. The average total cost curve of a firm is U shaped.
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61. A change in input prices has no impact on a firm’s budget line.
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62. Product indifference curves bow inward toward the origin because of diminishing returns to substitution of inputs.
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63. If MRP > P, a firm should use less of that input.
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64. A production indifference curve shows all combinations of input quantities capable of producing a given quantity of output.
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65. When marginal revenue product of an input is less than its price, the producers should use less of the input.
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66. Total physical product is maximized if marginal physical product is zero.
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67. A production indifference curve is sometimes called “isoquants” since the term implies equal quantities of output.
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68. The average cost curve shows the total cost divided by quantity produced for various levels of output.
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69. A budget line is the locus of all points representing every input combination of inputs that the producer can afford to buy with a given amount of money and given input prices.
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70. Marginal revenue product is essentially the additional revenue generating from selling one additional unit of output.
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71. The expansion path of product indifference curves shows the cost-minimizing combination of inputs.
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72. Cost minimization requires that a firm equate the ratio of marginal products of inputs to the ratio of input prices.
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73. If diminishing marginal returns are present for an input, then the marginal revenue product will be decreasing.
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74. Total physical product is the quantity of a firm’s output based upon a given input usage.
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75. Total fixed cost falls as output expands.
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76. Production technology determines the relationship of total cost to outputs.
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77. Firms should use a resource up to a point where MRP = P.
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78. Diminishing marginal returns explains why a firm’s long-run average total cost curve is U shaped.
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79. The least costly way to produce a given level of output is indicated by the point of tangency between a budget line and the production indifference curve corresponding to that level of output.
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80. The least costly combination of inputs is influenced by the relative prices of inputs.
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81. In the short run the firm has at least one fixed input.
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82. Production indifference curves generally have a positive slope.
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Indicate the answer choice that best completes the statement or answers the question. |
83. The graph of the average cost curve
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Figure 7-14
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84. Of the long-run AC curves in Figure 7-14, which displays increasing returns to scale for all levels of output?
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85. If the firm’s marginal physical product is 8, and its handicrafts sell for $70, when a unit of labor costs $150, the firm is operating
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86. If the MPP of labor is 60 and the price of labor per period is $20, the MPP of machinery is 75, and the price of the machinery per period is $25, in order to achieve optimal input proportions, the firm should use
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87. Marginal cost
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Figure 7-3  |
88. 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?
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89. If a firm has a U-shaped long-run average cost curve,
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90. Ray’s Barbecue produces about 200 slabs of barbecued ribs per day. The price that Ray pays for each slab of ribs rises by 10 and the rent on Ray’s restaurant location rises by 5 percent increase. Marginal cost will increase as a result of
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91. 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
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92. The case of production with a single variable input is analogous to
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93. In the long run,
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94. AC is lower in the long run than in the short run because
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95. In the short run, if the average cost curve is shown as decreasing, it is because
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96. Al’s Donuts produces about 600 dozen doughnuts daily. If flour prices increase 20 percent,
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97. Table 7-2 contains information on widget production. The marginal physical product of the sixth pound of plastic is ____.
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98. Which of the following formulas defines average cost?
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99. If a firm increases inputs by 15 percent and output increases by 12.5 percent, the firm is experiencing
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100. Which of the following is correct?
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101. When a firm’s AC eventually starts to rise, it is often because
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102. Renee runs an accounting firm that does tax returns, which she operates out of a building that she owns downtown. She hires all of the accountants and buys the equipment and supplies for the business. The costs used to calculate the total cost curve include
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Figure 7-11
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103. 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?
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104. Marginal cost is the
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John Amaker owns orange groves and hires pickers for a two-week period as shown in Table 7-3.
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105. In Table 7-3, diminishing returns set in with picker
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106. Economies of scale
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107. Everything else equal, the AC curve will shift downward if
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108. The marginal revenue product of an hour of labor used in steel production is equal to
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109. Which of the following is the correct statement of the marginal rule for optimal input proportions? The input proportion is optimal when
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110. The long-run average cost curve
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Table 7-1
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111. In Table 7-1, the marginal physical product of labor after the addition of the fourth worker is
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112. Which of the following is most likely to be a variable cost for an airline?
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113. If economies of scale exist for a particular production relationship, long-run average costs will
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114. In the typical AC curve, the downward-sloping part is attributable to
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Figure 7-8
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115. Of the graphs in Figure 7-8, which diagram is most likely to be the marginal cost?
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116. If a firm wants to determine total cost, it needs
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Figure 7-1
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117. In Figure 7-1, which graph best represents total physical product with diminishing returns?
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118. The major incentive for cost minimization is the
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119. 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
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120. 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
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121. 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
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122. Constant returns to scale for a firm would imply that
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123. For most firms, if the marginal cost curve is plotted on a graph, marginal cost will
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Table 7-5
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124. Table 7-5 shows short-run total cost figures for a stereo manufacturer. The manufacturer’s short-run fixed cost is
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125. The optimum quantity of an input occurs when
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Figure 7-1
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126. Of the graphs in Figure 7-1, which best represents marginal physical product?
