Question 1

Economists describe short-run decisions as "constrained" decisions, while long-run decisions are described as "planning" decisions.Referring to a firm's short-run average cost function and long-run average cost function, explain this distinction.

Accepted Answer

The answer of Economists describe short-run decisions as "constrained" decisions,...

Question 2

Regarding the production of health care, more recent studies suggest that economies of scale exist up to a hospital size of approximately 200 beds.

Accepted Answer

More recent studies suggest that economies of scale exist up to a hospital size of approximately 200 beds.

Question 3

If the inputs to a production process are perfect complements, the firm can choose from a virtually infinite array of combinations of the two inputs to minimize the costs of producing a given level of output.

Accepted Answer

In the case of perfect complements, the firm is constrained to use the inputs in a fixed ratio to produce a given level of output, limiting the combinations of inputs to one specific ratio that minimizes costs.

Question 4

As the price of labor increases relative to the price of capital, the firm will move to a more labor-intensive production method to minimize costs.

Accepted Answer

As the price of labor increases relative to the price of capital, the firm will move to a more capital-intensive production method to minimize costs. This is because the cost of using labor is now relatively more expensive compared to the cost of using capital.

Question 5

Assume a new technology is developed that increases the productivity of capital and creates additional economies of scale.How would this affect the firm's minimum efficient scale of operation.Illustrate this effect graphically.

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Question 6

Assume a firm is producing 1000 units of a good by using two inputs, capital and labor, whose per unit prices are $50 and $20.Assume also that the marginal physical product of the last unit of capital is 25 and the marginal physical product of the last unit of labor is 15.In order to minimize its costs of production, the firm should adjust its combination of inputs by employing more labor and less capital.

Accepted Answer

The firm should use inputs in such a way that the marginal cost per unit of the last dollar spent on each input is equal. The marginal cost of capital is $2 per unit ($50/25) and the marginal cost of labor is $1.33 per unit ($20/15). Since the marginal cost of labor is lower, the firm should employ more labor and less capital to minimize its costs of production.

Question 7

Assume that firms A and B have the same minimum efficient scale of operation and, at current production levels, both firms are incurring the same average costs of production.However, firm A's output is 5 times larger than firm B's output.How is this possible?

Accepted Answer

The answer of Assume that firms A and B have...

Question 8

Most of the empirical research on long-run costs suggests that the long-run average cost curve for most firms has a very pronounced U-shape.

Accepted Answer

Most empirical research suggests that the long-run average cost curve for many firms is relatively flat at the bottom, rather than having a pronounced U-shape. This implies that economies and diseconomies of scale are not as pronounced as the U-shape suggests, and firms can adjust their scale of operation without significantly affecting average costs.

Question 9

Use the firm's long-run cost-minimizing decision rule to explain the differences in the relative use of capital and labor in agriculture in the United States and the Peoples Republic of China.

Accepted Answer

The answer of Use the firm's long-run cost-minimizing decision rule...

Question 10

An isoquant identifies all of the combinations of two inputs that result in the same total costs of production.

Accepted Answer

An isoquant identifies all of the combinations of two inputs that result in the same level of output, not total costs of production.

Question 11

Empirical evidence suggests that economies of scale, advertising and image differentiation, and risk spreading all help account for the large-scale production that exists in many sectors of the economy.

Accepted Answer

Empirical evidence supports the idea that economies of scale, advertising and image differentiation, and risk spreading are all factors that contribute to large-scale production in various sectors of the economy.

Question 12

Briefly summarize the empirical literature on the long-run costs typically incurred by firms in a variety of industries.In particular, is there reason to believe that firms' long-run cost curves assume the typical U-shape? Why or why not?

Accepted Answer

The answer of Briefly summarize the empirical literature on the...

Question 13

Historically, empirical evidence showed that it was more cost effective to have a single generator of electricity serve a particular region's electricity needs than to have several smaller units compete against each other.More recently, technological advances have occurred in the generation of electricity that allow much smaller generating units to produce electricity for the same average cost as much larger units.Explain how this change would be reflected in the firm's long-run average cost curve and minimum efficient scale.

Accepted Answer

The answer of Historically, empirical evidence showed that it was...

Question 14

Explain why X-inefficiency is likely to be more prevalent in an industry in which firms have market power.

Accepted Answer

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Question 15

Explain how "learning by doing" and transportation costs each affect the long-run average cost curve.

Accepted Answer

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Question 16

If the inputs to a production process are perfect substitutes and the marginal rate of technical substitution is equal to the ratio of the prices of the two inputs, the firm can choose from a virtually infinite array of combinations of the two inputs to minimize the costs of producing a given level of output.

Accepted Answer

If the inputs are perfect substitutes and the MRTS is equal to the ratio of prices, then the isoquant is linear and the firm can minimize costs by choosing any combination of the two inputs that give the required level of output. This provides a virtually infinite array of options for the firm.

Question 17

Over the past several decades, technological change has led to a significant amount of consolidation in the U.S.brewing industry.

Accepted Answer

The rise of craft breweries and the acquisition of smaller breweries by larger ones have led to significant consolidation in the U.S. brewing industry.

Question 18

Explain how labor resistance and political and legislative influences reduce the ability of firms to minimize their costs of production.What do the two have in common in this regard?

Accepted Answer

The answer of Explain how labor resistance and political and...

Question 19

An improvement in technology would cause each of the isoquants in a firm's isoquant map to shift out away from the origin.

Accepted Answer

An improvement in technology makes it possible to produce the same amount of output with fewer inputs or more output with the same amount of inputs, effectively making the isoquants closer to the origin, not farther away.

Question 20

What are the two primary factors that influence a firm manager's choice between a labor-intensive and a capital-intensive method of production? How does each factor influence the manager's choice.

Accepted Answer

The answer of What are the two primary factors that...

Quiz 6: Production and Cost Analysis in the Long Run