Chapter 7-Production, Inputs, and Cost: Building Blocks For Supply Analysis

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.
ANS: F PTS: 1 DIF: Moderate NAT: Analytic

LOC: The Study of economics, and definitions in economics
TOP: Short-Run Vs. Long-Run Costs: What Makes an Input Variable?
2. The long run is a period long enough so that one of the firm’s commitments ends.

3. In the short run, a firm has fixed costs but never any variable costs.
ANS: F PTS: 1 DIF: Easy NAT: Analytic

4. In the short run the firm has at least one fixed input.
ANS: T PTS: 1 DIF: Easy NAT: Analytic

5. In the short run the firm has no more than one fixed input.

6. Fixed cost increases when output rises.

7. Variable costs increase when output rises.

8. In the long run, more costs become fixed.

1
9. In the hog farming example given in our textbook, as in most other businesses, there is only one way to
produce output.

TOP: Production, Input Choice, and Cost with One Variable Input
10. Total physical product shows what happens to the quantity of an output when the firm changes the
quantity of an input.

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

12. Average physical product measures the output per unit of input.

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

14. Total physical product is maximized if marginal physical product is zero.
ANS: T PTS: 1 DIF: Moderate NAT: Analytic

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

16. Marginal revenue product equals the marginal physical product multiplied by the quantity demanded.

17. The “law” of diminishing returns rests on the “law” of variable input proportions.

18. If MRP > P, a firm should use less of that input.

LOC: Understanding and Applying Economic Models
19. Firms should use a resource up to a point where MRP = P.

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

21. Production technology determines the relationship of total cost to outputs.

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

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

LOC: Costs of production
TOP: Multiple Input Decisions: The Choice of Optimal Input Combinations
24. Most firms have very little flexibility in their choice of input proportions.

LOC: Efficiency and equity
25. The least costly combination of inputs is influenced by the relative prices of inputs.

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: F PTS: 1 DIF: Difficult NAT: Analytic

27. If a firm is using optimal input proportions, it is minimizing its costs.

28. Cost minimization requires that a firm equate the ratio of marginal products of inputs to the ratio of input
prices.
ANS: T PTS: 1 DIF: Difficult NAT: Analytic

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

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

31. Input choices in the present are always affected by past decisions.

32. Input proportions are usually fixed by technological conditions alone.

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

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

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

TOP: Cost and Its Dependence on Output
36. The marginal cost curve shows the per-unit cost associated with various levels of output.

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

38. Total fixed cost falls as output expands.

39. The average fixed cost curve increases as output increases.

40. The average total cost curve of a firm is U-shaped.

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

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

5
43. For most industries, average costs decrease indefinitely as output expands.

44. Cost curves in the long run differ from cost curves in the short run.

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

46. Economies of scale are also called increasing returns to scale.

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

LOC: Gains from trade, specialization and trade TOP: Economies of Scale
48. Economies of scale lead to declining long-run average cost curves.

LOC: Reading and interpreting graphs TOP: Economies of Scale
49. The law of diminishing marginal returns is the same as increasing returns to scale.

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

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

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

TOP: Appendix: Production Indifference Curves
53. Higher production indifference curves correspond to larger amounts of one input in relation to a second
input.

54. Production indifference curves generally have a positive slope.

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

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

57. Production indifference curves show the combination of inputs that produce a given output.

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

59. A change in input prices will change the location of the budget line.

7
60. A change in input prices has no impact on the budget line.

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

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: D PTS: 1 DIF: Easy NAT: Analytic
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: A PTS: 1 DIF: Moderate NAT: Analytic
3. 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: C PTS: 1 DIF: Moderate NAT: Analytic
4. Some costs cannot be varied no matter how long the period in question. These are called
a. overheads.
b total costs.
.
c. fixed costs.
d variable costs,
.
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.
.
6. In which case will the transition from short run to long run involve the shortest chronological time?
a. a service that provides temporary secretaries to companies
b an automobile factory
.
c. a farm
d an electric utility
.
7. 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: B PTS: 1 DIF: Moderate NAT: Analytic
8. 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: C PTS: 1 DIF: Easy NAT: Analytic
9. 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.
.
11
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.
.
Table 7-1
Workers Toys
1 5
2 12
3 22
4 30
5 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: A PTS: 1 DIF: Easy NAT: Analytic
12. In Table 7-1, the average physical product after five workers are hired is
a. 5.
b 6.
.
c. 7.
d 8.
.
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.
.
LOC: Reading and interpreting graphs
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.
.
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
.
Table 7-2
Plastic (in pounds) 5 6 7

