Question 1

A plant uses machinery and waste water to produce steel. The owner of the plant wants to maintain an output of 10,000 tons a day, even though the government has just imposed a $100 per gallon tax on using waste water. The reduction in the amount of waste water that results from the imposition of this tax depends on:

Accepted Answer

The reduction in waste water usage depends on the relative productivity of waste water compared to machinery. The firm will adjust its input mix based on the marginal productivity ratio to minimize costs while maintaining output.

Question 2

Which of the following is the user cost of capital per dollar of capital?

Accepted Answer

The answer of Which of the following is the user...

Question 3

The total cost of producing a given level of output is:

Accepted Answer

The total cost of producing a given level of output is minimized when the ratio of marginal product to input price is equal for all inputs. This is a reflection of the principle of cost minimization where firms allocate their resources in a way that equalizes the marginal benefit per dollar spent on each input, ensuring the most efficient use of resources.

Question 4

Figure 7.3.2
-Refer to Figure 7.3.2 above. Which of the following changes, which causes the move from A to B?

Accepted Answer

The price of one of the inputs affects the producer's budget constraint, causing the move from A to B.

Question 5

An isocost line reveals the

Accepted Answer

An isocost line represents all the combinations of inputs that a firm can purchase for a given total cost, showing the trade-offs between the amounts of two inputs (like labor and capital) that the firm can afford given its budget.

Question 6

When an isocost line is just tangent to an isoquant, we know that:

Accepted Answer

When an isocost line is just tangent to an isoquant, it means that the firm is producing output at the minimum cost possible. This is because any movement away from this point (in either direction) will increase the cost of production without increasing output, which is inefficient for the firm. Therefore, option A is the correct answer.

Question 7

Figure 7.3.3
-Refer to Figure 7.3.3 above. The expansion path in the figure leads to the construction of:

Accepted Answer

The expansion path shows the cost-minimizing combination of inputs for different levels of output, which is used to derive the long run total cost curve.

Question 8

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm:

Accepted Answer

To minimize cost, the firm should use the inputs in a way that the marginal product per dollar spent on each input is equal. In this case,

MPL = 3 and wage rate = $10 per hour
MPPK = 5 and capital rate = $21 per hour

So, for labor, the marginal product per dollar spent is 3/10 = 0.3 and for capital, the marginal product per dollar spent is 5/21 = 0.24.

Since the marginal product per dollar spent on labor is higher than that of capital, the firm should use more labor and less capital to minimize its cost of producing the given output level. Therefore, the correct answer is C.

Question 9

A firm's expansion path is:

Accepted Answer

The expansion path is a graph that shows the least-cost input combination to produce each level of output given input prices. Therefore, it is represented by a curve that connects the tangency points between isoquants and isocost lines, indicating the most efficient input combination to produce each level of output.

Question 10

If the capital market is competitive, the user cost of capital equals:

Accepted Answer

In a competitive capital market, the user cost of capital reflects the opportunity cost of investing capital in one investment over another. This includes the rental rate of capital (the cost of using the capital), the return in that market (what you earn from the investment), and the rate of return of investing elsewhere (opportunity cost). Therefore, all of the options are correct.

Question 11

Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be:

Accepted Answer

The slope of the isocost curve is determined by the ratio of the prices of the inputs, which in this case is the wage rate to the rental cost of capital. The slope is -wage/rental cost = -$20/$25 = -4/5. This negative sign indicates that an increase in capital input must be offset by a decrease in labor input to keep costs constant, reflecting the trade-off between labor and capital.

Question 12

Figure 7.3.1
-Refer to Figure 7.3.1 above. Which point on the graph shows the optimal combination of inputs?

Accepted Answer

Point B represents the optimal combination of inputs because it is where the isoquant is tangent to the isocost line, maximizing output while minimizing cost.

Question 13

In the long run, which of the following is considered a variable cost?

Accepted Answer

In the long run, all costs are considered variable because firms have the flexibility to adjust all inputs. This includes wages, research and development, raw materials, and capital machinery and equipment.

Question 14

Figure 7.3.4
-Refer to Figure 7.3.4 above. The long run cost curve comes from:

Accepted Answer

The long run cost curve is derived from an expansion path which shows the optimal combination of inputs for every level of output.

Question 15

Suppose that the price of labor (  ) is $10 and the price of capital (  ) is $20. What is the equation of the isocost line corresponding to a total cost of $100?

Accepted Answer

The equation of the isocost line is given by TC = PL + PK, where TC is total cost, PL is the price of labor, PK is the price of capital, and L and K are the quantities of labor and capital used, respectively. Substituting the given values, we get 100 = 10L + 20K. Therefore, the correct choice is B.

Question 16

Figure 7.3.4
-At the optimum combination of two inputs,

Accepted Answer

At the optimum combination of two inputs, the slopes of the isoquant and isocost curves are equal, costs are minimized for the production of a given output, and the marginal rate of technical substitution equals the ratio of input prices. This means all of the statements A, B, and C are correct, making D the correct choice.

Question 17

Which of the following is NOT an expression for the cost minimizing combination of inputs?

Accepted Answer

The answer of Which of the following is NOT an...

Question 18

With its current levels of input use, a firm's MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis). This implies:

Accepted Answer

The answer of With its current levels of input use,...

Question 19

A firm wants to minimize the total cost of producing 100 tons of dynamite. The firm uses two factors of production, chemicals and labor. The combination of chemicals and labor that minimizes production costs will be found where:

Accepted Answer

The answer of A firm wants to minimize the total...

Question 20

An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in a river. Use the following two statements to answer this question: I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent.
II) The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees.

Accepted Answer

Both statements are true and support each other. If a steel firm can easily substitute capital (such as investing in water treatment technology) for waste materials, they will be more effective in reducing their effluent and therefore pay less in fees. This creates an incentive for the firm to invest in cleaner production processes.

Quiz 7: The Cost of Production

Which of the following is the user cost of capital per dollar of capital?

The total cost of producing a given level of output is:

Figure 7.3.2 -Refer to Figure 7.3.2 above. Which of the following changes, which causes the move from A to B?

An isocost line reveals the

When an isocost line is just tangent to an isoquant, we know that:

Figure 7.3.3 -Refer to Figure 7.3.3 above. The expansion path in the figure leads to the construction of:

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm:

A firm's expansion path is:

If the capital market is competitive, the user cost of capital equals:

Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis) . If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be:

Figure 7.3.1 -Refer to Figure 7.3.1 above. Which point on the graph shows the optimal combination of inputs?

In the long run, which of the following is considered a variable cost?

Figure 7.3.4 -Refer to Figure 7.3.4 above. The long run cost curve comes from:

Suppose that the price of labor ( ) is $10 and the price of capital ( ) is $20. What is the equation of the isocost line corresponding to a total cost of $100?

Figure 7.3.4 -At the optimum combination of two inputs,

Which of the following is NOT an expression for the cost minimizing combination of inputs?

With its current levels of input use, a firm's MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis) . This implies:

A firm wants to minimize the total cost of producing 100 tons of dynamite. The firm uses two factors of production, chemicals and labor. The combination of chemicals and labor that minimizes production costs will be found where: