Chapter 8

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TEST BANK CH-08 - Introduction to Microeconomics test

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Introduction to Microeconomics (Concordia University)
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Economics - Canadian Edition, 16e (Ragan)

Chapter 8 Producers in the Long Run
8.1 The Long Run: No Fixed Factors
1) The table below shows the number of units of labour and capital used in 4 alternative
production techniques for producing 1000 widgets per month.
Technique A B C D
Labour 25 35 50 30
Capital 50 35 25 60
TABLE 8-1
Refer to Table 8-1. If the price of labour is $5 and the price of capital is $10, which production
technique minimizes the costs of producing 1000 units of output?
A) A
B) B
C) C
D) D
E) Any of the techniques have the same cost.
Answer: C
Diff: 2 Type: MC
Topic: 8.1a. profit maximization and cost minimization
Skill: Applied
Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product
per dollar spent for all factors.
Graphics: Table
Category: Qualitative

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Technique A B C D
Labour 25 35 50 30
Capital 50 35 25 60
TABLE 8-1
Refer to Table 8-1. If the price of labour is $10 and the price of capital is $5, which production
technique minimizes the costs of producing 1000 units of output?
A) A
B) B
C) C
D) D
Answer: A
Diff: 2 Type: MC
Skill: Applied
Graphics: Table

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Technique A B C D
Labour 25 35 50 30
Capital 50 35 25 60
TABLE 8-1
Refer to Table 8-1. If the price of both labour and capital is $10, which production technique
minimizes the costs of producing 1000 units of output?
A) A
B) B
C) C
D) D
Answer: B
Diff: 2 Type: MC
Skill: Applied
Graphics: Table

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Technique A B C D
Labour 25 35 50 30
Capital 50 35 25 60
TABLE 8-1
Refer to Table 8-1. Which production technique is obviously technically inefficient?

A) A
B) B
C) C
D) D
E) All four techniques are inefficient.
Answer: D
Diff: 2 Type: MC
Skill: Applied
Graphics: Table
5) When there is no other way of producing a given level of output with a smaller total value of
inputs, the firm is operating at
A) minimum cost.
B) maximum output.
C) maximum profit.
D) optimal output.
E) maximum cost.
Answer: A
Diff: 1 Type: MC
Skill: Applied

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6) Which of the following conditions indicate cost minimization, assuming two inputs, labour (L)
and capital (K)?
A) PK ∙ MPK = PL ∙ MPL
B) MPL = MPK
C) MPK/PK = MPL/PL
D) MPK/PL = MPL/PK
E) PK = PL
Answer: C
Diff: 2 Type: MC
Skill: Recall
7) By expressing the cost-minimizing condition as MPK/MPL = PK/PL, we are able to see

A) how the firm determines its profit-maximizing output.
B) how the firm can adjust the marginal products of the factors of production to the prices of the
factors given by the market.
C) that the capital-labour ratio is fixed.
D) that the ratio of factor prices is constant over time.
E) that the firm is producing at a lower cost if the left-hand side of the equation is greater than
the right-hand side.
Answer: B
Diff: 1 Type: MC
Skill: Recall
8) For a firm with only two inputs, capital and labour, the condition MPK/MPL = PK/PL
guarantees that the firm is
A) at its profit-maximizing output but is not necessarily minimizing its costs.
B) minimizing its costs but is not necessarily maximizing its profits.
C) technically efficient but not economically efficient.
D) economically efficient but not technically efficient.
E) at its profit-maximizing and cost-minimizing level of output.
Answer: B
Diff: 3 Type: MC
Skill: Applied
9) A profit-maximizing firm will increase its use of capital and decrease its use of labour when
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the
A) marginal product of capital is higher than the marginal product of labour.
B) marginal product of capital, per dollar spent on capital, is greater than the marginal product of
labour, per dollar spent on labour.
C) average product of capital is higher than the average product of labour.
D) total product of capital is higher than the total product of labour.
E) marginal product of capital, per dollar spent on capital, is less than the marginal product of
Answer: B
Diff: 2 Type: MC
Skill: Recall
10) A cost-minimizing firm will increase its use of labour and decrease its use of capital when
the
A) marginal product of capital is higher than the marginal product of labour.
B) marginal product of capital, per dollar spent on capital, is greater than the marginal product of
C) average product of capital is higher than the average product of labour.
D) total product of capital is higher than the total product of labour.
E) marginal product of capital, per dollar spent on capital, is less than the marginal product of
Answer: E
Diff: 2 Type: MC
Skill: Recall
11) When a firm seeks to minimize costs of producing a given level of output, it needs to know
A) the price of its competitors' output.
B) the level of output that maximizes its profits.
C) the cost of the factors of production it uses.
D) the cost of the factors of production of its competitors.
E) the price of its output.
Answer: C
Diff: 2 Type: MC
Skill: Applied
12) The principle of substitution plays a central role in resource allocation because it
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demonstrates that
A) firms will find it profitable to make abundant use of relatively scarce factors.
B) methods of producing the same commodity will not differ from one country to another.
C) firms can use all factors of production interchangeably with no impact on their costs.
D) prices will be relatively low for those factors for which demand is high relative to supply.
E) relative factor prices reflect relative scarcities of factors in the economy and so firms will find
it profitable to make abundant use of relatively abundant factors.
Answer: E
Diff: 2 Type: MC
Skill: Recall
Learning Obj.: 8-2 Explain why profit‐maximizing firms substitute away from factors whose
prices have risen and toward factors whose prices have fallen.
13) Suppose a firm employs two inputs, X and Y, and that at their current levels of use
MPX/PX > MPY/PY. To minimize the cost of production, the firm should hire
A) more input Y and less input X.
B) more input X and less input Y.
C) more input Y only if its price falls.
D) more input X only if its price increases.
E) more input X only if its price decreases.
Answer: B
Diff: 2 Type: MC
Skill: Applied
14) When a cost-minimizing firm is faced with an increase in the relative price of labour, it
adjusts its factor usage so as to
A) increase the marginal product of capital relative to the marginal product of labour.
B) increase the marginal product of labour relative to the marginal product of capital.
C) use more labour per unit of output than before.
D) use more of both capital and labour per unit of output.
E) maintain the previous usage of labour.
Answer: B
Diff: 2 Type: MC
Skill: Applied
15) Suppose a firm is employing labour (L) and capital (K) such that MPK/MPL = PK/PL. If the
price of labour rises, the cost-minimizing firm should then
A) employ more labour and less capital because MPK/MPL > PK/PL.
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B) employ more capital and less labour because MPK/MPL > PK/PL.
C) employ more labour and less capital because MPK/MPL < PK/PL.
D) employ more capital and less labour because MPK/MPL < PK/PL.
E) do nothing.
Answer: B
Diff: 2 Type: MC
Skill: Applied
16) Suppose a firm is using 100 units of labour and 50 units of capital to produce 200 completed
client tax returns per day. The price of labour is $10 per unit and the price of capital is $5 per
unit. The MPL equals 2 and the MPK equals 5. In this situation,
A) the firm is minimizing its costs.
B) the firm should increase the use of both inputs.
C) the firm could lower its production costs by decreasing labour input and increasing capital
input.
D) the firm could lower its production costs by increasing labour input and decreasing capital
input.
E) the firm should decrease the use of both inputs.
Answer: C
Diff: 2 Type: MC
Skill: Applied
Category: Quantitative

