Chapter 5

Suppose the production function is given by Q = 3K + 4L. What is the average product of
capital when 10 units of capital and 10 units of labor are employed?
a) 3
b) 4
c) 7
d) 45

Which of the following statements is incorrect?

a) Fixed costs do not vary with output.
b) Sunk costs are those costs that are forever lost after they have been paid.
c) Fixed costs are always greater than sunk costs.
d) Fixed costs could be positive when sunk costs are zero.

If the production function is Q = KL and capital is fixed at 1 unit, then the marginal product
of labor when L = 25 is:
a) ¼.
b) 1/10.
c) 15.
d) None of the answers are correct.

If the last unit of input increases total product, we know that the marginal product is:
a) positive.
b) negative.
c) zero.
d) indeterminate.

For the production function Q = 5.2K + 3.8L, if K = 16 and L = 12, we know that MPK is:
a) 16.
b) 5.2.
c) 3.8.
d) 12.

Fixed costs exist only in:

a) the long run.
b) capital-intensive markets.
c) the short run.
d) labor-intensive markets.

Given a cost function C(Q) = 200 + 14Q + 8Q2, what is the marginal cost function?
a) 14 + 16Q
b) 14Q + 8Q2
c) 200 + 8Q2
d) 14 + 16Q2
Variable factors of production are the inputs that a manager:
a) may adjust in order to alter sales.
b) may adjust in order to alter production.
c) cannot adjust in the short run.
d) cannot adjust in the long run.

It is profitable to hire labor so long as the:

a) MPL is greater than wage.
b) MPL is less than wage.
c) VMPL is less than wage.
d) VMPL is greater than wage.

The marginal rate of technical substitution:

a) determines the rate at which a producer can substitute between two inputs in order to
increase one additional unit of output.
b) is the absolute value of the slope of the isoquant.
c) is the absolute value of marginal revenue.
d) is constant along the isoquant curve.

The difference between average total costs and average variable costs is:
a) marginal cost.
b) average fixed cost.
c) fixed cost.
d) None of the statements is correct.

Economies of scale exist whenever long-run average costs:

a) increase as output is increased.
b) decrease as output is increased.
c) remain constant as output is increased.
d) None of the statements is correct.

Suppose the production function is given by Q = 4K + 6L. What is the average product of
capital when 10 units of capital and 5 units of labor are employed?
a) 14
b) 10
c) 7
d) 5

In the short run, the marginal cost curve crosses the average total cost curve at:
a) a point just below the average fixed cost curve.
b) the minimum point of the average total cost curve.
c) the maximum point of the average total cost curve.
d) the point where the average total cost curve and average variable cost curve intersect.

Suppose that production for good X is characterized by the following production function, Q
= K0.5L0.5, where K is the fixed input in the short run. If the per-unit rental rate of capital, r, is
$25 and the per-unit wage, w, is $15, then the variable cost of using 81 units of capital and 9
units of labor is:
a) $2,160.
b) $2,025.
c) $135.
d) There is insufficient information to determine the variable costs.

Suppose the w = $20 and r = $30. The isocost line for a firm in this industry is:
a) C = 20K + 30L.
b) K = 0.033C − 0.66L.
c) 1.5L + K = 0.5C.
d) Depends entirely on the functional form of the production function.

Suppose that production for good X is characterized by the following production function, Q
= 4K0.5L0.5, where K is the fixed input in the short run. If the per-unit rental rate of capital, r,
is $86.80 and the per-unit wage, w, is $20, then the average total cost of using 25 units of
capital and 49 units of labor is:
a) $5.25.
b) $22.50.
c) $31.00.
d) There is insufficient information to determine the average total costs.

Suppose the production function is given by Q = min{K, L}. How much output is produced
when 10 units of labor and 9 units of capital are employed?
a) 0
b) 4
c) 9
d) 13

The production function Q = L.5K.5 is called:

a) Cobb Douglas.
b) Leontief.
c) linear.
d) None of the answers are correct.

