Chapter 30

True-False Production
Topic: Production Diculty: 2
% Correct Responses: 0 Discrimination Index: 0
Correct Answer: True
30.1 If there are constant returns to scale in an industry, then in competitive equilibrium, prots
in that industry must necessarily be zero.

Topic: Production Diculty: 1

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: False
30.2 When there is production, a competitive equilibrium is not Pareto optimal unless there are
increasing returns to scale.

Topic: Production Diculty: 1

% Correct Responses: 82 Discrimination Index: 14
Correct Answer: True
30.3 The marginal rate of transformation between two goods indicates the rate at which an e-
cient economy would have to give up one good to obtain more of the other.

Topic: Production Diculty: 2

% Correct Responses: 68 Discrimination Index: 25
Correct Answer: False
30.4 There are two people and two goods, person A has comparative advantage in the production
of good 1 if and only if it takes person A less time to produce good 1 than it takes person B .
Multiple Choice Production

Topic: Production Diculty: 1

% Correct Responses: 77 Discrimination Index: 22
Correct Answer: A
30.1 A small company produces two goods, swords and plowshares. The company has 100 Type
Alpha employees and 100 Type Beta employees. If an Alpha devotes all his time to producing
swords, he can make 4 swords per week. If he devotes all his time to producing plowshares, he can
make 20 plowshares per week. A Beta can produce either 1 plowshare per week or 1 sword per
week. The company wants to produce 425 swords and as many plowshares as it can. How many
type Betas should it employ at making swords?
(a) 100
(b) 25
(c) 80
(d) 0
(e) None of the above.

Topic: Production Diculty: 1

% Correct Responses: 77 Discrimination Index: 22
Correct Answer: A
30.2 A small company produces two goods, swords and plowshares. The company has 100 Type
Alpha employees and 100 Type Beta employees. If an Alpha devotes all his time to producing
swords, he can make 3 swords per week. If he devotes all his time to producing plowshares, he
can make 6 plowshares per week. A Beta can produce either 1 plowshare per week or 1 sword per
week. The company wants to produce 314 swords and as many plowshares as it can. How many
type Betas should it employ at making swords?
(a) 100
(b) 14
(c) 85
(d) 0
(e) None of the above.
 MULTIPLE CHOICE 551

Topic: Production Diculty: 2

% Correct Responses: 64 Discrimination Index: 32
Correct Answer: B
30.3 Ernie and Burt both make pizzas for a living. Making a pizza consists of two tasks: making
the crust and applying toppings. Ernie can make crusts at the rate of 30 crusts per hour. He can
apply toppings at the rate of 15 toppings per hour. Burt can make crusts at the rate of 15 crusts
per hour. He can apply toppings at the rate of 30 toppings per hour. After years of operating
separate, one-man shops, they realize they can produce more eciently by combining operations
and dividing the tasks between them. How many more pizzas per hour can they make if they work
together and allocate tasks eciently than they made when they worked separately?
(a) 5
(b) 10
(c) 14
(d) 25
(e) 8

Topic: Production Diculty: 2

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: A
30.4 Mandy is a master woodcarver and Jerry is her apprentice. They will each work the same
number of hours making toy cars. Each car requires 4 wheels and 1 body. Mandy makes wheels
at the rate of 25 per hour and bodies at the rate of 10 per hour. Jerry makes wheels at the rate
of 10 per hour and bodies at the rate of 10 per hour. If they wish to maximize output, how many
wheels should Jerry make per hour?
(a) 3
(b) 2
(c) 10
(d) 6
(e) There is not enough information to determine the answer.
 CHAPTER 30 Production 552

Topic: Production Diculty: 1

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: C
30.5 Amy Canvas is an artist who produces sketches and paintings. She can produce 12 sketches
a week if she spends all of her workday sketching. She can produce 3 paintings per week if she
spends all of her workdays painting. The rate at which she produces either sketches or paintings
is independent of how many she makes. She can divide her time in any way she wishes between
sketching and painting. If you draw her production possibility frontier with sketches on the hori-
zontal axis and paintings on the vertical axis, the production possibility frontier will be
(a) the outer two sides of a rectangle.
(b) a downward sloping curve that gets steeper as you move to the left.
(c) a downward sloping straight line.
(d) an upward sloping straight line.
(e) an upward sloping curve that gets steeper as you move to the left.

