Question 1

The marginal rate of technical substitution (MRTS)along an isoquant:
A)is equal to the price ratio at all points along an isoquant.
B)is equal to the ratio of the marginal utilities of the two goods.
C)is equal to the ratio of the marginal products of the two inputs.
D)remains constant as we alter the combinations of the two inputs.

Accepted Answer

The marginal rate of technical substitution (MRTS) is the amount by which the quantity of one input must be reduced when one additional unit of another input is used so as to keep the level of output constant. It is equal to the ratio of the marginal products of the two inputs. At any point along an isoquant, the production function gives the maximum output that can be produced with a given combination of inputs. Therefore, the MRTS remains constant as we alter the combinations of the two inputs. Nonetheless, it is not the price ratio or the ratio of the marginal utilities of the two goods.

Question 2

Assume a firm produces 500 units of a good by using two inputs, capital and labor, whose per unit prices are $10 and $4.Assume also that the marginal physical product of the last unit of capital is 30 and the marginal physical product of the last unit of labor is 10.Is this firm minimizing its costs of producing 500 units of output?
A)No, because the marginal products of the two inputs are not equal.
B)No, because the MRTS and the price ratio for the two inputs are not equal.
C)No, because the prices of the two inputs are not equal.
D)The answer cannot be determined without more information.

Accepted Answer

The firm is not minimizing its costs because the MRTS (Marginal Rate of Technical Substitution) is not equal to the price ratio of the two inputs. In this case, MRTS = MPL/MPK = 10/30 = 1/3 and the price ratio = $4/$10 = 2/5. Since the MRTS and price ratio are not equal, the firm can reduce its costs by adjusting the mix of inputs used.

Question 3

A movement down along a given isoquant causes the marginal rate of technical substitution to:
A)increase.
B)stay the same.
C)decrease.
D)cannot be determined without additional information.

Accepted Answer

When moving down along a given isoquant, the input that is being reduced (held constant) is being substituted for the input that is increasing. As more and more of the increasing input is added, the value of its marginal product falls, and the value of the marginal product of the decreasing input rises. Thus, the marginal rate of technical substitution falls, indicating that more and more of the decreasing input are required to offset the reduction in the increasing input.

Question 4

Assuming capital and labor are substitutes, an improvement in technology that affects only the productivity of capital would cause a firm to employ more capital but leave the amount of labor employed unchanged.

Accepted Answer

An improvement in technology that increases the productivity of capital makes capital more attractive to use, potentially leading to a substitution effect where firms use more capital in place of labor, thus potentially reducing the amount of labor employed.

Question 5

Assume a firm produces 500 units of a good by using two inputs, capital and labor, whose per unit prices are $10 and $4.Assume also that the marginal physical product of the last unit of capital is 30 and the marginal physical product of the last unit of labor is 10.To minimize costs this firm should employ:
A)the existing combination of resources.
B)more labor and less capital.
C)more capital and less labor.
D)both more labor and more capital.

Accepted Answer

To minimize costs, a firm should employ resources in such a way that the ratio of the marginal product to the price of each input is equal. Here, the marginal product per dollar for capital is 30/$10 = 3, and for labor, it's 10/$4 = 2.5. Since capital is more productive per dollar spent, the firm should use more capital and less labor to minimize costs.

Question 6

In the long-run production function, all of the inputs to the production process are allowed to vary.

Accepted Answer

In the long-run production function, all inputs are variable and can be changed.

Question 7

Graphically, all else constant, a decrease in the price of labor would be illustrated by:
A)a parallel shift of the isocost line in toward the origin.
B)rotating the isocost line away from the origin along the labor axis.
C)a parallel shift of the isocost line away from the origin.
D)rotating the isocost line in toward the origin along the capital axis.

Accepted Answer

The answer of Graphically, all else constant, a decrease in...

Question 8

An isocost line represents:
A)all the combinations of inputs to a production process that result in the same total costs of production.
B)all the combinations of inputs that result in the same amount of output.
C)all of the combinations of two inputs for which the amount of money spent on each of the inputs is equal.
D)all of the levels of output that result in the same total cost.