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17) Suppose a firm is using 100 units of labour and 50 units of capital to produce 200 completed
client tax returns per day. The price of labour is $5 per unit and the price of capital is $2 per unit.
The MPL equals 5 and the MPK equals 2. In this situation, the firm
A) is minimizing its costs.
B) should increase the use of both inputs.
C) could lower its production costs by decreasing labour input and increasing capital input.
D) could lower its production costs by increasing labour input and decreasing capital input.
E) should decrease the use of both inputs.
Answer: A
Diff: 2 Type: MC
Skill: Applied
18) Suppose a firm is using 1500 units of labour and 20 units of capital to produce 100 tonnes of
mineral ore. The price of labour is $40 per unit and the price of capital is $1000 per unit. The
MPL equals 25 and the MPK equals 750. In this situation,
input.
input.
Answer: C
Diff: 3 Type: MC
Skill: Applied

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input.
input.
Answer: D
Diff: 3 Type: MC
Skill: Applied
input.
input.
Answer: A
Diff: 3 Type: MC
Skill: Applied
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input.
input.
Answer: C
Diff: 2 Type: MC
Skill: Applied
input.
input.
Answer: A
Diff: 2 Type: MC
Skill: Applied
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23) Consider a firm that uses only labour and capital as inputs. At the present use of labour and
capital, the MP of labour is four times the MP of capital, and the price of labour is twice the price
of capital. In order to minimize its costs, the firm should
A) substitute capital for labour until their marginal products are equal.
B) decrease both capital and labour.
C) decrease capital and increase labour.
D) increase both labour and capital.
E) stay at its present factor mix.
Answer: C
Diff: 2 Type: MC
Skill: Applied
24) Consider a firm that uses only labour and capital. At the present use of labour and capital, the
MP of labour is two times the MP of capital, and the price of labour is two times the price of
capital. In order to minimize its costs, the firm should
A) substitute capital for labour until their marginal products are equal.
E) not alter its present factor mix.
Answer: E
Diff: 2 Type: MC
Skill: Applied
25) Consider a firm that uses only labour and capital. At the present use of labour and capital, the
MP of labour is twice the MP of capital, and the price of labour is four times the price of capital.
In order to minimize its costs, the firm should
A) increase capital and decrease labour.
E) maintain its present factor mix.
Answer: A
Diff: 2 Type: MC
Skill: Applied
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26) Suppose capital costs $10 per unit and labour costs $5 per unit. For a profit-maximizing firm
operating at its optimal factor mix, if the marginal product of capital is 50, the marginal product
of labour must be
A) 10.
B) 20.
C) 25.
D) 50.
E) 100.
Answer: C
Diff: 2 Type: MC
Skill: Applied
27) Suppose capital costs $6 per unit and labour costs $3 per unit. If the marginal product of
capital is 3 and the marginal product of labour is 6, the cost-minimizing firm should
A) employ more of both capital and labour.
B) employ less of both capital and labour.
C) employ more capital and less labour.
D) employ less capital and more labour.
E) not change its current factor use.
Answer: D
Diff: 2 Type: MC
Skill: Applied
capital is 12 and the marginal product of labour is 6, the cost-minimizing firm should
Answer: E
Diff: 2 Type: MC
Skill: Applied
capital is 100 and the marginal product of labour is 30, a cost-minimizing firm should
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Answer: C
Diff: 2 Type: MC
Skill: Applied
capital is 200 and the marginal product of labour is 60, a cost-minimizing firm should
A) employ more capital and less labour.
B) employ more of both capital and labour.
C) employ less of both capital and labour.
Answer: A
Diff: 2 Type: MC
Skill: Applied
31) Suppose capital costs $8 per unit and labour costs $4 per unit. For a profit- maximizing firm
operating at its optimal factor mix, if the marginal product of capital is 60, the marginal product
of labour must be
A) 10.
B) 20.
C) 30.
D) 90.
E) 120.
Answer: C
Diff: 3 Type: MC
Skill: Applied
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32) Suppose capital costs $2000 per unit and labour costs $50 per unit. For a profit- maximizing
firm operating at its optimal factor mix, if the marginal product of labour is 10, the marginal
product of capital must be
A) 40.
B) 50.
C) 100.
D) 400.
E) 500.
Answer: D
Diff: 3 Type: MC
Skill: Applied
33) Suppose capital costs $280 per unit and labour costs $16 per unit. For a profit- maximizing
firm operating at its optimal factor mix, if the marginal product of capital is 70, the marginal
product of labour must be
A) 4.
B) 6.
C) 8.
D) 12.
E) 16.
Answer: A
Diff: 3 Type: MC
Skill: Applied
capital is 50 and the marginal product of labour is 50, the firm should ________ in order to
minimize its costs of producing its output.
A) employ more capital and labour
B) employ less capital and labour
C) employ more capital and less labour
D) employ less capital and more labour
E) not change its current factor use
Answer: D
Diff: 2 Type: MC
Skill: Applied
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35) Suppose a firm employs two kinds of inputs, capital at $100 per unit, and labour at $25 per
unit. If the marginal product of capital is 50, then the firm should ________ in order to minimize
its production costs.
A) employ more capital and less labour
B) employ more labour and less capital
C) employ more labour and more capital
D) not change its current factor use
E) There is insufficient information to make a recommendation.
Answer: E
Diff: 3 Type: MC
Skill: Applied
36) The following table shows the marginal products of capital (K) and labour (L) for various
methods for Firm ABC to produce 1000 toys per day.
Production
Method MPK MPL
A 50 4
B 45 8
C 40 12
D 35 16
E 30 20
F 25 24
G 20 28
TABLE 8-2
Refer to Table 8-2. As this firm switches from production method A to production method G,
production is
A) moving farther and farther away from cost minimization.
B) becoming more capital intensive and less labour intensive.
C) becoming more profitable.
D) becoming more labour intensive and less capital intensive.
E) remaining at a cost-minimizing level of output.
Answer: B
Diff: 3 Type: MC
Skill: Applied
Graphics: Table
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Production
Method MPK MPL
A 50 4
B 45 8
C 40 12
D 35 16
E 30 20
F 25 24
G 20 28
TABLE 8-2
Refer to Table 8-2. If capital costs $6 per unit and labour costs $4 per unit, which production
method minimizes the cost of producing 1000 toys per day?
A) method B
B) method C
C) method D
D) method E
E) method F
Answer: D
Diff: 3 Type: MC
Skill: Applied
Graphics: Table
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Production
Method MPK MPL
A 50 4
B 45 8
C 40 12
D 35 16
E 30 20
F 25 24
G 20 28
TABLE 8-2
Refer to Table 8-2. Suppose capital costs $6 per unit and labour costs $4 per unit and the firm is
employing production method A. How should this firm adjust its use of capital and labour to
minimize costs?
B) employ less capital and more labour
C) employ more capital and more labour
D) employ less capital and less labour
E) There is insufficient information to know.
Answer: A
Diff: 2 Type: MC
Skill: Applied
Graphics: Table
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Production
Method MPK MPL
A 50 4
B 45 8
C 40 12
D 35 16
E 30 20
F 25 24
G 20 28
TABLE 8-2
Refer to Table 8-2. Suppose the firm is employing production method G. How should this firm
adjust its use of capital and labour in order to minimize costs?
B) employ less capital and more labour
C) employ more capital and labour
D) employ less capital and labour
E) There is insufficient information to know.
Answer: E
Diff: 3 Type: MC
Skill: Applied
Graphics: Table
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Production
Method MPK MPL
A 50 4
B 45 8
C 40 12
D 35 16
E 30 20
F 25 24
G 20 28
TABLE 8-2
Refer to Table 8-2. Suppose capital costs $80 per unit and labour costs $24 per unit. Which
production method minimizes the cost of producing 1000 toys per day.
A) method B
B) method C
C) method D
D) method E
E) method F
Answer: B
Diff: 3 Type: MC
Skill: Applied
Graphics: Table
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41) Canada has a much lower population density than does Japan. Therefore, the price of land,
relative to the price of labour, is lower in Canada than in Japan. Consider a Canadian firm and a
Japanese firm, both producing rice, both having access to the same technologies, and both
striving to minimize their costs. The Canadian firm will use the two inputs, land and labour, in
such a way that its land/labour ratio is
A) equal to that of the Japanese firm.
B) lower than that of the Japanese firm.
C) higher than that of the Japanese firm.
D) equal to one.
E) indeterminate as there is insufficient information to know.
Answer: C
Diff: 2 Type: MC
Skill: Applied
42) Canada has a much lower population density than does Japan. Therefore, the price of land,
relative to the price of labour, is lower in Canada than in Japan. Consider a Canadian firm and a
Japanese firm, both producing rice, both having access to the same technologies, and both
striving to minimize costs. Now suppose that the relative price of land rises in Canada but
remains the same in Japan. The effect on the use of inputs will be to
A) increase the land/labour ratio for both the Canadian and the Japanese firms.
B) decrease the land/labour ratio for both the Canadian and the Japanese firms.
C) increase the land/labour ratio for the Canadian firm.
D) decrease the land/labour ratio for the Canadian firm.
E) not change the land/labour ratio for either firm.
Answer: D
Diff: 2 Type: MC
Skill: Applied
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43) One hundred years ago, in North America and Europe it was commonplace for middle class
households to employ housemaids. As you know, this is quite rare today. Most such households
now have dishwashers, washing machines and dryers. What is an explanation of this change?
A) Over long periods of time, labour is always replaced by capital.
B) Over long periods of time, capital is always replaced by labour.
C) Households substituted away from a factor whose price was falling (labour) and toward a
factor whose price was rising (capital).
D) Households substituted away from an increasingly expensive factor (labour) and toward an
increasingly inexpensive factor (capital).
E) The marginal product of labour was falling over time while the marginal product of capital
was rising.
Answer: D
Diff: 2 Type: MC
Skill: Applied
44) In recent years, garbage collection has changed dramatically. Twenty-five years ago a crew
of up to 4 or 5 workers and 1 truck collected residential garbage. Now collection is often done by
one driver and 1 more fully automated truck. What is an explanation for this change?
A) Over long periods of time, labour is always replaced by capital.
B) Over long periods of time, capital is always replaced by labour.
C) Firms and municipalities substituted away from an increasingly expensive factor (labour) and
toward an increasingly inexpensive factor (capital).
D) Firms and municipalities substituted away from a factor whose price was falling (labour) and
toward a factor whose price was rising(capital).
E) The marginal product of labour was falling over time while the marginal product of capital
was rising.
Answer: C
Diff: 2 Type: MC
Skill: Applied
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45) In the 1890s nearly 50 percent of the Canadian population worked on a farm. Today, that
number is less than 2 percent. One important explanation for this change is
A) the response to a rising price of labour and a falling relative price of capital.
B) the response to a rising price of capital and a falling relative price of labour.
C) that over long periods of time, labour is always replaced by capital.
D) that over long periods of time, capital is always replaced by labour.
E) that the marginal product of labour was falling over time while the marginal product of capital
was rising.
Answer: A
Diff: 3 Type: MC
Skill: Applied
46) Which of the following are likely to be sources of increasing productivity?

