I. Matching Definitions
average fixed cost production function
average product of labor quasi-fixed input
average total cost short run
average variable cost short-run marginal cost
economic efficiency technical efficiency
fixed input total cost
fixed proportions production total fixed cost
law of diminishing marginal product total variable cost
long run variable input
marginal product of labor variable proportions production
production
1. __________________ The creation of goods and services from inputs or
resources.
2. __________________ A table or mathematical equation showing the maximum
amount of output that can be produced from any
specified set of inputs, given the existing technology.
3. __________________ Production of the maximum level of output that can be
obtained from a given combination of inputs.
4. __________________ Production of a given amount of output at the lowest
possible total cost.
5. __________________ An input for which the level of usage cannot readily be
changed.
6. __________________ An input for which the level of usage may be changed
quite readily.
7. __________________ A fixed input that need not be paid when output is zero.
8. __________________ That period of time in which the level of usage of one or
more inputs is fixed.
9. __________________ That period of time in which all inputs are variable,
which is sometimes called the planning horizon.
10. __________________ Production in which a given level of output can be
produced with more than one combination of inputs.
11. __________________ Production in which one, and only one, ratio or mix of
inputs can be used to produce a good.
12. __________________ Total product divided by the number of units of labor
employed.
13. __________________ Additional output attributable to using one more worker holding the use of all other inputs constant.
14. __________________ As the level of usage of the variable input increases,
other inputs held constant, a point will be reached beyond which the marginal product decreases.
15. __________________ Total amount paid for fixed inputs.
16. __________________ Total amount paid for variable inputs.
17. __________________ The sum of total fixed and total variable costs.
18. __________________ Fixed cost per unit of output (i.e., total fixed cost divided by output).
19. __________________ Variable cost per unit of output (i.e., total variable cost
divided by output).
20. __________________ Total cost per unit of output (i.e., total cost divided by
output).
21. __________________ The change in either total cost or total variable cost per
unit change in output.
II. Multiple Choice
1. Marginal product equals average product
a. when marginal product equals zero.
b. when average product equals zero.
c. at the inflection point of the total product curve.
d. at the maximum value of marginal product.
e. at the maximum value of average product.
2. The economically efficient input combination for producing a given level of output
a. minimizes the average cost of producing the given level of output.
b. occurs at the maximum value of the total product curve.
c. can produce that level of output at the lowest possible total cost.
d. is determined entirely by the production function.
3. If average product is rising, then marginal product
a. cannot be falling.
b. can be either rising or falling, but it must lie above average product.
c. must lie below average product.
d. must be rising.
In questions 4–7, suppose that the short-run production function is given by:
4. The average product of labor when 3 units of labor are employed is
a. 3.
b. 5.
c. 7.
d. 11.
e. –1.
5. The marginal product of the 6th laborer is
a. 3.
b. 5.
c. 7.
d. 11.
e. –1.
6. Diminishing marginal returns begin with the
a. 2nd unit of labor.
b. 4th unit of labor.
c. 5th unit of labor.
d. 6th unit of labor.
7. Marginal product is negative when more than
a. 3 units of labor are employed.
b. 4 units of labor are employed.
c. 5 units of labor are employed.
d. 6 units of labor are employed.
8. Fixed costs
a. must be considered in any decision-making process.
b. do not exist in the long run.
c. decrease as output rises.
d. a and b.
e. b and c.
9. When the average product of the variable input is equal to the marginal product,
a. marginal cost reaches its minimum value.
b. average variable cost reaches its minimum value.
c. marginal cost is rising.
d. both a and c.
e. both b and c.
10. If a firm is producing 5 units of output and the marginal cost for the fifth unit is $7 and the average variable cost for the fifth unit is $3, then the average variable cost for the fourth unit is _______.
a. 1
b. 2
d. 8
e. none of the above
16. If short-run marginal cost is U-shaped, then
a. total cost increases at an increasing rate, then increases at a decreasing rate.
b. total variable cost increases at a decreasing rate then increases at an
increasing rate.
c. total variable cost must be S-shaped.
d. all of the above.
e. both b and c.
17. Average total cost
a. increases as output increases.
b. decreases as output increases.
c. increases if marginal cost is increasing.
d. increases if marginal cost is greater than average total cost.
e. both c and d.