Widgets 14 17 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: D PTS: 1 DIF: Moderate NAT: 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
.
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.
.
15
John Amaker owns orange groves and hires pickers for a two-week period as shown in Table 7-3.
Table 7-3
Pickers Oranges Picked

1 1,000
2 2,000
3 3,000
4 3,900
5 4,700
6 5,400
7 6,000
8 6,200
9 6,000
19. In Table 7-3, diminishing returns set in with picker

a. 3.
b 4.
.
c. 5.
d 6.
.
e. 9.
20. In Table 7-3, negative returns set in with picker

a. 6.
b 7.
.
c. 8.
d 9.
.
e. 5.
Figure 7-1
21. Of the graphs in Figure 7-1, which best represents marginal physical product?
a. 1
b 2
.
c. 3
d 4
.
22. In Figure 7-1, which graph best represents total physical product with diminishing returns?
a. 1
b 2
.
c. 3
d 4
.
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: B PTS: 1 DIF: Difficult NAT: 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.
.
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
.
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: C PTS: 1 DIF: Moderate NAT: 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: B PTS: 1 DIF: Easy NAT: 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.
.
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 million.
.
c. the team’s total revenue will equal $15 million.
d Gretzky’s marginal revenue product will rise in the long run.
.
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
.
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.
.
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.
.
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.
.
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.
.
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
.
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.
.
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.
.
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: D PTS: 1 DIF: Difficult NAT: 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.
.
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
.
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: C PTS: 1 DIF: Difficult NAT: Analytic
LOC: Efficiency and equity
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.
.
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.
.
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: D PTS: 1 DIF: Easy NAT: Reflective
25
45. A firm uses two inputs, A and B. At its optimal choice of input proportions,
a. MRP of A = MRP of B.
b P of A/P of B = MRP of A/MRP of B.
.
c. MPP of A = MPP of B.
.
46. 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?
a. MRP of additional labor falls below MRP of additional tools.
b MRP of additional capital increases above MRP of additional tools.
.
c. MRP of additional labor becomes equal to MRP of additional tools.
d MRP of the additional labor falls to zero.
.
47. 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
a. more labor and less machinery.
b more machinery and less labor.
.
c. more labor with the same amount of machinery.
d the current combination.
.
48. The firm can calculate all points on its total cost curve if it knows
a. its production 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.
.
Table 7-4
6 346 490 600 692 775 846

5 316 448 548 632 705 775
4 282 400 480 564 632 692
CAPITAL 3 245 346 423 490 548 600
2 200 282 346 400 448 490
1 141 200 245 282 316 346
0 1 2 3 4 5 6
LABOR
27
49. 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?
a. 2
b 3
.
c. 4
d 5
.
50. 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?
a. from 3 to 4
b from 4 to 5
.
c. from 4 to 6
d stays the same
.

51. The production relationship in Table 7-4 indicates a process characterized by

a. decreasing returns to scale.
b constant returns to scale.
.
c. increasing returns to scale.
d increasing then decreasing returns to scale.
.
52. 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?
a. 1
b 2
.
c. 3
d 4
.
53. To determine total cost, the businessperson must know

a. input quantity and output price.
b output quantity and output price.
.
c. output quantity and input price.
d input quantity and input price.
.
LOC: Costs of production TOP: 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.
.
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.
.
LOC: Costs of production TOP: 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.
.
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.
.

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.
.
31
Figure 7-2
Output
59. In Figure 7-2 at an output of 500, marginal cost equals

a. 10.
b 20.
.
c. 30.
d 40.
.
60. In Figure 7-2, average cost at 500 units of output equals

a. 4,000.
b 200.
.
c. 8.
d 6.
.
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.
.
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
.
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
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.
.
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.
.
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 further.
.
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.
.
Figure 7-5
35
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)
.
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)
.
70. Which of the following is a fixed cost?
a. electricity
b worker bonuses
.
c. mortgage on the building
d steel to produce refrigerators
.
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.
.
72. Which of the following is a fixed cost to farmer McDonald?
a. gasoline
b fertilizer
.
c. insurance
d seed
.
37
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
.
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
.
75. Which of the following is correct?
a. AC = AFC/Q
b AC = AFC + AVC
.
c. AC = MFC + MVC
d TFC + TMC = MFC + MVC
.
Figure 7-7
76. In Figure 7-7 at 100 units, AFC equals