Accepted Answer

An isocost line represents all the combinations of inputs to a production process that result in the same total costs of production. It shows the various combinations of inputs that can be used to produce a certain level of output, while keeping the total cost of production constant.

Question 9

For the simple case of a production function with two inputs in which the inputs are perfect complements, each isoquant is represented by:
A)a vertical line.
B)a horizontal line
C)a downward sloping straight line.
D)a line that forms a right angle.

Accepted Answer

In the case of perfect complements, each isoquant is represented by a line that forms a right angle, reflecting the fixed proportion in which the inputs must be used.

Question 10

Isoquants are convex to the origin due to:
A)the law of diminishing marginal utility.
B)the assumption of the diminishing marginal productivity of each input.
C)the fact that as less capital is used, its marginal productivity falls.
D)the fact that as more labor is used, its marginal productivity rises.

Accepted Answer

Isoquants are convex to the origin because of the assumption of the diminishing marginal productivity of each input. This means that as more units of one input are used, the marginal productivity of that input will eventually start to decrease, allowing for a more efficient combination of inputs to be found. This leads to isoquants that are convex, reflecting the fact that there are diminishing returns to each input, and that a balance of inputs is needed to maximize output.

Question 11

All else constant, an increase in the price of labor would cause the total amount of output that can be produced with a fixed amount of spending to ________.This would result in a movement to a ________ isoquant.
A)increase; lower
B)increase; higher
C)decrease; lower
D)decrease; higher

Accepted Answer

An increase in the price of labor would lead to an increase in the cost of production, thereby reducing the total amount of output that can be produced with a fixed amount of spending. This would result in a movement to a lower isoquant as the firm will have to reduce the level of production to compensate for the increased cost of labor.

Question 12

The fact that a firm is using a capital-intensive method of production means that input substitution is not possible.

Accepted Answer

Input substitution is always possible regardless of the method of production. The degree to which input substitution is possible may differ based on the production method, but it is not impossible in capital-intensive methods.

Question 13

Why are isoquants negatively sloped?
A)Along a single isoquant, the firm can substitute the use of one input for another while holding the total level of output constant.
B)Due to the effects of diseconomies of scale.
C)Because the farther the isoquant is from the origin, the higher the level of output.
D)Because price and quantity demanded are inversely related.

Accepted Answer

Isoquants show the different combinations of inputs that a firm can use to produce the same level of output. As a firm substitutes one input for another, it moves along a single isoquant. The isoquant is negatively sloped because in order to keep output constant, when the firm reduces the use of one input, it must increase the use of another. Thus, the tradeoff between inputs is captured by the negative slope of the isoquant.

Question 14

The slope of the isocost line:
A)changes as the combination of labor and capital is altered by the firm.
B)is equal to the ratio of the marginal productivities at all points along the isocost line.
C)is equal to the negative of the ratio of the prices of the outputs.
D)is equal to the negative of the ratio of the prices of the inputs.

Accepted Answer

The slope of the isocost line is equal to the negative of the ratio of the prices of the inputs (labor and capital). This means that as the firm changes the combination of labor and capital it uses, the slope of the isocost line remains constant.

Question 15

Assume a firm produces 500 units of a good by using two inputs, capital and labor, whose per unit prices are $10 and $4.Assume also that the marginal physical product of the last unit of capital is 30 and the marginal physical product of the last unit of labor is 10.What will change to move the firm to a new cost-minimizing equilibrium?
A)The marginal product of capital will fall and the marginal product of labor will increase.
B)The marginal product of labor will fall and the marginal product of capital will increase.
C)The price of labor will rise.
D)The price of capital will rise.

Accepted Answer

A firm reaches a cost-minimizing equilibrium when the ratio of the marginal product to the price of each input is equal. In this case, the marginal product of capital is 30 and the price of capital is $10, so the ratio is 3. Similarly, the ratio for labor is 2.5. Therefore, the firm is using more capital than labor. To move to a new cost-minimizing equilibrium, the firm needs to decrease the use of capital and increase the use of labor until the ratios are equal. This means that the marginal product of capital should fall and the marginal product of labor should increase.