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127. In which zone does the total physical product reach it maximum value?
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Figure 7-5
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128. Which of the graphs in Figure 7-5 could be a firm’s total fixed cost curve?
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Figure 7-2  |
129. In Figure 7-2, average cost at 500 units of output equals
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130. The marginal physical product of an input is the
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Figure 7-12
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131. 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?
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132. In which case is the transition from short run to long run likely to involve the shortest chronological time period?
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133. Greg’s Restaurant specializes in cheeseburger and produces about 2,000 burgers daily. Greg’s rent went up by 15 percent over last year. This will result in
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Table 7-5
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134. Table 7-5 shows short-run total cost figures for a stereo manufacturer. The short-run average variable cost of producing five stereos is
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135. A cost curve drawn with years on the horizontal axis and costs per unit on the vertical axis would be a(n)
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136. Which of the following is a fixed cost?
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137. A firm that is seeking to minimize costs to produce a certain output
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138. 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
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139. The “law” of diminishing returns
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John Amaker owns orange groves and hires pickers for a two-week period as shown in Table 7-3.
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140. In Table 7-3, negative returns set in with picker
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141. For a typical firm, the portion of the AC curve that is downward-sloping is because production
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142. Which of the following observations is true?
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Figure 7-8
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143. Of the graphs in Figure 7-8, which represents fixed cost?
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144. Some costs cannot be varied within a given time period. These costs are called
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145. Which of the following statements is equivalent to the law of diminishing marginal returns?
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Figure 7-7
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146. In Figure 7-7 at 100 units, FC equals
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Table 7-5
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147. Table 7-5 shows short-run total cost figures for a stereo manufacturer. At what output level does short-run average variable cost reach a minimum?
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148. A factory produces 1,000 radios a year, AVC = $10 and TFC = $5,000. The factory’s TC
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Figure 7-9
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149. Of the graphs in Figure 7-9, which represents total fixed cost?
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150. In the short run,
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151. Where marginal cost is less than average cost,
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152. Average cost curves have the same basic shape as
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153. A firm uses two inputs, A and B. At its optimal choice of input proportions,
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Figure 7-15
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154. For a firm at equilibrium, at point A in Figure 7-15,
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Table 7-1
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155. Table 7-1 In Table 7-1, the marginal physical product of labor from the addition of the second worker is
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156. When economies of scale exist,
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Figure 7-8
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157. Of the graphs in Figure 7-8, which represents total cost?
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158. The rule for the optimal use of any input says that
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159. If a firm has increasing returns to scale at all levels of output, then the
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160. The short run is the time period during which
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161. A firm’s AC will eventually begin to rise because
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162. Which of the following observations is true?
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Figure 7-7
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163. In Figure 7-7 at 100 units, AVC equals
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164. If on a given product indifference curve, a firm is using an insufficient (nonoptimal) amount of one of its inputs,
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165. The amount of time during which at least one input cannot be adjust is the
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166. 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
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Table 7-5
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167. 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?
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168. Economies of scale is another term for
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169. A roller coaster operator produces thrill-packed rides using electricity and a roller coaster. For the roller coaster operator, electricity is
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Table 7-4
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170. Table 7-4 shows a production relationship. 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?
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171. Which of the following equations defines marginal revenue product?
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Table 7-4
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172. Table 7-4 shows a production relationship. 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?
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Table 7-6
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173. Table 7-6 shows a baker’s daily production relationship for bread. Diminishing returns to labor begin when the baker goes from
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174. In a bakery for a given amount of croissant production, an additional pastry worker produces 100 additional croissants, and one extra mixing machine produces 50 extra croissants. Each pastry worker costs $30 to hire, and a mixing machine costs $10 per unit. The bakery owner should
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Figure 7-17
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175. Which of the following statements must be true when a firm makes choices that put it at point A in Figure 7-17?
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176. A firm produces 2,000 high-quality bicycles per year. At this output, AVC $300 and the firm’s fixed costs are $200,000. The firm’s total costs are
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Table 7-1
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177. In Table 7-1, the average physical product after five workers are hired is
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178. Which of the following is most likely to be a fixed cost for farmer McDonald? Fertilizer
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179. A firm is operating with an optimal combination of inputs. Suddenly the price of one input rises. The firm should
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180. A firm’s optimal input proportions may change if
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181. The typical average cost curve
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182. Table 7-2 contains information on widget production. The average physical product of the seventh pound of plastic is calculated as ____.
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183. Which of the following indicates an input is being overused relative to the optimal level?