18. Average fixed cost
a. increases as output increases.
b. decreases as output increases.
c. increases if marginal cost is increasing.
d. increases if marginal cost is greater than average fixed cost.
II. COSTS AND PRODUCTION IN LONG-RUN
A. Matching Definitions
constant costs increasing returns to scale
constant returns to scale isocost curve
decreasing returns to scale isoquant
diseconomies of scale long-run average cost
economies of scale long-run marginal cost
economies of scope marginal rate of technical substitution
expansion path short-run expansion path
1. ____________________ A curve that displays all the various combinations of
inputs that will produce a given amount of output.
2. ____________________ The rate at which one input is substituted for another
along an isoquant.
3. ____________________ Line that shows all the possible combinations of inputs that can be purchased for a given total cost.
4. ____________________ A curve showing all of the cost-minimizing levels of
input usage for various levels of output.
5. ____________________ When the usage of all inputs is increased by an
equiproportionate amount, output increases by exactly the same proportion.
6. ____________________ When the usage of all inputs is increased by an
equi-proportionate amount, output increases by a larger proportionate amount.
7. ____________________ When the usage of all inputs is increased by an
equi-proportionate amount, output increases by a smaller proportionate amount.
8. ____________________ Cost per unit in the long run.
9. ____________________ The change in long-run total cost per unit change in
output.
10. ____________________ When long-run average cost falls as output increases.
11. ____________________ When long-run average cost increases with increases in output.
12. ____________________ Long-run average and marginal costs are equal for all levels of output.
13. ____________________ The situation in which the joint cost of producing two goods is less than the sum of the separate costs of producing the two goods.
14. ____________________ Horizontal line showing the cost-minimizing input
combinations for various output levels when capital is fixed in the short run.
B. Study Problems
1. In the following figure, isoquant Q0 is the isoquant for 1,000 units of output.
a. Marginal rate of technical substitution between points A and C is _______.
b. Marginal rate of technical substitution between points C and B is _______.
c. Marginal rate of technical substitution at point C is _______.
2. The following graph shows two isocost curves. The price of capital is $100.
a. The total cost associated with isocost I is $_________, and the price of labor
is $_________.
b. The equation for isocost I is _____________________. With isocost I the
firm must give up ______ units of capital to purchase one more unit of labor
in the market.
c. The total cost associated with isocost II is $_________, and the price of labor
is $_________.
d. The equation for isocost II is _____________________. With isocost II the
firm must give up ______ units of capital to purchase one more unit of labor
in the market.
3. The following figure shows a firm’s isoquant for producing 2,000 units of output and four isocost curves. Labor and capital each cost $50 per unit.
a. At point A, the MRTS is _____________ (less than, greater than, equal to)
the input price ratio, w/r. The total cost of producing 2,000 units of output
with input combination A is $_____________.
b. By moving from A to B, the firm __________________ (increases,
decreases) labor usage and _________________ (increases, decreases)
capital usage. At point B the MRTS is ________________ (greater than, less
than, equal to) the input price ratio, w/r. The movement from A to B
__________________ (increased, decreased) total cost by $____________.
c. At Point D the firm __________________ (minimizes, maximizes) the cost
of producing 2,000 units of output. The MRTS is _______________ (greater
than, less than, equal to) the input price ratio, w/r.
d. The optimal input combination is __________ units of labor and
__________ units of capital. At this combination, the total cost of producing
2,000 units is $ ___________________.
e. At point E, the MP per dollar spent on ____________ is less than the MP per
dollar spent on ____________. The total cost of producing 2,000 units of
output with input combination E is $_____________.
4. The next three questions refer to the following:
a. What is the marginal rate of technical substitution at point A?
a. 0.3
b. 1
c. 1.125
d. 1.67
e. none of the above
b. As you move from point A to point B,
a. output is unchanged.
b. cost is unchanged.
c. the rate at which the firm can substitute labor for capital while holding output
constant decreases.
d. both a and b.
e. both a and c.
c. If the firm continues to produce 45 units of output and moves from the combination at A to the combination at B, it must be true that
a. the price of labor decreased relative to the price of capital.
b. the price of capital decreased relative to the price of labor.
c. the cost of producing 45 units decreased.
d. both b and c.
e. none of these are true.
