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Midterm3 Practice 3

1. A production function identifies the _____.

a. minimum output that a specific combination of inputs can produce

b. maximum number of inputs that can be used to produce output
c. highest possible output for a given combination of inputs
d. least-cost method of producing a given level of output

Answer: C

2. What is meant by technological efficiency in production?

a. Using the latest available technology in production

b. Producing the maximum possible output from given inputs
c. Using the least number of inputs in production
d. Minimizing the cost of production

Answer: B

3. A farmer is growing corn on an acre of land. Output will be 200 bushels if one worker is
hired, 500 if two, 700 if three, 850 if four, and 900 if five. The marginal product of the fourth
worker is _____ bushels of corn.

a. 850
b. 150
c. 212.5
d. 50

Answer: B
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4. Table 7.1 shows the quantities of labor and capital required to produce various levels of
output.

Amount of Amount of
Total Product
Capital Labor
5 1 10
5 2 24
5 3 42
5 4 56
5 5 66
5 6 74
5 7 80

Refer to Table 7-1. What is the average product of labor when four units of labor are used?

a. 10
b. 14
c. 42
d. 33

Answer: B

5. If the average product of labor is 150 bushels of wheat when three workers farm an acre of
land and the marginal product of the fourth worker is 75 bushels, then the total output with four
workers is _____ bushels.

a. 225
b. 50
c. 525
d. 675

Answer: C
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6. Table 7-3 shows the combinations of labor and capital required to produce various level of
output.

Refer to Table 7-3. Assume that capital remains fixed while labor is the only variable input used
in production. If the firm is currently producing 26 units of output using three units of labor,
what is the marginal product of labor at this point?

a. 2
b. 4
c. 6
d. 8

Answer: C

7. The average product of labor at a particular point can be determined:

a. by the slope of the total product curve at that point.

b. by multiplying the total product by the quantity of labor at that point.
c. by the slope of a line from the origin to the particular point on the total product curve.
d. by the vertical distance of the average product curve from the marginal product curve.

Answer: C
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8. Figure 7-2 shows the total product curve for different levels of a variable input, labor.

In Figure 7.3, the law of diminishing marginal returns comes into play beyond point _____.

a. A
b. B
c. C
d. D

Answer: B

9. The duration of the short run varies by industry because _____.

a. the total labor demand varies by industry

b. some inputs cost more in some industries
c. the technology used in production is not the same in all industries
d. the time required to change a variable input differs by industry

Answer: D
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10. An isoquant shows _____.

a. the different quantities of output that can be produced with different quantities of inputs
b. the combination of inputs that can be used to produce a fixed quantity of output
c. the different quantities of output that can be produce with fixed quantities of inputs
d. the combination of inputs than can be used to produce different quantities of output

Answer: B

11. If isoquants are drawn as right angles, it implies:

a. that the two inputs are perfect substitutes for each other.
b. that the MRTS is constant.
c. that the inputs must be used in fixed proportions.
d. the isoquants can be intersecting.

Answer: C

12. If isoquants are drawn as straight lines, it implies that:

a. the two inputs are perfect substitutes for each other.

b. the MRTS is decreasing.
c. that the inputs must be used in fixed proportions.
d. the MRTS is zero.

Answer: A
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13. Table 7-3 shows the combinations of labor and capital required to produce various level of
output.

Refer to Table 7-3. If the firm is currently producing 26 units of output using three units of labor,
what is the marginal rate of technical substitution of labor for capital at this point?

a. -1
b. -2
c. -3
d. -4

Answer: C

14. If the marginal product of labor is 25 and the marginal product of capital 10, what is the
marginal rate of technical substitution of labor for capital?

a. 0.6
b. 1
c. 1.5
d. 2.5

Answer: D

15. An isoquant map, with labor on the horizontal axis and capital on the vertical axis, has
horizontal isoquants. This implies that the:

a. marginal product of capital is zero.

b. marginal rate of substitution of capital for labor approaches infinity.
c. marginal product of labor is zero.
d. marginal rate of substitution of capital for labor is positive.