1. substitution toward labour and away from capital (with constant technology)
2. better-trained labour
3. increases in technological know-how
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2 only
E) 2 and 3 only
Answer: E
Diff: 1 Type: MC
Skill: Applied
47) The long-run average cost (LRAC) curve for a firm shows
A) the lowest unit cost at which the firm can produce a given output.
B) the highest unit costs of producing a given output.
C) the operation of the law of diminishing returns.
D) what happens to the fixed costs in the long run.
E) the same cost and output levels as the short-run average cost curve.
Answer: A
Diff: 1 Type: MC
Topic: 8.1b. long-run costs and the LRAC curve
Skill: Recall
Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves.
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48) Which of the following best describes a firm's long-run average cost curve? The LRAC
curve
A) shows the minimum cost of producing each possible level of output with a fixed factor.
B) shows the relationship between marginal cost and output given that the economically most
efficient method of production is employed.
C) is the boundary between attainable and unattainable cost levels, with known production
technologies and given factor prices.
D) is horizontal in most situations.
E) is an envelope of short-run average variable cost curves.
Answer: C
Diff: 2 Type: MC
Skill: Recall
49) In defining a firm's long-run average cost curve,

A) factor prices are held constant and technology is assumed to change.
B) factor prices are held constant and the quantity of factors of production used is varied.
C) factor prices are varied and the quantity of factors of production is held constant.
D) technology, factor prices, and the quantity of factors of production are all varied.
E) the time period must be longer than one year.
Answer: B
Diff: 2 Type: MC
Skill: Recall
50) Suppose a firm is experiencing increasing returns to scale. This is shown graphically by
A) a downward-sloping long-run average cost curve.
B) an upward-sloping long-run average cost curve.
C) a horizontal long-run average cost curve.
D) a vertical long-run average cost curve.
E) None of the above; returns to scale have nothing to do with the shape of the long-run average
cost curve.
Answer: A
Diff: 1 Type: MC
Skill: Recall
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51) In the long run, a profit-maximizing firm producing a given level of output chooses the
production method that
A) produces that output at the lowest possible cost.
B) maximizes the marginal product of all factors.
C) maximizes the marginal product of labour.
D) leads to a flat total cost curve.
E) MINIMIZES LABOUR INPUT.
Answer: A
Diff: 1 Type: MC
Skill: Recall
52) What is meant by the term "increasing returns to scale"?