Topic: Production Diculty: 2

% Correct Responses: 49 Discrimination Index: 25
Correct Answer: D
30.6 Last year a pestilential fungus ravaged the cocoa elds. The price of chocolate has risen
abruptly to $1 per ounce. The government is considering emergency measures to aid suering
chocolate addicts. One plan being considered is the Chocolate Relief Plan (CRP). This plan would
set a price ceiling of $.80 per ounce on chocolate. This would cause a shortage, so the CRP will
limit consumption to no more than 10 ounces of chocolate per person per week. At $.80 per ounce,
enough chocolate would be produced for everyone to have 10 ounces. Jill buys less than 10 ounces
per week at $1 per ounce, but would buy more than 10 ounces if the price dropped to $.80.
(a) Jill is denitely better o without the CRP.
(b) Jill is better o without the CRP if $1 is the competitive equilibrium price without the CRP.
(c) Jill is better o with CRP only if the industry is monopolized and the price exceeds marginal cost in the
absence of the CRP.
(d) Jill is denitely better o with the CRP.
(e) None of the above.
 MULTIPLE CHOICE 553

Topic: Production Diculty: 2

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: C
30.7 Robinson Crusoe's preferences over coconut consumption, C; and leisure, R; are represented
by the utility function, U(C; R) = CR. There are 48 hours available for Robinson to allocate be-
tween labor and leisure. If he works L hours, he will produce the square root of L coconuts. He
will choose to work:
(a) 8 hours.
(b) 12 hours.
(c) 16 hours.
(d) 20 hours.
(e) 24 hours.

Topic: Production Diculty: 2

% Correct Responses: 76 Discrimination Index: 23
Correct Answer: C
30.8 Robinson Crusoe spends 4 hours a day catching sh and picking coconuts. He can always
catch 2 sh per hour and he can always gather 3 coconuts per hour. His utility function is CF
where C is the number of coconuts he eats per day and F is the number of sh he eats per day.
How many sh will he choose to eat per day?
(a) 8
(b) 6
(c) 4
(d) 2
(e) 1
 CHAPTER 30 Production 554

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: A
30.9 Tip can write 5 pages of term paper or solve 20 workbook problems in an hour, while Spot
can write 4 pages of term paper or solve 12 workbook problems in an hour. If they each decide
to work a total of 8 hours and to share their output, then if they produce as many pages of term
paper as possible given that they produce 35 workbook problems:
(a) Spot will spend all of his time writing term papers and Tip will spend some time at each task.
(b) Tip will spend all of his time writing term papers and Spot will spend some time at each task.
(c) Both students will spend some time at each task.
(d) Spot will write term papers only and Tip will do workbook problems only.
(e) Tip will write term papers only and Spot will do workbook problems only.

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: A
30.10 Tip can write 2 pages of term paper or solve 2 workbook problems in an hour, while Spot
can write 5 pages of term paper or solve 20 workbook problems in an hour. If they each decide
to work a total of 6 hours and to share their output, then if they produce as many pages of term
paper as possible given that they produce 10 workbook problems:
(a) Spot will spend all of his time writing term papers and Tip will spend some time at each task.
(b) Tip will spend all of his time writing term papers and Spot will spend some time at each task.
(c) Both students will spend some time at each task.
(d) Spot will write term papers only and Tip will do workbook problems only.
(e) Tip will write term papers only and Spot will do workbook problems only.

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: A
30.11 Al and Bill are the only workers in a small factory which makes geegaws and doodads. Al
can make 5 geegaws per hour or 20 doodads per hour. Bill can make 4 geegaws per hour or 24
doodads per hour. Assuming that neither of them nds one task more odious than the other:
(a) Al has comparative advantage in producing geegaws and Bill has comparative advantage in producing
doodads.
(b) Bill has comparative advantage in producing geegaws and Al has comparative advantage in producing
doodads.
(c) Al has comparative advantage in producing both geegaws and doodads.
(d) Bill has comparative advantage in producing both geegaws and doodads.
(e) Both persons have comparative advantage in producing doodads.
 MULTIPLE CHOICE 555

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: A
30.12 Al and Bill are the only workers in a small factory which makes geegaws and doodads.
Al can make 3 geegaws per hour or 15 doodads per hour. Bill can make 2 geegaws per hour or 6
doodads per hour. Assuming that neither of them nds one task more odious than the other:
(a) Al has comparative advantage in producing geegaws and Bill has comparative advantage in producing
doodads.
(b) Bill has comparative advantage in producing geegaws and Al has comparative advantage in producing
doodads.
(c) Al has comparative advantage in producing both geegaws and doodads.
(d) Bill has comparative advantage in producing both geegaws and doodads.
(e) Both persons have comparative advantage in producing doodads.

