Chapter 8

Question 1

If the price of capital is higher than the price of​ labour, a firm should use:
A. capital and​ labour, making sure that the ratio of the average product of
capital to average product of
labour equals the ratio of the price of capital to the price of labour.
B. capital and​ labour, making sure that the ratio of capital to labour equals the ratio of the marginal product of capital to the marginal product of labour.
C. capital and​ labour, making sure that the marginal product of capital is
larger than the marginal product of labour.
D. capital and​ labour, making sure that the ratio of the marginal product of capital to the marginal product of labour equals the ratio of the price of capital to the price of labour.
E. less capital than labour.

Answer 1

D. capital and​ labour, making sure that the ratio of the marginal product of capital to the marginal product of labour equals the ratio of the price of capital to the price of labour.

Question 2

The short run average total cost curve will touch the long run average cost curve at a level of output:
A. such that the long run cost curve is at a minimum.
B. for which the quantity of the fixed factor is optimal.
C. such that all the factors of production are at the optimal level.
D. such that the short run marginal cost equals the short run average total cost.

Answer 2

B. for which the quantity of the fixed factor is optimal.

Question 3

If the​ short-run average total cost curve touches the​ long-run average cost curve at the minimum point of the SRATC​ curve, the:
A. long​-run average cost curve is constant.
B.firm is not minimizing costs.
C. long​-run average cost curve is drawn incorrectly.
D. long-run average cost curve is at a minimum.
E. short​-run average cost curve is decreasing.

Answer 3

D. long-run average cost curve is at a minimum.

Question 4

If a​ firm’s production technology exhibits increasing returns to scale for all levels of​ output, then the​ long-run average cost curve​ (LRAC) will be:
A. horizontal for all levels of output.
B. U-shaped.
C. downward sloping for low levels of output and horizontal for high levels of output.
D. upward sloping for all levels of output.
E. downward sloping for all levels of output.

Answer 4

E. downward sloping for all levels of output.

Question 5

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:
A. employ more labour and less capital because MPK​/MPL<PK​/PL.
B. employ more capital and less labour because MPK​/MPL<PK​/PL.
C. employ more capital and less labour because MPK​/MPL>PK​/PL.
D. employ more labour and less capital because MPK​/MPL>PK​/PL.
E. do nothing

Answer 5

C. employ more capital and less labour because MPK​/MPL>PK​/PL.

Question 6

In the long​ run, a firm is moving along its existing LRAC curve. In the very long​ run, however, the LRAC curve is shifting ______.

Answer 6

downward

Question 7

The following three kinds of technological change influence production and cost in the very long​ run:
A. new​ techniques, substitution of K for L ​, and new products.
B. new​ techniques, improved​ products, and larger K.
C. new​ techniques, improved​ inputs, and new products.
D. larger K​, more intensive use of land​,
and new products.
E. larger K​, improved​ inputs, and new products.

Answer 7

C. new​ techniques, improved​ inputs, and new products.

Question 8

Over the very long​ run, which of the following has influenced the most on costs of production and on standards of​ living?
A.Increases in the labour force
B. Increases in output made possible by technological improvements
C. Increases in the resource base
D. All of the above

Answer 8

B. Increases in output made possible by technological improvements

Question 9

Changes in the techniques available for producing existing products are called:
A. process innovation.
B. a rise in productivity.
C. investment.
D. creative destruction.
E. product innovation

Answer 9

A. process innovation

Question 10

Isoquants slope downward because:
A. capital has a negative marginal productivity.
B. of the law of diminishing productivity of a fixed factor.
C. a reduction in the use of capital requires an increase in the use of labour to keep output constant.
D. they represent decreasing LRAC

Answer 10

C. a reduction in the use of capital requires an increase in the use of labour to keep output constant.

Question 11

In the long​ run, if a firm is maximizing its profits while producing a given level of​ output, then this firm is also ________ its costs.

Answer 11

minimizing

Question 12

In the long​ run, all factors of production are _________. There are no ________ factors

Answer 12

variable, fixed

Question 13

Profit-maximizing firms employ factors of production such that the marginal products per dollar spent on each factor are ________.

Answer 13

equalized

Question 14

Profit-maximizing firms adjust their methods of production in response to changes in relative prices. This is known as the _______.

Answer 14

principle of substitution

Question 15

The​ long-run average cost curve is often saucer shaped. Over the range of output where the LRAC curve is​ falling, the firm is experiencing ______________.

Answer 15

decreasing costs or increasing returns

Question 16

As output​ increases, average costs are ________.

Answer 16

failing

Question 17

When the LRAC curve reaches its​ minimum, the firm has reached its ________.

Answer 17

minimum efficient scale (MES)

Question 18

The LRAC (long run average cost) curve represents the _________ cost for each level of output.

Answer 18

lowest possible

Question 19

The SRATC curve shows the lowest possible cost of producing any output when one or more factors are _________.

Answer 19

fixed

Question 20

Explain why a​ profit-maximizing firm must also minimize costs. For any given ________, profit maximization requires that the difference between TR and TC be _______. If the firm is not minimizing its costs for any given ________, then profits can be increased for any given revenue amount.​ Thus, cost minimization is necessary for profit maximization.

Answer 20

level of output, maximized, level of output