A) output rises proportionately less than inputs, increasing per unit cost of production in the short
run
B) output rises proportionately more than inputs, resulting in increasing per unit costs
C) output rises proportionately more than inputs, resulting in lower per unit costs in the long run
D) it has the same meaning as increasing costs of production
E) it implies that the long-run average cost curve is shifting downward
Answer: C
Diff: 2 Type: MC
Skill: Recall
53) In the long run, the law of diminishing marginal returns

A) is not relevant because there are no fixed factors of production.
B) sometimes holds, depending on the production process.
C) does hold, regardless of production process.
D) is exactly the same as in the short run.
E) does not hold because technology is a variable.
Answer: A
Diff: 2 Type: MC
Skill: Recall
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54) Assume a firm is using 10 units of capital and 10 units of labour to produce 10 widgets per
hour. By doubling both inputs the result is a doubling of output. This firm is experiencing
A) constant returns to scale.
B) economies of scale.
C) diseconomies of scale.
D) increasing costs.
E) decreasing returns.
Answer: A
Diff: 2 Type: MC
Skill: Applied
55) Assume a firm is using 10 units of capital and 10 units of labour and is producing 10 widgets
per hour. Now it doubles both inputs, resulting in output of 30 widgets per hour. This firm is
experiencing
A) decreasing returns to scale.
B) increasing returns to scale.
C) constant returns to scale.
D) diseconomies of scale.
E) increasing costs.
Answer: B
Diff: 2 Type: MC
Skill: Applied
56) Assume a firm is using 10 units of labour and 10 units of capital and is producing 10 units of
output per hour. Now both inputs are doubled, resulting in output rising to 18 units per hour. The
firm is experiencing
A) constant returns to scale.
C) decreasing returns to scale.
D) economies of scale.
E) decreasing costs.
Answer: C
Diff: 2 Type: MC
Skill: Applied
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57) Assume a firm is using 6 units of capital and 6 units of labour to produce 6 baskets. Now it
doubles both inputs resulting in a new total of 16 baskets being produced. This firm is
experiencing
A) decreasing returns to scale.
C) constant returns to scale.
D) diseconomies of scale.
E) increasing costs.
Answer: B
Diff: 2 Type: MC
Skill: Applied
58) Suppose a firm experiences decreasing returns to scale. This is shown graphically by
A) a downward-sloping long-run average cost curve.
B) an upward-sloping long-run average cost curve.
C) a downward-sloping long-run marginal-cost curve.
D) a horizontal long-run average cost curve.
E) an increasing marginal product curve.
Answer: B
Diff: 1 Type: MC
Skill: Applied
59) "The bigger the volume, the lower the cost, and we pass these savings on to you" is a
familiar advertising slogan. It implies essentially that the
A) total cost of the firm will remain constant as output expands.
B) firm expects to experience increasing returns over the relevant range of output.
C) average fixed cost will decline or remain constant over the long run.
D) consumer is able to pay less today because the total cost of the firm is expected to decline
tomorrow.
E) firm is altruistic.
Answer: B
Diff: 2 Type: MC
Skill: Applied
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60)
FIGURE 8-1
Refer to Figure 8-1. Which of the four firms in the figure is displaying decreasing returns to scale
at all output levels?
A) Firm A
B) Firm B
C) Firm C
D) Firm D
E) All firms are displaying increasing returns to scale.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Graphics: Graph
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61)
FIGURE 8-1
Refer to Figure 8-1. Which of the four firms in the figure is displaying constant returns to scale
at all output levels?
A) Firm A
B) Firm B
C) Firm C
D) Firm D
E) None of the four firms is displaying constant returns to scale.
Answer: B
Diff: 1 Type: MC
Skill: Recall
Graphics: Graph
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62)
FIGURE 8-1
Refer to Figure 8-1. For which of the four firms in the figure is output increasing more than in
proportion to inputs for all output levels?
A) Firm A
B) Firm B
C) Firm C
D) Firm D
E) none of the four firms
Answer: A
Diff: 2 Type: MC
Skill: Recall
Graphics: Graph
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63)
FIGURE 8-1
Refer to Figure 8-1. For which of the four firms is output increasing less than in proportion to
inputs for all output levels?
A) Firm A
B) Firm B
C) Firm C
D) Firm D
Answer: C
Diff: 2 Type: MC
Skill: Recall
Graphics: Graph
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64)
FIGURE 8-1
Refer to Figure 8-1. For which of the four firms would the family of short-run average total cost
curves lie below the LRAC?
A) Firm A
B) Firm B
C) Firm C
D) Firm D
Answer: E
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
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65) The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the
SRATC curves refer to different plant sizes.
FIGURE 8-2
Refer to Figure 8-2. Increasing returns to scale occur over the output range
A) 0 to Q1 only.
B) Q1 to Q2 only.
C) Q2 to Q3 only.
D) 0 to Q3 only.
E) beyond Q3 only.
Answer: D
Diff: 1 Type: MC
Skill: Applied
Graphics: Graph
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FIGURE 8-2
Refer to Figure 8-2. Decreasing returns to scale occur over the output range
A) 0 to Q1 only.
B) Q1 to Q2 only.
C) Q3 to Q5 only.
D) 0 to Q3 only.
E) beyond Q3 only.
Answer: E
Diff: 1 Type: MC
Skill: Applied
Graphics: Graph
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FIGURE 8-2
Refer to Figure 8-2. In the long run, the lowest-cost level of output achievable by this firm is
A) Q2.
B) Q3.
C) Q4.
D) Q5.
E) not shown in the diagram
Answer: B
Diff: 1 Type: MC
Skill: Applied
Graphics: Graph
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68) Consider the long-run average cost curve for a firm. Any point representing a cost and output
combination that is below the LRAC curve
A) may represent actual cost and production levels in the short run.
B) represents less efficient cost levels than points on the long-run average cost curve.
C) is attainable only when all factors are variable.
D) represents unattainable cost levels, given current technologies.
E) is attainable if the firm minimizes its costs according to the "principle of substitution."
Answer: D
Diff: 2 Type: MC
Skill: Recall
69) Which of the following paired concepts are equivalent to each other?
A) constant costs; economies of scale
B) increasing returns; decreasing costs
C) increasing returns; increasing costs
D) increasing costs; economies of scale
E) increasing returns; diseconomies of scale
Answer: B
Diff: 2 Type: MC
Skill: Recall
70) Which of the following paired concepts are equivalent to each other?
A) constant costs; economies of scale
B) decreasing returns; decreasing costs
C) increasing returns; increasing costs
D) decreasing costs; economies of scale
E) increasing returns; diseconomies of scale
Answer: D
Diff: 2 Type: MC
Skill: Applied
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71) Of the following, which is the least likely to represent a firm's long-run decision?
A) What should be the size and design of a firm's new plant?
B) Should the firm choose a method of production that uses relatively more capital than labour?
C) By how much should output be expanded from existing plants?
D) Should the firm invest resources in the development of better technologies?
E) What technique (technology) is the best to use under current factor pricing?
Answer: C
Diff: 2 Type: MC
Skill: Applied
72) The long-run average cost curve is an envelope curve, with each point associated with a
short-run average cost curve
A) tangent at that point.
B) crossing that point from above.
C) lying below it.
D) intersecting that point.
E) at its minimum point.
Answer: A
Diff: 1 Type: MC
Skill: Applied
73) The point of tangency between the short-run average total cost (SRATC) curve and the long-
run average cost (LRAC) curve occurs
A) at the point of minimum SRATC.
B) at a point where average total cost is falling but the marginal cost is rising.
C) at a point where both the average total cost and the marginal cost are rising.
D) at an output level for which the quantity of the fixed factor is optimal.
E) only when the LRAC curve is at its minimum.
Answer: D
Diff: 2 Type: MC
Skill: Recall
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74) In the long run, decreasing returns to scale are likely to be caused by
A) diseconomies of scale associated with management problems.
B) a decrease in factor prices.
C) increasing specialization of labour.
D) diminishing returns to the variable factor.
E) decreasing costs.
Answer: A
Diff: 2 Type: MC
Skill: Recall
75) Which of the following statements concerning long-run and short-run cost curves is correct?
A) A short-run average cost curve can fall below the long-run average cost curve.
B) The short-run average cost curve for the optimal plant size is tangent to the long-run average
cost curve at all levels of output of the fixed factor.
C) The long-run average cost curve envelops a whole family of short-run marginal cost curves.
D) The minimum point of the long-run average cost curve will correspond to the minimum point
on a single short-run average cost curve.
E) Both the long-run and short-run average cost curves show the lowest cost of producing any
output when all factors are variable.
Answer: D
Diff: 2 Type: MC
Skill: Recall
76) A short-run average total cost curve will touch the long-run average cost curve at a level of
output only
A) where the short-run cost curve is downward sloping.
B) where the short-run cost curve is upward sloping.
C) when the quantity of the fixed factor being employed is at the optimal level for that level of
output.
D) where the short-run cost curve is downward-sloping and the quantity of the fixed factor is
optimal.
E) by coincidence.
Answer: C
Diff: 2 Type: MC
Skill: Recall
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77) Consider the short-run and long-run cost curves for a firm. If factor prices decrease,
A) the firm will move down along both its long-run and short-run average cost curves.
B) the firm will move down along its long-run average cost curve only.
C) both the long-run and short-run average cost curves will shift downward.
D) there will be a downward shift in the long-run average cost curve but not in the short-run
average cost curve.
E) there will be no change in the cost curves in the long run.
Answer: C
Diff: 2 Type: MC
Skill: Applied
78) Which of the following cost curves demonstrates increasing returns to scale?
A) a downward-sloping long-run average cost curve
B) an upward-sloping long-run average cost curve
C) a horizontal long-run average cost curve
D) a vertical long-run average cost curve
E) Returns to scale have nothing to do with the shape of the long-run average cost curve.
Answer: A
Diff: 1 Type: MC
Skill: Recall
79) For many firms, the LRAC curve is U-shaped. The downward-sloping portion of the LRAC
curve can be explained by
A) economies of scale.
B) diminishing returns to the variable factor.
C) diminishing returns to the fixed factor.
D) rising prices of the fixed factor.
E) decreasing short-run marginal cost.
Answer: A
Diff: 2 Type: MC
Skill: Recall
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80) Suppose Farmer Smith hires 4 workers and leases 2 tractors and 15 hectares of farmland for
one growing season, and produces 120 000 bushels of crop. The next year he hires 8 workers and
leases 4 tractors and 30 hectares of farmland, and produces 210 000 bushels of crop. This firm
(the farmer) is exhibiting ________ returns to scale.
A) decreasing
B) increasing
C) constant
D) marginal
E) variable
Answer: A
Diff: 2 Type: MC
Skill: Applied
A) decreasing
B) increasing
C) constant
D) marginal
E) variable
Answer: B
Diff: 2 Type: MC
Skill: Applied
A) decreasing
B) increasing
C) constant
D) marginal
E) variable
Answer: C
Diff: 2 Type: MC
Skill: Applied
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83) Suppose a shipping company employs 2000 workers, operates 400 delivery trucks and makes
1.5 million domestic shipments in one year. The next year they increase their workforce to 3000
workers, operate 600 trucks and make 2.8 million domestic shipments in one year. This firm is
exhibiting ________ returns to scale.
A) decreasing
B) increasing
C) constant
D) marginal
E) variable
Answer: B
Diff: 2 Type: MC
Skill: Applied
84) A short-run average total cost curve and a long-run average cost curve are tangent
A) where the short-run cost curve is downward sloping.
B) where the short-run cost curve is upward sloping.
C) when the plant size is at the optimal level for that level of output.
D) where the short-run cost curve is downward sloping and the plant size is optimal.
E) by coincidence.
Answer: C
Diff: 2 Type: MC
Skill: Recall
85) In the long run, a profit-maximizing firm produces any given level of output by choosing the
production method that
A) maximizes the marginal product of all factors.
B) equates the marginal product of all factors.
C) equates the average cost per unit of all factors.
D) is associated with a flat total cost curve.
E) produces that output at the lowest possible cost.
Answer: E
Diff: 1 Type: MC
Skill: Recall
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86) Why do we refer to the long-run average cost curve as a "boundary"?