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: A
30.13
Every consumer has a red-money income and a blue-money income and each commodity has a red
price and a blue price. You can buy a good by paying for it either with blue money at the blue
price, or with red money at the red price. Harold has 30 units of red money to spend and 48 units
of blue money to spend. The red price of ambrosia is 3 and the blue price of ambrosia is 8. The
red price of bubblegum is 1 and the blue price of bubblegum is 2. If ambrosia is on the horizontal
axis, and bubblegum on the vertical, axis, then Harold's budget set is bounded:
(a) by two line segments, one running from (0; 54) to (10; 24) and another running from (10; 24) to (16; 0).
(b) by two line segments one running from (0; 54) to (6; 30) and the other running from (6; 30) to (16; 0).
(c) by two line segments, one running from (0; 30)to (10; 24) and the other running from (10; 24) to (40; 0).
(d) a vertical line segment and a horizontal line segement, intersecting at (10; 24).
(e) a vertical line segment and a horizontal line segment, intersecting at (6; 30).
 CHAPTER 30 Production 556

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: A
30.14
Every consumer has a red-money income and a blue-money income and each commodity has a red
price and a blue price. You can buy a good by paying for it either with blue money at the blue
price, or with red money at the red price. Harold has 20 units of red money to spend and 48 units
of blue money to spend. The red price of ambrosia is 2 and the blue price of ambrosia is 6. The
red price of bubblegum is 1 and the blue price of bubblegum is 2. If ambrosia is on the horizontal
axis, and bubblegum on the vertical, axis, then Harold's budget set is bounded:
(a) by two line segments, one running from (0; 44) to (10; 24) and another running from (10; 24) to (18; 0).
(b) by two line segments one running from (0; 44) to (8; 20) and the other running from (8; 20) to (18; 0).
(c) by two line segments, one running from (0; 32)to (10; 24) and the other running from (10; 24) to (30; 0).
(d) a vertical line segment and a horizontal line segement, intersecting at (10; 24).
(e) a vertical line segment and a horizontal line segment, intersecting at (8; 20).

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: A
30.15 Robinson Crusoe has exactly 10 hours per day to spend gathering coconuts or catching
sh. He can catch 5 sh per hour or he can pick 15 coconuts per hour. His utility function is
U(F; C) = FC where F is his consumption of sh and C is his consumption of coconuts. If he allo-
cates his time in the best possible way between catching sh and picking coconuts, his consumption
will be the same as it would be if he could buy sh and coconuts in a competitive market where
the price of coconuts is 1.
(a) His income is 150, and the price of sh is 3.
(b) His income is 50, and the price of sh is 5.
(c) His income is 200 and the price of sh is 5.
(d) His income is 150 and the price of sh is 0.20.
(e) His income is 100 and the price of sh is 0.20.
 MULTIPLE CHOICE 557

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: A
30.16 Robinson Crusoe has exactly 10 hours per day to spend gathering coconuts or catching sh.
He can catch 3 sh per hour or he can pick 9 coconuts per hour. His utility function is U(F; C) = FC
where F is his consumption of sh and C is his consumption of coconuts. If he allocates his time
in the best possible way between catching sh and picking coconuts, his consumption will be the
same as it would be if he could buy sh and coconuts in a competitive market where the price of
coconuts is 1.
(a) His income is 90, and the price of sh is 3.
(b) His income is 30, and the price of sh is 3.
(c) His income is 120 and the price of sh is 3.
(d) His income is 90 and the price of sh is 0.33.
(e) His income is 60 and the price of sh is 0.33.

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: B
30.17 On a certain island there are only two goods, wheat and milk. The only scarce resource is
land. There are 1000 acres of land. An acre of land will produce either 20 units of milk or 30 units
of wheat. Some citizens have lots of land, some have just a little bit. The citizens of the island all
have utility functions of the form U(M; W) = MW . At every Pareto optimal allocation:
(a) the number of units of milk produced equals the number of units of wheat produced.
(b) total milk production is 10,000.
(c) all citizens consume the same commodity bundle.
(d) every consumer's marginal rate of substitution between milk and wheat is ,1.
(e) None of the above is true at EVERY Pareto optimal allocation.
 CHAPTER 30 Production 558

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: B
30.18 On a certain island there are only two goods, wheat and milk. The only scarce resource is
land. There are 1000 acres of land. An acre of land will produce either 11 units of milk or 31 units
of wheat. Some citizens have lots of land, some have just a little bit. The citizens of the island all
have utility functions of the form U(M; W) = MW . At every Pareto optimal allocation:
(a) the number of units of milk produced equals the number of units of wheat produced.
(b) total milk production is 5,500.
(c) all citizens consume the same commodity bundle.
(d) every consumer's marginal rate of substitution between milk and wheat is ,1.
(e) None of the above is true at EVERY Pareto optimal allocation.