Answer: C
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16. Suppose that at a point on an isoquant, the following information is true: MPL = 3 and MPK
= 2. Then if K falls by 5, L must increase by:

a. 0.30.
b. 0.67.
c. 3.33.
d. 1.50.

Answer: C

17. Table 7-4 shows the shows the quantities of labor and capital required to produce various
levels of output.

Quantity of Quantity
Output
Capital of Labor
6 2 40
12 4 100
24 8 220
48 16 440
96 32 800

Refer to Table 7-4. When the firm increases production from 24 units of capital and 8 units of
labor to 48 units of capital and 16 units of labor, the production function exhibits:

a. decreasing marginal rate of technical substitution.

b. constant returns to scale.
c. increasing returns to scale.
d. diminishing marginal returns
Answer: B

18. Which of the following correctly explains increasing returns to scale?

a. With small scale operations, management inefficiencies are avoided.

b. Increasing the number of workers in a factory allows division and specialization of labor.
c. Firms that operate in small industries have higher input procurement costs.
d. Communication channels in large organizations tend to be complex.

Answer: B
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19. Table 7-4 shows the shows the quantities of labor and capital required to produce various
levels of output.

Quantity of Quantity
Output
Capital of Labor
6 2 40
12 4 100
24 8 220
48 16 440
96 32 800

Refer to Table 7-4. When the firm expands from 6 units of capital and 2 units of labor
to 12 units of capital and 4 units of labor, the production function exhibits:

a. increasing returns to scale.

b. constant returns to scale.
c. decreasing returns to scale.
d. diminishing marginal returns.
Answer: A

20. Which of the following contributes to the increasing returns to scale in production as a firm
expands capacity?

a. Specialization of labor
b. Increase in average cost and decrease in output
c. Increase labor while keeping capital constant
d. Increase in marginal utility
Answer: A

21. Marico Corp. can manufacture 45,000 ball bearings per day at one of its production
facilities. If the company uses the same facility for manufacturing rivets, a total of 30,000 rivets
can be produced each day. Calculate Marico Corp.’s implicit cost per day of producing rivets at
this facility.

a. The monetary value of 45,000 ball bearings

b. The monetary value of 30,000 rivets
c. The monetary value of 15,000 ball bearings
d. The monetary value of 15,000 rivets

Answer: A
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22. If fixed costs are $1,000 and variable costs are constant at $1.00 per unit over the relevant
range of output, what will the average total cost be when 2,000 units are produced?

a. $0.50
b. $1.00
c. $1.50
d. $2.00

Answer: C

23. If total fixed costs are $1,000, variable costs are constant at $5.00 per unit over the relevant
range of output and average total cost is $6, what is total variable cost?

a. $100
b. $1,000
c. $5,000
d. $6,000

Answer: C

24. If the marginal cost curve intersects the average variable cost curve at 1,000 units per day,
the rate of output at which average total cost is minimized is _____.

a. 1,000 units
b. more than 1,000 units
c. less than 500 units
d. 500 units

Answer: B
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25. Refer to Figure 8-1. Which of the following is true at the output level BT?

a. The firm’s fixed cost is RT.

b. The firm’s average variable cost is RT/BT.
c. The firm’s marginal cost is RT/RB.
d. The firm’s variable cost is AB

Answer: B
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26. In the figure given below, curves F, C, and G denote the total cost, the total variable cost, and
the total fixed cost of a firm.
Error: Reference source not found

Refer to Figure 8-1. The total fixed costs of the firm are identified by the distance:

a. RS.
b. ST.
c. BR.
d. BT.

Answer: A

27. Which of the following statements about marginal cost is correct?

a. When the marginal product of a variable input is rising, the marginal cost will fall.
b. When marginal cost equals average cost, average cost is at its maximum.
c. In the short-run, the marginal cost curve is parallel to the average variable cost curve.
d. When marginal cost is falling, total fixed cost is rising.