A) The points on the curve represent a boundary between fixed factor prices and variable factor
prices.
B) The points below the curve represent cost levels that are unattainable given current
technology and factor prices.
C) The points below the curve represent cost levels attainable to the firm only with adjustment of
all factor prices.
D) The points above the curve represent costs that are unattainable given current technology and
factor prices.
E) The points above the curve represent cost levels attainable to the firm only with adjustment of
all factor prices.
Answer: B
Diff: 2 Type: MC
Skill: Recall
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FIGURE 8-2
Refer to Figure 8-2. What is the difference between the SRATC curves and the LRAC curve?
A) The SRATC curves show the optimal plant size when all factors of production are variable,
whereas the LRAC shows the lowest cost attainable associated with each LRAC curve.
B) The SRATC curves show the lowest attainable cost of production at each level of output
when all factors are variable in the short run, whereas the LRAC curve shows the same in the
long run.
C) The LRAC is an envelope curve, joining the minimum points on all SRATC curves.
D) For the SRATC curves, one or more of the factors of production is fixed, whereas for the
LRAC curve, all factors of production are variable.
E) The SRATC curves show diseconomies of scales, whereas the LRAC curve shows economies
of scale.
Answer: D
Diff: 2 Type: MC
Skill: Recall
Graphics: Graph
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FIGURE 8-2
Refer to Figure 8-2. The points of tangency between each of the three SRATC curves and the
LRAC curve show
A) technically inefficient methods of production, given that they lie above the LRAC.
B) the lowest cost attainable, given that the plant size is the largest it can possibly be.
C) the output that is possible when all factors of production are fixed.
D) the lowest cost attainable for any given plant size.
E) optimal plant sizes in the long run.
Answer: D
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
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FIGURE 8-2
Refer to Figure 8-2. The minimum efficient scale is achieved by this firm at output level
A) Q1.
B) Q2.
C) Q3.
D) Q4.
E) Q5.
Answer: C
Diff: 1 Type: MC
Skill: Applied
Graphics: Graph
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FIGURE 8-2
Refer to Figure 8-2. If this firm is producing at point B, then

