4_Cost and Production

Question 1

___ refers to the planning or production horizon when the firm cannot adjust some costs; costs are both variable and fixed.

Answer 1

Short-run

Question 2

___ refers to the planning and production horizon when the firm can adjust any costs; all costs are variable.

Answer 2

Long-run

Question 3

___ is a process of combining inputs and produce to output.

Answer 3

Production

3 inputs: land, labor, capital

Question 4

___ is the manufacture of large quantities of standardized products often using assembly lines or automation technology.

Answer 4

Mass production

Question 5

___ occurs when producing two or more products jointly by one firm is less than the cost of producing them separately; the opportunity for a firm to reduce per unit costs.
I.e., peanut butter and chocolate

Answer 5

Economies of Scope

Question 6

___ examines what size of firms are tending to succeed over time and what sizes are declining; leads to elimination of firms with inefficient size; only firms with lower average costs will survive.

Answer 6

Survivor technique

Question 7

In the ___-run, consumers are limited in their choices by their current circumstances of lifestyles, consumption technologies, and understanding.

Answer 7

Short-run

Question 8

In the ___-run, consumers have the ability to alter their lifestyle and technology and improve their understanding to improve utility of consumption.

Answer 8

Long-run

Question 9

In the ___-run, producers are somewhat limited by their facilities, skill sets, and technology; costs are fixed and variable; capacity is fixed.

Answer 9

Short-run (production)

Question 10

In the ___-run, producers have sufficient time to expand, or modify facilities including adding employees, reducing employees, or retraining employees; change technology and equipment used to carryout their business; all costs are variable; capacity can be resized to where the firm expects to have the best stream of profits over time.

Answer 10

Long-run (production)

Question 11

___ is the production level at which the LRATC flattens; this ability is crucial for survival in a competitive market.

Answer 11

Minimum efficient scale

Question 12

___ is when the average cost decreases as the scale increases.

Answer 12

Economies of scale

Question 13

___ is when the average cost increases as the scale increases.

Answer 13

Diseconomies of scale

Question 14

___ are multiple products generated by a single production process at the same time; create a natural opportunity for an economy of scope.

Answer 14

Joint products

Question 15

The ___ is an approach firms typically use where they start with the goods and services that they intend to provide, then decide what production configuration will achieve the intended output at the lowest cost.

Answer 15

Cost approach to planning production

Question 16

The ___ principle states that the optimal output levels for the goods and services occur when marginal revenue equals marginal cost; MR = MC.

Answer 16

Principle for Profit Maximization

Question 17

The ___ is the amount of additional output that would be created if one more unit of the input were obtained and processed.

Answer 17

Marginal product of a production input

Question 18

The principle for profit maximization can be applied in determining the ___ using the concepts of marginal product and marginal revenue product.

Answer 18

Optimal level of production

Question 19

The ___ is the marginal revenue created from the marginal product resulting from one additional unit of the input.

Answer 19

Marginal revenue product of a production unit

Question 20

At the optimal level, marginal revenue product and marginal cost of the input would be ___.

Answer 20

Equal

Question 21

If the marginal cost of the input exceeds the marginal revenue product, profit will improve by ___ and corresponding ___ in output.

Answer 21

Decreasing the use of the input
and
Decrease

Question 22

___ is the production volume where average cost is at the lowest value (visible on an average cost curve).

Answer 22

Capacity of the Operation

Question 23

High variable costs usually indicate ___.

Answer 23

Inefficient allocation

Question 24

The target production level is often called ___ since the business is able to adjust all factors of production in the long-run.

Answer 24

Scale of business

Question 25

___ occurs when all factors of production were increased by a percentage increase by a higher or lower percentage.

Answer 25

Returns to scale

Can be increasing returns to scale when potential output increases by a higher percentage or decreasing returns to scale when it increases by less than the percentage.

Can also be constant returns to scale when it increases by the same percentage.

Question 26

___ is a defining capability or advantage that distinguishes a firm from its competitors.

Answer 26

Core competencies

Question 27

___ helps determine which kinds of goods or services would be best to exploit to stand apart from competitors; helps plan the approach and how to arrange production to accomplish it.

Answer 27

Resource approach to the planning of production

Question 28

The ___ approach is utilized by a firm that is already in a particular line of business and can make incremental improvements to reduce cost.

Answer 28

Cost approach

Question 29

___ is the difference between the amount the provider of the limited input supply is able to charge and the minimum amount that would have been necessary to induce the provider to sell the unit to the firm.
I.e., the need for qualified workers immediately results in having to pay a higher wage to those qualified to work

Answer 29

Economic rent

Question 30

The ___ view of production management is to make sure that all resources employed in the creation of goods and services are used as effectively as possible; the measure of average productivity.