a. 10.
b 100.
.
39
c. 1,000.
d 180.
.
ANS: A PTS: 1 DIF: Difficult NAT: Analytic
77. In Figure 7-7 at 100 units, FC equals
a. 1,000.
b 1,800.
.
c. 800.
d 80.
.
78. In Figure 7-7 at 100 units, AVC equals

a. 8.
b 800.
.
c. 100.
d 1,000.
.
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
.

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

a. 1
b 2
.
41
c. 3
d 4
.
81. Of the graphs in Figure 7-8, which represents fixed cost?
a. 1
b 2
.
c. 3
d 4
.
82. Of the graphs in Figure 7-8, which represents total cost?

a. 1
b 2
.
c. 3
d 4
.
Figure 7-9
83. Of the graphs in Figure 7-9, which represents total fixed cost?
a. 1
b 2
.
c. 3
d 4
.
84. Of the graphs in Figure 7-9, which represents average fixed cost?
a. 1
b 2
.
c. 3
d 4
43
.
Figure 7-10
85. In Figure 7-10, the curve B is

a. average fixed cost.
b average total cost.
.
c. average variable cost.
d marginal cost.
.
86. In Figure 7-10, the curve labeled C is

a. average fixed cost.
b average total cost.
.
c. average variable cost.
d marginal cost.
.
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.
.

88. The average cost curve
a. is the vertical summation of the AFC and the AVC curves.
b lies below the AVC curve.
45
.
c. lies below the AFC curve.
d is the vertical summation of the MC and AVC curves.
.
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.
.
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.
.
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
.
47
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.
.
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.
.
Table 7-5
Stereos produced 0 1 2 3 4 5 6
Total cost (in $) 200 325 410 475 550 660 825
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.
.
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.
.
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
.
LOC: Reading and interpreting graphs TOP: Cost and Its Dependence on Output
49
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: B PTS: 1 DIF: Moderate NAT: 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)
.
Figure 7-13
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
.
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.
.
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.
.
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.
.
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.
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.
.
Table 7-6
Number of ovens 2 2 2 2 2 2 2 2
Labor hours used 1 2 3 4 5 6 7 8
Loaves of Bread Produced 20 34 55 70 82 91 94 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.
.
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
b diminishing returns to labor.
.
c. increasing long-run average cost.
d decreasing short-run average variable cost.
.
ANS: B PTS: 1 DIF: Moderate NAT: 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.
.
108. Whether or not a production process shows economies of scale depends on
53
a. the number of inputs used.
b technology.
.
c. technology and input prices.
d technology and output prices.
.
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.
.
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.
.
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.
.
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¢.
.
113. Economies of scale is another term for

a. increasing returns to scale.
.
c. increasing marginal physical productivity.
d decreasing returns to scale.
55
.
114. If a firm has increasing returns to scale at all levels of output, the
a. slope of its long-run total cost curve is always negative.
b slopes of its short-run average cost curves are always negative.
.
c. slope of its long-run average cost curve is always negative.
d slope of its production function is always negative.
.
115. If doubling the quantity of inputs more than doubles the quantity of outputs, the firm is experiencing
b decreasing returns to scale.
.
c. constant returns to scale.
d increasing costs per unit of output.
.
116. If a firm increases inputs by 15 percent and output increases by 12.5 percent, the firm is experiencing
.
.

117. If in some range of production average cost is falling, the firm is experiencing
.
.
118. If in some production range average cost is rising, the firm is experiencing
.
.
57
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
.
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
.
c. increasing returns to scale.
d abnormal demand patterns.
.
ANS: C PTS: 1 DIF: Moderate NAT: 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: D PTS: 1 DIF: Difficult NAT: 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. historical cost curve.
d theoretical cost curve.
.
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.
.
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.
.
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.
.
d minimizing costs in the short run.
.
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.
.
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
.
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.
.
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.
.
Figure 7-16
63
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.
.
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.
.
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: 1 DIF: Easy NAT: Analytic

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: 1 DIF: Moderate NAT: Reflective

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

1 10 6 75
2 25 7 77
3 45 8 78
4 60 9 77
5 70 10 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: 1 DIF: Moderate NAT: 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.