A) this firm is producing a level of output that is technically inefficient in the long run.
B) this firm is experiencing decreasing returns to scale.
C) this firm could produce the same level of output at a lower cost with plant size 2.
D) it should employ more of its variable factors of production.
E) plant size 1 is optimal.
Answer: C
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
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FIGURE 8-2
Refer to Figure 8-2. Suppose this firm is producing at point B. Why might this firm continue to
produce at point B, rather than immediately move to point C and produce the same level of
output (Q2), at a lower cost?
A) If this firm continues to produce at point B for any period of time, it must be because it is not
profit-maximizing.
B) If this firm continues to produce at point B for any period of time, it must be because it is not
cost-minimizing.
C) There can be a significant time delay while the firm readjusts its plant size, during which time
it remains at point B.
D) The firm may choose to remain at point B until the price of its output increases enough to
justify building a new plant.
E) The firm cannot produce at point C because there is no SRATC curve through this point.
Answer: C
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
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FIGURE 8-2
Refer to Figure 8-2. Should this profit-maximizing firm ever consider moving from point E
(output level Q3 on SRATC2) to point F (output level Q5 on SRATC3)?
A) No, because they are already producing at their lowest possible cost at point E.
B) Yes, because the firm can take advantage of economies of scale.
C) Yes, because SRATC3 is the optimal plant size for this firm.
D) No, because producing at point F implies a higher cost per unit of output.
E) Yes, if the product price rises enough to lead the firm to expand to plant size 3.
Answer: E
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
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FIGURE 8-2
Refer to Figure 8-2. Suppose this firm is producing output level Q3 with plant size 2. Now
suppose this firm changes to plant size 3 and is producing output level Q5. We can say that
A) the firm is then operating with the optimal plant size.
B) this firm has experienced economies of scale.
C) output has increased more than in proportion to the increase in inputs.
D) output has increased exactly in proportion to the increase in inputs.
E) output has increased less than in proportion to the increase in inputs.
Answer: E
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
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8.2 The Very Long Run: Changes in Technology
1) Consider the short-run and long-run cost curves for a firm. If there is an improvement in the
firm's technology,
A) the firm will move to a lower point on both its long-run and short-run average cost curves.
B) the firm will move to a lower point on its long-run average cost curve only.
C) both the long-run and short-run average cost curves will shift downward.
D) there will be a downward shift in the long-run average cost curve but not in the short-run
average cost curve.
E) there will be no change in the cost curves in the long run.
Answer: C
Diff: 2 Type: MC
Topic: 8.2. technological change
Skill: Recall
Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated
to innovate.
2) Economists collect and analyze data on output per worker and output per hour of work. What
are they trying to measure by doing so?
A) the ratio of marginal products of factors
B) the principle of substitution
C) diminishing marginal returns
D) returns to scale
E) productivity
Answer: E
Diff: 1 Type: MC
Skill: Recall
to innovate.
3) A change in the technique for producing an existing product is known as

A) product innovation.
B) investment.
C) invention.
D) an increase in productivity.
E) process innovation.
Answer: E
Diff: 1 Type: MC
Skill: Recall
to innovate.
4) With respect to innovation, which of the following statements is true?

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A) Government policy cannot influence the rate of innovation.

B) Innovation is exogenous to the economic system.
C) The utilization rate of existing plant and equipment and its durability are independent of the
pace of innovation.
D) The principal incentive for innovation does not appear to be related to profits.
E) Innovation is often endogenous to the economic system.
Answer: E
Diff: 1 Type: MC
Skill: Recall
to innovate.
5) What is the definition of productivity?

A) output produced per unit of input
B) output produced by a combination of two or more inputs
C) the cost of a unit of output
D) a measure of input used
E) the efficient use of technology
Answer: A
Diff: 2 Type: MC
Skill: Recall
to innovate.
6) Which of the following factors is most important as a source of sustained growth in material
living standards?
A) population increase
B) changing relative factor prices
C) decrease in cost of capital
D) technological improvement
E) capital-labour substitution
Answer: D
Diff: 2 Type: MC
Skill: Recall
to innovate.
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7) A very-long-run consideration that could change a firm's production function is

A) rising cost of the factors of production.
B) increasing returns to scale of operation.
C) an improvement in education that increases the quality of the economy's labour force.
D) diminishing returns.
E) size of the plant.
Answer: C
Diff: 1 Type: MC
Skill: Applied
to innovate.
8) Although capital is a variable factor in the long run, once chosen, it often becomes a fixed
factor for a long time. A profit-maximizing firm must therefore select a method of production
that is
A) economically efficient at current factor prices.
B) technologically advanced beyond methods currently used.
C) labour intensive, as labour is always a variable factor.
D) economically efficient at current factor prices and sufficiently flexible to adapt to changing
factor prices over time.
E) adaptable to wide ranges of output over time.
Answer: D
Diff: 2 Type: MC
Skill: Recall
to innovate.
9) The fact that new methods to extract oil are developed as oil prices increase suggests
A) that methods of production do not change in response to factor-price changes.
B) that invention is exogenous.
C) that invention does respond to economic signals and is endogenous.
D) that oil has many close substitutes.
E) nothing; changes in technology occur regardless of market prices.
Answer: C
Diff: 1 Type: MC
Skill: Applied
to innovate.
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10) The creation of a new product is called

A) process innovation.
B) a rise in productivity.
C) creative destruction.
D) investment.
E) product innovation.
Answer: E
Diff: 1 Type: MC
Skill: Recall
to innovate.
11) Suppose RioTintoAlcan is considering the construction of a new aluminum smelter in

Northern Quebec, the operation of which requires a great deal of electricity. Suppose also that
the price of electricity is predicted to rise significantly in the near future. As a result, the firm
decides to build a plant using existing technology that is more expensive but uses less electricity
per tonne of aluminum produced. This behaviour is an example of
A) short-run profit maximization.
B) short-run cost minimization.
C) the long-run principle of substitution.
D) innovation away from changes in factor prices.
E) long-run economies of scale.
Answer: C
Diff: 3 Type: MC
Skill: Applied
to innovate.
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12) Suppose RioTintoAlcan is considering the construction of a new aluminum smelter in