Answer 30

Resource

Question 31

The measure of average productivity could be ___, which can be compared for which goods and services sold are most effective in generating sales a better productivity measure.

Answer 31

The form of Labor, amount of floor space, or sections of a store

Question 31

___ is a productivity gain from experience and improved knowledge as a result of trial and error; improvement in overall productivity from increased knowledge in how to employ productive resources better.

Answer 31

Learning by doing

Question 33

___ is the relationship between cumulative production experience and average costs.

Answer 33

Learning curve

Question 34

The ___ is the reduction in average costs that occurs each time cumulative production double; a learning curve with a doubling rate may be called a learning curve to indicate the magnitude of the average cost compared to when cumulative production was only half as large.

Answer 34

The doubling rate of reduction

Question 35

Which of the following is a reason why a firm would experience diseconomies of scale?

a. As the size of the firm increases it becomes more difficult to coordinate the operations of its manufacturing plants.
b. As the size of the firm increases, it becomes more difficult to find markets where it doesn’t already have operations.
c. To finance an increase in the size of its plant a firm must borrow more money or sell more shares of stock.
d. As the size of the firm increases, it must operate in other countries where differences in language, customs and laws increase its average costs.

Answer 35

a. As the size of the firm increases it becomes more difficult to coordinate the operations of its manufacturing plants.

Question 36

The minimum efficient scale is

a. the level of output where diminishing returns have not set in yet.
b. level of operation where long-run average costs are lowest.
c. the smallest output level where the firm finally reaches productive efficiency.
d. the plant size that yields the most profit.

Answer 36

b. level of operation where long-run average costs are lowest.

Question 37

Which of the following is not a reason why firms experience economies of scale?

a. Workers and managers can become more specialized, enabling them to be more productive.
b. Technology can make it possible to increase production with a smaller increase in at least one input.
c. Larger firms may be able to purchase inputs at lower costs than smaller competitors.
d. As output increases, the managers can begin to have difficulty coordinating the operations of their firms.

Answer 37

d. As output increases, the managers can begin to have difficulty coordinating the operations of their firms.

Question 38

Economies of scope exist between book publishing and magazine publishing if

a. the cost of publishing a book falls over time as the publisher acquires more experience.
b. the cost of publishing a magazine is lower for firms that publish many magazines than for firms that publish only one magazine.
c. the cost of publishing a magazine is lower for book publishers than for other firms.
d. the cost of a publishing a book is not subject to diminishing marginal returns.

Answer 38

c. the cost of publishing a magazine is lower for book publishers than for other firms.

Question 39

Learning curves represent the relationship between

a. total cost and technology
b. average variable cost and the number of units produced per time period
c. average variable cost and the rate of increase in technology
d. average variable cost and the cumulative number of units produced

Answer 39

d. average variable cost and the cumulative number of units produced

Question 40

If the marginal product of labor is 2, the marginal product of capital is 4, the wage rate is $3, the rental price of capital is $6, and the price of output is $1.50, then the firm should

a. Increase output by hiring more labor, more capital, or both
b. None of the above is correct
c. Hold output constant, but hire more labor and less capital
d. Decrease output by reducing the quantity of capital, reducing the number of units of labor, or both

Answer 40

b. None of the above is correct

Question 41

Answer whether the following statement is true or false: If the marginal revenue product of an input is less than the price of that input, the input is too expensive and the firm should stop using that input and try to find some alternate inputs.

Select one:
True
False

Answer 41

False

Question 42

Answer whether the following statement is true or false: Economic rent for an input is higher if the input is abundant is supply

Select one:
True
False

Answer 42

False

Question 43

A firm’s demand curve for labor slopes downwards because

a. workers supply less labor services as the wage rate falls.
b. of the law of diminishing marginal returns.
c. firms supply less labor as the wage rate rises.
d. of rising marginal product.

Answer 43

b. of the law of diminishing marginal returns.

Question 44

Economic rent is defined as

a. the price of a factor of production that is fixed in supply.
b. what you pay to rent your apartment or house.
c. the surplus received by employing a factor of production in its highest valued use.
d. the revenue received by a factor of production with an upward sloping supply curve.

Answer 44

a. the price of a factor of production that is fixed in supply.

Question 45

Economies of scale exist as a firm increases its size in the long run because of all of the following except

a. labor and management can specialize even further in their tasks. 
b. the firm can afford more sophisticated technology in production.
c. as a larger input buyer, the firm can purchase inputs at a lower per unit cost.
d. as a firm expands its production, its profit margin per-unit of output increases.