5. 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

6. 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.

67
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.

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.

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 × P, is only $5, which is less than
the input’s $10 price.
PTS: 1 DIF: Moderate NAT: Reflective LOC: 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 mass-
production 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: Efficiency and equity

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.

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: Efficiency and equity
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: 1 DIF: Difficult NAT: Analytic

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.
69
Figure 7-20

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 firms 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.

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.

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: 1 DIF: Moderate NAT: Reflective

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 TPP APP MPP MRP
1 4
2 9
3 15
4 21
5 26
6 30
7 33
8 35
9 36
ANS:
LABOR TPP APP MPP MRP
1 4 4 4 $48
2 9 4.5 5 60
3 15 5 6 72
4 21 5.25 6 72
5 26 5.2 5 60
6 30 5 4 48
7 33 4.71 3 36
8 35 4.375 2 24
9 36 4 1 12

71
20. Complete the table below by computing the missing numbers from those that are given.
Q Fixed Costs Variable Costs Average Cost Marginal Cost

0 $20
1 $8
2 $15
3 $13.67
4 6
5 7
6 42
7 51
8 10.125
ANS:
Q Fixed Costs Variable Costs Average Cost Marginal Cost

0 $20
1 $8 $28 $8
2 15 17.5 7
3 21 13.67 6
4 27 11.75 6
5 34 10.8 7
6 42 10.33 8
7 51 10.143 9
8 61 10.125 10

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).

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: Efficiency and equity

23. Explain briefly the following concepts:
(a) Increasing returns to scale.
(b) Decreasing returns to scale.
(c) Constant returns to scale.
ANS:
Increasing returns to scale: If the percentage changes in output is greater than the percentage changes in
input.
Decreasing returns to scale: When the percentage changes in output is less than the percentage changes in
inputs.
Constant returns to scale: When percentage changes in output and input are same.

24. 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.
ANS:
The graph should be very similar to Figure 7-15 in the text

73

Chapter 7-Production, Inputs, and Cost: Building Blocks For Supply Analysis

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Chapter 7-Production, Inputs, and Cost: Building Blocks For Supply Analysis

Hochgeladen von

Copyright:

Verfügbare Formate

Chapter 7—Production, Inputs, and Cost: Building Blocks for Supply Analysis

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: F PTS: 1 DIF: Easy NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Easy NAT: Analytic

6. Fixed cost increases when output rises.

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

7. Variable costs increase when output rises.

ANS: T PTS: 1 DIF: Easy NAT: Analytic

8. In the long run, more costs become fixed.

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Easy NAT: Analytic

14. Total physical product is maximized if marginal physical product is zero.

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Analytic

18. If MRP > P, a firm should use less of that input.

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

19. Firms should use a resource up to a point where MRP = P.

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

21. Production technology determines the relationship of total cost to outputs.

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: F PTS: 1 DIF: Difficult NAT: Analytic

27. If a firm is using optimal input proportions, it is minimizing its costs.

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Difficult NAT: Analytic

ANS: F PTS: 1 DIF: Easy NAT: Analytic

ANS: T PTS: 1 DIF: Difficult NAT: Analytic

ANS: T PTS: 1 DIF: Difficult NAT: Analytic

32. Input proportions are usually fixed by technological conditions alone.

ANS: F PTS: 1 DIF: Difficult NAT: Analytic

ANS: F PTS: 1 DIF: Difficult NAT: Analytic

ANS: T PTS: 1 DIF: Difficult NAT: Analytic

ANS: F PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Analytic

38. Total fixed cost falls as output expands.

ANS: F PTS: 1 DIF: Easy NAT: Analytic

39. The average fixed cost curve increases as output increases.

ANS: F PTS: 1 DIF: Easy NAT: Analytic

40. The average total cost curve of a firm is U-shaped.

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: F PTS: 1 DIF: Difficult NAT: Analytic

ANS: F PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Easy NAT: Analytic

ANS: F PTS: 1 DIF: Easy NAT: Analytic

46. Economies of scale are also called increasing returns to scale.

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

ANS: T PTS: 1 DIF: Moderate NAT: Analytic

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