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184. Determining the optimal choice of input combinations generally does not involve
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185. The “law” of diminishing returns is also referred to as
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Figure 7-10
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186. In Figure 7-10, the curve labeled C is
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187. One reason why critics argue that large firms should not be broken up is that in some cases
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188. Total fixed cost
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189. When economies of scale are present,
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Figure 7-2 |
190. In Figure 7-2, at an output of 500, marginal cost equals
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Figure 7-9
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191. Of the graphs in Figure 7-9, which represents average fixed cost?
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Figure 7-7
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192. In Figure 7-7 at 100 units, AFC equals
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Figure 7-16
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193. In Figure 7-16, as we move from A to B,
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194. When the marginal revenue product of an input is less than its price, the
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195. Which of the following will not lead to increase in the marginal revenue product?
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196. If in some range of production, average cost is falling, the firm is experiencing
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197. A total product curve shows the
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198. To determine total cost, the business owner must know
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John Amaker owns orange groves and hires pickers for a two-week period as shown in Table 7-3.
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199. In Table 7-3, the marginal physical product of the fifth picker is
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200. Marginal revenue product is the
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201. Production costs for a given output will be minimized when the
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Figure 7-15
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202. In Figure 7-15, we would expect a move along the production indifference curve from A to B if
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203. A Detroit business advertises, “The more we sell, the lower the price, and the lower the price, the more we sell.” This statement implies that the firm is experiencing
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204. If the marginal revenue product of an input is greater than its price, the
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205. Total fixed cost
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206. The firm can calculate all points on its total cost curve if it knows
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207. In a machine shop, the marginal physical product of an additional unit of labor is 4 units of output, while the marginal physical product of an additional piece of machinery is 2, under what conditions would the firm increase labor usage?
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208. Cost minimization is the process of making optimal use of all of the inputs whose quantities are
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209. Which of the following experiments will yield observations that would allow one to calculate the marginal physical product of labor?
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210. The total physical product of an input is the same thing as its
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211. Whether or not a production process shows economies of scale depends on
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212. If a firm has increasing returns to scale at all levels of output, the
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Table 7-1
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213. In Table 7-1, the marginal physical product begins to diminish with the addition of the
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214. If in some production range average cost is rising, the firm is experiencing
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215. Where should a producer stop devoting more of his spending on labor if initially the MRP of the additional dollar spent on labor is higher than the MRP of the additional unit spent on tools?
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Table 7-4
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216. Table 7-4 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?
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217. With regard to the characteristics of production indifference curves, which of the following statements is/are NOT true?
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218. 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
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219. If the marginal physical product of more labor is twice as high as the marginal physical product of more machinery, a rational firm should
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220. If doubling the quantity of inputs more than doubles the quantity of outputs, the firm is experiencing
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221. Marginal revenue product is increasing as
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Figure 7-13
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222. 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?
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223. If a single large firm is able to produce a market’s output less expensively than many small firms is evidence that, for this market, there are
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224. An example of the law of variable input proportions can be found in
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225. Production indifference curves bow inward toward the graph’s origin because of
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226. A firm practices input substitution when it
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Figure 7-4
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227. 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?
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228. Marginal physical product can tell a producer
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229. The optimal level of resource use comes when
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230. Everything else equal, the AC curve will shift when
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Figure 7-6
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231. Which of the lines in Figure 7-6 represents a typical average fixed cost curve?
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232. If a firm’s marginal physical product is 5, and it sells its product for $60, and a unit of labor costs $200, the firm should
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233. The average cost curve
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Table 7-4
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234. The production relationship in Table 7-4 indicates a process characterized by
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Figure 7-5
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235. Which of the curves in Figure 7-5 could be a firm’s average fixed cost curve?
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Figure 7-10
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236. In Figure 7-10, the curve B is
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237. 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? |
238. “If it were not for the law of diminishing marginal returns, the world’s wheat could be grown in a flower pot.” Explain. |
239. What is the shape of average cost curve? Provide the reason for that particular shape. |
240. How long is the long run? |
241. 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? |
242. 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. |
243. Explain briefly the following concepts:
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244. Complete the table below by computing the missing numbers from those that are given.
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245. Give a short concise definition for the following terms and explain their relationship to the study of economics.
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246. “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? |
247. “A producer wanting to employ optimal quantity of inputs should choose the point where diminishing returns set in.” True or false? |
248. 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. |
249. Draw a graph using production indifference curves and budget lines showing a firm initially minimizing cost with its inputs of A and B. Then illustrate a new optimal combination of inputs when the prices of the inputs change. |
250. 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? |
251. Explain why the average cost curve for the long run differs from that for the short run. |
252. 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? |
253. Explain why the long-run average cost is typically U shaped. |
254. 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. |
255. Are returns to a single input and returns to scale one and the same? Explain. |
256. 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.
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257. “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? |
258. The following table depicts the production relationship between units of labor and output of pepper on Pietrov’s Pepper Farm.
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259. Differentiate between the short run and the long run. |
260. 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? |
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Microeconomics Principles and Policy 14e | Test Bank by Baumol
By William J. Baumol