Question 16

A firm is more likely to use a labor-intensive method of production when the relative amount of available labor is greater than the available amount of capital.

Accepted Answer

This is because when labor is abundant and capital is scarce, it is more cost-effective for the firm to use labor-intensive methods rather than investing in expensive capital equipment. In contrast, when capital is abundant and there is a shortage of labor, a firm is more likely to use capital-intensive production methods.

Question 17

Regarding the production of health care, more recent studies suggest that:
A)economies of scale exist up to a hospital size of approximately 500 beds.
B)hospitals of many different sizes can compete effectively with each other on the basis of cost.
C)the LRAC curve exhibits significant diseconomies of scale beginning with a hospital size of approximately 100 beds.
D)the LRAC for hospitals exhibits a very distinct U shape.

Accepted Answer

More recent studies suggest that hospitals of many different sizes can compete effectively with each other on the basis of cost. This contradicts the old belief that larger hospitals can experience economies of scale and therefore produce health care at a lower cost. However, it is important to note that this may vary depending on the specific health care market and location.

Question 18

Which of the following statements about production isoquants is correct?
A)They show all the combinations of two inputs that result in the same level of output.
B)They are usually concave to the origin.
C)They show all the combinations of two inputs that yield the same cost of production.
D)They represent lower levels of output the farther they are from the origin.

Accepted Answer

Production isoquants show all the combinations of two inputs (such as labor and capital) that result in the same level of output. They are typically represented as downward-sloping curves, with a convex shape (curving inward toward the origin) indicating increasing marginal returns to scale. Therefore, choice A is the correct statement about production isoquants. Choice B is incorrect because isoquants can be convex or straight, depending on the nature of the production function. Choice C is incorrect because isoquants are not related to the cost of production. Choice D is incorrect because isoquants do not necessarily represent lower levels of output as they move farther from the origin.

Question 19

A change in technology or the relative prices of the inputs used in a production process would cause a manager's choice of inputs to use in the production process to change as well.

Accepted Answer

A change in technology can lead to new, more efficient inputs being used, while a change in relative prices can make certain inputs more or less expensive compared to others, prompting a change in input usage to achieve cost savings.

Question 20

All else constant, a decrease in the per unit price of labor would create an incentive for a firm manager to substitute labor for capital in the firm's production process.

Accepted Answer

When the per unit price of labor decreases, it becomes relatively cheaper than capital, which provides an incentive for firms to substitute labor for capital in their production process. This is because the cost of producing goods or services using labor decreases, making it a more profitable option for firms.

Quiz 6: Production and Cost Analysis in the Long Run

The marginal rate of technical substitution (MRTS) along an isoquant:

A movement down along a given isoquant causes the marginal rate of technical substitution to:

Assuming capital and labor are substitutes, an improvement in technology that affects only the productivity of capital would cause a firm to employ more capital but leave the amount of labor employed unchanged.

In the long-run production function, all of the inputs to the production process are allowed to vary.

Graphically, all else constant, a decrease in the price of labor would be illustrated by:

An isocost line represents:

For the simple case of a production function with two inputs in which the inputs are perfect complements, each isoquant is represented by:

Isoquants are convex to the origin due to:

All else constant, an increase in the price of labor would cause the total amount of output that can be produced with a fixed amount of spending to .This would result in a movement to a isoquant.

The fact that a firm is using a capital-intensive method of production means that input substitution is not possible.

Why are isoquants negatively sloped?

The slope of the isocost line:

A firm is more likely to use a labor-intensive method of production when the relative amount of available labor is greater than the available amount of capital.

Regarding the production of health care, more recent studies suggest that:

Which of the following statements about production isoquants is correct?

A change in technology or the relative prices of the inputs used in a production process would cause a manager's choice of inputs to use in the production process to change as well.

All else constant, a decrease in the per unit price of labor would create an incentive for a firm manager to substitute labor for capital in the firm's production process.