Answer 45

d. as a firm expands its production, its profit margin per-unit of output increases.

Question 46

Over the past twenty years, the number of small family farms has fallen significantly and in their place there are fewer, but larger, farms owned by corporations. Which of the following best explains this trend?

a. economies of scale in farming
b. diminishing returns to labor in farming
c. diseconomies of scale in farming

Answer 46

a. economies of scale in farming

Question 47

The president of Toyota’s Georgetown plant was quoted as saying, “Demand for high volumes saps your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and knowledge we painstakingly built up over the years.” This quote suggests that

a. Toyota was focused on “churning” out cars for which it did not invest sufficiently in training its workers.
b. high demand for Toyota’s cars prevented the company from focusing on its strength: auto design.
c. Toyota was experiencing an excess demand for its automobiles which it had difficulty keeping up with.
d. as Toyota expanded its capacity, it experienced diseconomies of scale.

Answer 47

d. as Toyota expanded its capacity, it experienced diseconomies of scale.

Question 48

If the marginal product of capital is six times as large as the marginal product of labor and the price of capital is three times as large as the price of labor, for costs to be minimized:

a. more labor should be used and less capital.
b. the price of capital must fall.
c. more labor should be used but the use of capital should remain constant.
d. more capital should be used and less labor.

Answer 48

d. more capital should be used and less labor.

Question 49

The marginal revenue product of labor for a firm

a. will decrease if the firm hires more labor.
b. is the firm’s demand curve for labor.
c. will increase if the price of the firm’s output increases.
d. All of the above are correct.

Answer 49

d. All of the above are correct.

Question 50

Would you expect economies of scope to occur in the following situation; Producing two goods that use the same resource

a. I cannot answer based on the available information
b. I do not know.
c. No
d. Yes

Answer 50

d. Yes

Question 51

Would you expect economies of scope to occur in the following situation; Producing two goods that are complementary to each for the buyer such as coffee and sugar.

a. No
b. Cannot be determined based on the provided information
c. I do not know
d. Yes

Answer 51

a. No

Question 52

Evaluate the Statement; Cost approach is the easier approach to achieve optimal production when the firm is at the start of their production plan

Select one:
True
False

Answer 52

False

Question 53

Evaluate the Statement; Resource approach is the easier approach to achieve optimal production after the firm has already established a production plan and requires only incremental changes in their plan to achieve the maximum possible profit

Select one:
True
False

Answer 53

False

Question 54

The demand for labor is described as a derived demand because

a. it is derived from government institutions which rely on labor markets for the purpose of raising tax revenue.
b.
it is derived by producers seeking to make profits by starting new businesses.
c. it is derived by workers seeking to earn income to fund the consumption of goods and services.
d. it is derived from the demand for products that use labor in the production process.

Answer 54

d. it is derived from the demand for products that use labor in the production process.

Question 55

Which type of workers is most likely to enjoy substantial economic rent?

Select one:

a. Those with low wages which can be paid because their jobs have other very pleasant aspects.
b. Those with high wages which compensate them for unpleasant aspects of their jobs.
c. Those with low wages which result from no need to have a period of training.
d. Those with high wages which result from them possessing the innate ability to develop some skill to a very high level

Answer 55

d. Those with high wages which result from them possessing the innate ability to develop some skill to a very high level

Question 56

What is the difference between “diminishing marginal returns” and “diseconomies of scale”?

a. Both concepts explain why average total cost increases after some point but diminishing marginal returns applies only in the short run when there is at least one fixed factor, while diseconomies of scale applies in the long run when all factors are variable.
b. Diminishing marginal returns, which applies only in the short run when at least one factor is fixed, explains why marginal cost increases, while diseconomies of scale, which applies in the long run when all factors are variable, explains why average cost increases.
c. Both concepts explain why marginal cost increases after some point but diminishing marginal returns applies only in the short run when there is at least one fixed factor, while diseconomies of scale applies in the long run when all factors are variable.
d. Diminishing marginal returns, which applies only in the long run when all factors are variable, explains why average variable cost increases, while diseconomies of scale, which applies in the short run when at least one factor is fixed, explains why average total cost increases.

Answer 56

b. Diminishing marginal returns, which applies only in the short run when at least one factor is fixed, explains why marginal cost increases, while diseconomies of scale, which applies in the long run when all factors are variable, explains why average cost increases.

Question 57

As the level of output increases, what happens to the value of average fixed cost, and what happens to the difference between the value of average total cost and average variable cost?

Answer 57

Assuming economies of scale, as output increases, the average fixed costs decrease and the different between average total cost and average variable cost also decreases.