The production function for a competitive firm is Q = K.5L.5. The firm sells its output at a
price of $10, and can hire labor at a wage of $5. Capital is fixed at one unit and costs $2. The
maximum profits are:
a) 3.
b) 10.
c) 15.
d) None of the answers are correct.

What is the value marginal product of labor if: P = $10, MPL = $25, and APL = 40?
a) $10,000
b) $1,000
c) $400
d) $250
Isoquants are normally drawn with a convex shape because:
a) inputs are perfectly substitutable.
b) inputs are perfectly complementary.
c) inputs are not perfectly substitutable.
d) inputs are not perfectly complementary.

Costs that are forever lost after they have been paid are:
a) production costs.
b) fixed costs.
c) sunk costs.
d) variable costs.

For the cost function C(Q) = 1000 + 14Q + 9Q2 + 3Q3, what is the marginal cost of producing
the fourth unit of output?
a) $42
b) $295
c) $230
d) $116

The long run is defined as:

a) the horizon in which the manager can adjust all factors of production.
b) the horizon in which there are only fixed factors of production.
c) the horizon in which there are both fixed and variable factors of production.
d) greater than one year.

The demand for an input is:

a) sloping upward.
b) the VMP of the input.
c) determined by MPL = W.
d) derived from input owner's profit-maximizing condition.

An isocost line:
a) represents the combinations of w and K that cost the firm the same amount of money.
b) represents the combinations of K and L that cost the firm the same amount of money.
c) represents the combinations of r and w that cost the firm the same amount of money.
d) has a convex shape.

Cost complementarity exists in a multiproduct cost function when:

a) the average cost of producing one output is reduced when the output of another
product is increased.
b) the average cost of producing one output is increased when the output of another
product is increased.
c) the marginal cost of producing one output is increased when the output of another
product is decreased.
d) the marginal cost of producing one output is reduced when the output of another
product is increased.

The costs of production include:

a) the costs that appear on the income statements.
 b) the opportunity costs foregone by producing a given product.
c) accounting costs.
d) accounting costs and opportunity costs.

For the cost function C(Q) = 50 + 4Q + 2Q2, the total variable cost of producing 7 units of
output is:
a) 32.
b) 102.
c) 126.
d) None of the answers are correct.

Which of the following cost functions exhibits economies of scope over the specified output
range?
a) C(Q1, Q2) = 10 + 0.5Q1Q2 + (Q1)2 + (Q2)2, for all Q1 < 3 and Q2 < 3.
b) C(Q1, Q2) = 10 + 3Q1Q2 + (Q1)2 + (Q2)2, for all Q1 > 0 and Q2 > 0.
c) C(Q1, Q2) = 10 + 0.5Q1Q2 + (Q1)2 + (Q2)2, for all Q1 > 2 and Q2 > 2.
d) C(Q1, Q2) = 10 + 3Q1Q2 +(Q1)2 + (Q2)2, for all Q1 > 4 and Q2 > 4.

Suppose that production for good X is characterized by the following production function, Q
= K0.5L0.5, where K is the fixed input in the short run. If the per-unit rental rate of capital, r, is
$25 and the per-unit wage, w, is $15, then the average variable cost of using 81 units of
capital and 9 units of labor is:
a) $5.
b) $75.
c) $80.
d) There is insufficient information to determine the average variable costs.

For given input prices, isocosts closer to the origin are associated with:
a) lower costs.
b) the same costs.
c) higher costs.
d) initially lower, then higher costs.

Suppose that production for good X is characterized by the following production function, Q
= K0.5L0.5, where K is the fixed input in the short run. If the per-unit rental rate of capital, r, is
$15 and the per-unit wage, w, is $25, then the average fixed cost of using 9 units of capital
and 81 units of labor is:
a) $5.
b) $75.
c) $80.
d) There is insufficient information to determine the average fixed costs.