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: C
30.19 In the process of producing one hormone-free, stress-free, happy cow, the New Age Cattle
Ranch produces one ton of natural, organic plant fertilizer. Demand for the ranch's cattle is given
by Pc = 2; 000 , 10Qc ; and demand for fertilizer is given by Pf = 500 , 3Qf . The cost of producing
Q cow-fertilizer bundles is C = 5; 000 + 300Q. To maximize prots, the ranch should
(a) produce 85 cow-fertilizer units; sell 85 cattle, and sell 85 tons of fertilizer.
(b) produce 85 cow-fertilizer units; sell 85 cattle, and sell 33.33 tons of fertilizer.
(c) produce 85 cow-fertilizer units; sell 85 cattle, and sell 83.33 tons of fertilizer.
(d) produce 84.62 cow-fertilizer units; sell 84.62 cattle, and sell 84.62 tons of fertilizer.
(e) produce 100 cow-fertilizer units; sell 100 cattle, and dispose of all the fertilizer in an environmentally
friendly manner.
 MULTIPLE CHOICE 559

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: C
30.20 In the process of producing one hormone-free, stress-free, happy cow, the New Age Cattle
Ranch produces one ton of natural, organic plant fertilizer. Demand for the ranch's cattle is given
by Pc = 2; 000 , 20Qc ; and demand for fertilizer is given by Pf = 500 , 4Qf . The cost of producing
Q cow-fertilizer bundles is C = 5; 000 + 400Q. To maximize prots, the ranch should
(a) produce 40 cow-fertilizer units; sell 40 cattle, and sell 40 tons of fertilizer.
(b) produce 40 cow-fertilizer units; sell 40 cattle, and sell 12.50 tons of fertilizer.
(c) produce 62.50 cow-fertilizer units; sell 40 cattle, and sell 62.50 tons of fertilizer.
(d) produce 43.75 cow-fertilizer units; sell 43.75 cattle, and sell 43.75 tons of fertilizer.
(e) produce 50 cow-fertilizer units; sell 50 cattle, and dispose of all the fertilizer in an environmentally friendly
manner.

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: A
30.21
For each carload of ore removed from the Matchless Mine, one pound of lead and one ounce of
silver is smelted. The cost of mining and processing one carload of ore is C(Q) = 500 + 2Q + 0:03Q2.
The demand for silver (per ounce) is Ps = 50 , 0:40Qs and the demand for lead (per pound) is
Pl = 5 , 0:03Ql. What should the owners of the Matchless Mine do to maximize prots (in the long
run)?
(a) Mine and process 57.61 carloads of ore, sell 57.61 ounces of silver, and sell 57.61 pounds of lead.
(b) Mine and process 62.50 carloads of ore, sell 62.50 ounces of silver, and sell 25 pounds of lead.
(c) Mine and process 83.33 carloads of ore, sell 55.81 ounces of silver, and sell 83.33 pounds of lead.
(d) Mine and process 83.33 carloads of ore, sell 62.50 ounces of silver, and sell 83.33 pounds of lead.
(e) Shut down the mine.
 CHAPTER 30 Production 560

Topic: Production Diculty: 0

% Correct Responses: 0 Discrimination Index: 0
Correct Answer: A
30.22
For each carload of ore removed from the Matchless Mine, one pound of lead and one ounce of
silver is smelted. The cost of mining and processing one carload of ore is C(Q) = 700 + 5Q + 0:01Q2.
The demand for silver (per ounce) is Ps = 40 , 0:50Qs and the demand for lead (per pound) is
Pl = 6 , 0:04Ql. What should the owners of the Matchless Mine do to maximize prots (in the long
run)?
(a) Mine and process 37.27 carloads of ore, sell 37.27 ounces of silver, and sell 37.27 pounds of lead.
(b) Mine and process 40 carloads of ore, sell 40 ounces of silver, and sell 10 pounds of lead.
(c) Mine and process 75 carloads of ore, sell 34.31 ounces of silver, and sell 75 pounds of lead.
(d) Mine and process 75 carloads of ore, sell 40 ounces of silver, and sell 75 pounds of lead.
(e) Shut down the mine.
Essay Production
Topic: Production Diculty: 2
% Correct Responses: 0 Discrimination Index: 0
30.1 On a certain small island, there are 100 units of labor and 200 units of capital. Two goods
can be produced. Good A is produced with xed coecients, using 1 unit of labor and 3 units of
capital per unit of output. Good B is produced with xed coecients, using 1 unit of labor and 1
unit of capital per unit of ouput. Let Xa denote the quantity of good A and Xb be the quantity of
good B that is produced. The set of feasible outputs combinations for this economy is restricted by
the fact that it cannot use more than 100 units of labor or 200 units of capital. a) Write down two
inequalities expressed in terms of Xa and Xb that must be satised at feasible output combinations.
b) Draw a graph showing the economy's production possibility set. Put numerical labels on your
graph so that this graph is precisely described.
Answer: a) Xa + Xb <= 100; 3Xa + Xb <= 200 b) Production possibility set is the area in the
intersection of the halfspaces from a.