Northern Quebec, the operation of which requires a great deal of electricity. Suppose also that
the price of electricity is predicted to rise significantly in the near future. As a result, the firm
decides to embark on new research and development which leads to the development of a new
production technique that uses less electricity per tonne of aluminum produced. This is an
example of
A) the marginal rate of substitution between factors.
B) innovation away from increases in factor prices.
C) short-run cost minimization.
D) short-run profit maximization.
E) long-run economies of scale.
Answer: B
Diff: 3 Type: MC
Skill: Applied
to innovate.
13) Suppose Commercial Footwear Inc. is making a cost-minimizing decision about the level of
output to produce with a given technology. Which of the following is a long-run decision?
A) Should we build a larger shoe manufacturing facility?
B) Should we hire additional labour to work in the existing facility?
C) Should we change to a lower-cost leather supplier?
D) Should we invest in research in the hope of developing a new technology for shoe
production?
E) Should we hire more accountants to investigate ways to reduce our corporate tax payments?
Answer: A
Diff: 3 Type: MC
Skill: Applied
to innovate.
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14) Which of the following statements most accurately makes the distinction between the long
run and the very-long run with respect to the long-run average cost (LRAC) curve?
A) In the long run, the LRAC curve is shifting down, whereas in the very-long run the firm is
moving along the existing LRAC curve.
B) In the long run, the LRAC curve is shifting up, whereas in the very-long run the firm is
moving along the existing LRAC curve.
C) In the long run, the firm is moving along the existing LRAC curve, whereas in the very-long
run, the LRAC curve is shifting up.
D) In the long run, the firm is moving along the existing LRAC curve, whereas in the very-long
run, the LRAC curve is shifting down.
E) There is no distinction between the long run and the very-long run with respect to the LRAC
curve.
Answer: D
Diff: 3 Type: MC
Skill: Recall
to innovate.
8A-1 Isoquants
1) What information is displayed by an isoquant?

A) the whole set of technically efficient factor combinations that can produce varying levels of
output
B) various levels of output that can be produced with different factor combinations
C) various levels of output that can be produced with a fixed factor combination
D) the whole set of technically efficient factor combinations that can produce a single level of
output
E) the alternative factor combinations that require the same expenditure
Answer: D
Diff: 2 Type: MC
Topic: 8-appendix.1. isoquant analysis
Skill: Recall
Learning Obj.: 8-8A-1 Isoquants
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2) What does the slope of an isoquant measure?

A) the marginal rate of (technical) substitution between factors
B) the average capital/labour ratio
C) the marginal cost of a given level of output
D) the ratio of prices of inputs
E) the ratio of prices of goods
Answer: A
Diff: 1 Type: MC
Skill: Recall
3) Movement from one point to another along an isoquant implies a change in

A) output levels, holding factor combinations constant.
B) factor combinations, holding output constant.
C) product prices.
D) the level of output, independent of what happens to factor combinations.
E) money income.
Answer: B
Diff: 1 Type: MC
Skill: Recall
4) Which of the following is indicated by the downward slope of an isoquant?

A) the diminishing marginal productivity of a variable factor
B) the diminishing marginal productivity of a fixed factor
C) that each factor input has a negative marginal productivity
D) a change in relative factor prices, with output held constant
E) that a reduction in the use of one factor requires an increase in the use of the other factor in
order to keep output constant
Answer: E
Diff: 1 Type: MC
Skill: Recall
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5) Isoquants are usually drawn convex to the origin. This convex shape reflects the assumption
that
A) both factors are subject to the law of diminishing returns.
B) the variable factor is subject to the law of diminishing returns.
C) the marginal productivity of all factors is positive.
D) the marginal productivity of all factors is negative.
E) both factors are subject to increasing returns.
Answer: A
Diff: 2 Type: MC
Skill: Recall
6) Suppose a firm moves from one isoquant to an isoquant further from the origin on an isoquant
map. This movement indicates that
A) factor prices for all inputs have increased.
B) the price of capital has decreased.
C) the firm has increased its plant size.
D) the firm has hired more labour.
E) the firm has increased its level of output.
Answer: E
Diff: 2 Type: MC
Skill: Applied
8A-2 Cost Minimization
1) The slope of a firm's isocost line is equal to the ratio of