Answer: A

28. If the marginal product of the variable input rises and then falls, the MC curve will:
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a. rise and then fall.

b. fall and then rise.
c. downward sloping throughout.
d. not depend upon the path of the marginal product of the variable input.

Answer: B

29. Which of the following statements about the relationship between marginal cost and average
cost is correct?

a. When MC is falling, AC is rising.

b. AC equals MC at MC's lowest point.
c. When MC exceeds AC, AC must be rising.
d. When AC exceeds MC, MC must be rising.

Answer: C

30. Suppose labor is on the horizontal axis and capital is on the vertical axis. If the wage rate is
$15 per worker per hour and the rental rate of capital is $10 per unit per hour, what is the slope
of the isocost curve?

a. –0.667
b. –1.5
c. –10
d. –15

Answer: B

31. The expansion path identifies:

a. the least costly combination of inputs required to produce various levels of output.
b. the firm's demand curves for the inputs.
c. the various combinations of inputs that can be used to produce a given level of output.
d. the least-cost combination of outputs.

Answer: A

32. The point of tangency between an isoquant and the isocost line indicates:
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a. that in the long run fixed costs are equal to variable costs.
b. the maximum cost incurred for producing one unit of output.
c. that in the long run marginal costs tend to exceed fixed costs.
d. the minimum cost necessary to produce a particular level of output.

Answer: D

33. Suppose the wage rate is $15 per hour and the rental rate of capital is $10 per hour. If the
marginal product of labor is 60 and the marginal product of capital 10, the profit maximizing
firm should:

a. hire more labor and less capital.

b. utilize more capital and less labor.
c. maintain its current input mix of capital and labor.
d. employ more of both capital and labor.

Answer: A

34. Suppose a firm that uses labor and capital as the only inputs in production is currently on the
long-run expansion path. The marginal product of labor and capital at this least cost combination
are 60 units and 80 units respectively and the wage rate of labor is $6. Calculate the rental cost of
capital borne by the firm.

a. $10
b. $8
c. $5
d. $12

Answer: B

35. Consider a firm that uses labor and capital as the only inputs. Suppose labor is on the
horizontal axis and capital is on the vertical axis. Further, the expansion path has shifted down
and average cost curves have shifted up. Which of following provides the most likely
explanation for what has happened?

a. The wage rate decreased

b. The wage rate increased
c. The price of capital decreased
d. The price of capital increased

Answer: D
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36. Which of the following is guaranteed by increasing returns to scale in production

experienced in the long run?

a. Negative marginal costs

b. Zero average costs
c. Declining average costs
d. Rising marginal costs

Answer: C

37. Learning by doing is illustrated by:

a. a movement along the average cost curve to a lower cost.

b. a downward shift of the average cost curve.
c. a movement along the average cost curve to a higher cost.
d. an upward shift of the average cost curve.

Answer: B

38. An important determinant of market structure is:

a. the difference between short-run average cost and long-run average cost for a given rate of
output.
b. the elasticity of market demand where it intersects the industry supply curve.
c. the slope of the expansion path.
d. the level of output at which long-run average cost is at a minimum relative to market demand.

Answer: D

39. Assume that the long run average cost for a representative firm in an industry is minimized
at $10 per unit of output. Further assume that total industry output is X at a price of $10, and that
each firm in this industry produces 0.2X at an average cost of $10. Under these conditions we
would expect the market to have:

a. a single firm.
b. two firms.
c. infinite number of firms.
d. five firms.

Answer: D
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40. The minimum efficient scale is:

a. the level of output at which average cost per unit is smallest.

b. the scale of operations at which marginal cost is minimized.
c. the scale of operations at which average fixed cost per unit is minimized.
d. the level of output at which total cost is minimized.

Answer: A