A) the marginal products of its factors.
B) the marginal rate of substitution between factors.
C) the factor prices.
D) total variable cost to total cost.
E) product prices.
Answer: C
Diff: 1 Type: MC
Topic: 8-appendix.2. isoquant analysis and cost minimization
Skill: Recall
Learning Obj.: 8-8A-2 Cost minimization
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2) A firm's least-cost position for producing a given output level occurs at that point where
A) the isocost line intersects the highest isoquant.
B) the isocost and isoquant intersect the horizontal axis.
C) the isoquant is closest to the origin.
D) the isocost line and the isoquant are tangent to each other.
E) the isocost and isoquant intersect the vertical axis.
Answer: D
Diff: 2 Type: MC
Skill: Recall
3) Movement from one point to another along an isocost line implies a change in
A) output levels, holding factor combinations constant.
B) factor combinations, holding expenditure constant.
C) factor prices.
D) the level of output, independent of what happens to factor combinations.
E) expenditure.
Answer: B
Diff: 1 Type: MC
Skill: Applied
4) An individual isocost line is a downward sloping straight line. The constant slope reflects
A) decreasing factor prices.
B) increasing factor prices.
C) that each factor price has a negative value.
D) a change in relative factor prices.
E) constant factor prices.
Answer: E
Diff: 2 Type: MC
Skill: Applied
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5) A firm operates at its least-cost position for a given level of output by equating
A) the marginal product of each factor.
B) the marginal product per dollar spent for each factor.
C) the price of each input.
D) the total expenditure on each input.
E) the average product for each factor.
Answer: B
Diff: 2 Type: MC
Skill: Recall
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6)
FIGURE 8-3
Refer to Figure 8-3. A firm that is producing an output of 1000 units will minimize its costs at
point
A) A.
B) B.
C) C.
D) D.
E) halfway between B and D.
Answer: B
Diff: 1 Type: MC
Skill: Applied
Graphics: Graph
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7)
FIGURE 8-3
Refer to Figure 8-3. A firm that is producing an output of 2000 units will minimize its costs at
point
A) A.
B) B.
C) C.
D) D.
E) There is not enough information provided to be sure.
Answer: E
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
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8)
FIGURE 8-3
Refer to Figure 8-3. The firm is initially minimizing the cost of producing 1000 units of output.
Suppose the factor prices then change such that the price of capital (K) rises and the price of
labour (L) falls. If the firm decides to keep its output unchanged, it will move toward the point
A) A.
B) B.
C) C.
D) D.
E) There is not enough information to know.
Answer: C
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
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9)
FIGURE 8-3
Refer to Figure 8-3. The firm is initially minimizing the cost of producing 1000 units of output.
Suppose the factor prices then change such that the price of capital (K) falls and the price of
labour (L) rises. If the firm decides to leave its output unchanged, it will now move toward the
point
A) A.
B) B.
C) C.
D) D.
E) There is not enough information to know.
Answer: A
Diff: 2 Type: MC
Skill: Applied
Graphics: Graph
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10)
FIGURE 8-3
Refer to Figure 8-3, with the isoquants and isocost line as shown. A firm that is producing at
point A can reduce its costs for producing 1000 units by employing
A) less capital and less labour.
B) more capital and less labour.
C) less capital and more labour.
D) more capital and more labour.
E) less capital and the same labour.
Answer: C
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11)
FIGURE 8-3
Refer to Figure 8-3, with the isoquants and isocost line as shown. A firm that is producing at
point C can reduce its costs for producing 1000 units by employing
A) less capital and less labour.
B) more capital and less labour.
C) less capital and more labour.
D) more capital and more labour.
E) less labour and the same capital.
Answer: B
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12)
FIGURE 8-3
Refer to Figure 8-3. The firm is initially producing 1000 units and minimizing its production cost
at point B. Suppose the prices of capital and labour each fall by 20%. If the firm wishes to
continue producing the same level of output it will
A) move toward point A.
B) remain at point B.
C) move toward point C.
D) move toward point D.
E) move to the left of point B.
Answer: B
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13)
FIGURE 8-3
Refer to Figure 8-3. The firm is initially producing 2000 units and minimizing its production cost
at point D. Suppose the prices of capital and labour each rise by 10%. If the firm wishes to
continue producing the same level of output it will
A) move toward point A.
B) move toward point B.
C) move toward point C.
D) remain at point D.
E) move to the right of point D.
Answer: D
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14)
FIGURE 8-3
Refer to Figure 8-3. The firm is initially operating at point B. If prices of both factors fell by
25% and the firm wished to continue expending the same amount on each resource (while
continuing to maintain efficiency) the firm would
A) move towards point D.
B) move toward point A.
C) shift towards the origin.
D) move toward point C.
E) stay at point B.
Answer: A
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15)
FIGURE 8-3
Refer to Figure 8-3. The firm is initially operating at point B. An improvement in technology
would be represented by
A) a shift to the curve indicated by Q = 2000.
B) a movement toward point D.
C) a movement toward the origin.
D) a new isoquant map.
E) a new isocost curve.
Answer: D
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16) The figure below shows the isocost lines facing a firm producing golf tees.
FIGURE 8-4
Refer to Figure 8-4. This firm can be a "cost minimizer" by producing on isocost line
A) 1 only.
B) 2 only.
C) 3 only.
D) 4 only.
E) Not able to determine from the information provided.
Answer: E
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FIGURE 8-4
Refer to Figure 8-4. Given the information provided about the isocost lines, we know that the per
unit price of capital is ________ and the per unit price of labour is ________.
A) $20; $50
B) $50; $20
C) $2; $5
D) $5; $2
E) not determinable; not determinable
Answer: D
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FIGURE 8-4
Refer to Figure 8-4. If the cost-minimizing firm is initially producing at a point on isocost line 1
and then moves to a point on isocost line 3, we can say that
A) the per unit prices of capital and labour have each doubled.
B) the output of golf tees has doubled.
C) the per unit prices of capital and labour have fallen by 50%.
D) the firm's level of output has increased.
E) the firm is producing more efficiently.
Answer: D
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FIGURE 8-4
Refer to Figure 8-4. The firm that is facing the isocost lines as shown will minimize its cost of
production of any given output level if it employs capital and labour such that the ratio of the
marginal product of labour to the marginal product of capital (MPL/MPK) is equal to
A) 5/2.
B) 5.
C) 2.
D) 2/5.
E) Not able to determine from the information provided.
Answer: D
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20) The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.
FIGURE 8-5
Refer to Figure 8-5. This firm will minimize its costs of producing 2000 golf tees at point
A) A.
B) B.
C) C.
D) D.
E) E.
Answer: C
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FIGURE 8-5
Refer to Figure 8-5. Suppose this firm is producing 4000 golf tees with 10 units of capital and 25
units of labour (point G). The marginal rate of substitution between capital and labour is
A) 2.5.
B) 0.4.
C) 100.
D) 40.
E) 0.025.
Answer: B
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FIGURE 8-5
Refer to Figure 8-5. At each of points A, C, E and G on the isoquant map we know that
A) the firm is at its cost-minimizing position for an output level of 4000 golf tees.
B) the firm can adjust its employment of factors to reduce its total cost, with output unchanged.
C) the firm has adjusted the factor prices to equate the ratio of marginal products of the factors.
D) the ratio of the marginal utilities of capital and labour is equal to the ratio of the prices of
capital and labour.
E) the ratio of the marginal products of capital and labour is equal to the ratio of the prices of
capital and labour.
Answer: E
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FIGURE 8-5
Refer to Figure 8-5. The cost-minimizing factor combination for producing 2000 golf tees is
A) 10 units of capital and 25 units of labour.
B) 12 units of capital and 30 units of labour.
C) 6 units of capital and 15 units of labour.
D) 8 units of capital and 20 units of labour.
E) 4 units of capital and 10 units of labour.
Answer: C
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FIGURE 8-5
Refer to Figure 8-5. Suppose this firm is producing 3000 golf tees and is at point F on the
isoquant map. Which of the following is true?
A) MPK/MPL is equal to PK/PL.
B) MPK/MPL is greater than 5/2.
C) MPL/MPK is greater than 5/2.
D) MPK/MPL is equal to 2/5.
E) MPK/MPL is equal to 5/2.
Answer: B
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FIGURE 8-5
Refer to Figure 8-5. Suppose this firm is producing 3000 golf tees and is at point F on the
isoquant map. In order to maintain its output and minimize costs this firm should
A) not change its use of factors.
B) move to an isoquant closer to the origin.
C) move to an isocost line further from the origin.
D) employ more labour and less capital.
E) employ more capital and less labour.
Answer: E
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FIGURE 8-5
Refer to Figure 8-5. Suppose there is a change in relative factor prices and the cost-minimizing
method of producing 2000 golf tees is now at point D. If the total cost of producing 2000 golf
tees is still $60, it must be the case that
A) the price of labour fell and the price of capital remained constant.
B) the price of labour and capital both fell.
C) the price of labour rose and the price of capital fell.
D) the price of labour fell and the price of capital rose.
E) the price of labour and capital both rose.
Answer: D
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FIGURE 8-5
Refer to Figure 8-5. Suppose the firm is currently producing at point E and the prices of capital
and labour each increase by 30%. If the firm wants to minimize the cost of producing the same
level of output, the firm's chosen factor combination would be at point
A) A.
B) C.
C) E.
D) G.
E) not determinable from the information provided.
Answer: C
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FIGURE 8-5
Refer to Figure 8-5. As this firm is increasing its production of golf tees, it is experiencing
________ returns to scale.
A) constant
B) decreasing
C) increasing
D) diminishing
E) Not determinable from the information provided.
Answer: C
Diff: 3 Type: MC
Skill: Applied
Graphics: Graph
82

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Chapter 8

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TEST BANK CH-08 - Introduction to Microeconomics test

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Economics - Canadian Edition, 16e (Ragan)

8.1 The Long Run: No Fixed Factors

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Refer to Table 8-1. Which production technique is obviously technically inefficient?

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7) By expressing the cost-minimizing condition as MPK/MPL = PK/PL, we are able to see

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A) employ more of both capital and labour.

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methods for Firm ABC to produce 1000 toys per day.

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46) Which of the following are likely to be sources of increasing productivity?

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49) In defining a firm's long-run average cost curve,

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52) What is meant by the term "increasing returns to scale"?

53) In the long run, the law of diminishing marginal returns

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86) Why do we refer to the long-run average cost curve as a "boundary"?

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Refer to Figure 8-2. If this firm is producing at point B, then

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