Q: A firm’s average product of labor is calculated as:

$$\text{total product} \div \text{total units of labor}$$

Question 1

A firm earns $$50,000 in total revenue and incurs 40$$,000 in explicit costs and $5,000 in opportunity costs. What is the firm's economic profit?

Accepted Answer

$5,000

Question 2

Which of the following best describes the law of diminishing returns?

Accepted Answer

As more units of a variable input are added to fixed inputs, the marginal product of the variable input eventually declines.

Question 3

A firm is deciding between two production technologies to produce 100 units of output. Technology A uses 2 units of capital and 10 units of labor, while Technology B uses 5 units of capital and 4 units of labor. If the price of capital $$P_K is$$ $$2$$ and the price of labor $$P_L is$$ $$1$$, which technology minimizes cost?

Accepted Answer

Technology B, with a total cost of $$14$$

Question 4

Which equation correctly represents the slope of an isoquant?

Accepted Answer

$$\Delta K / \Delta L = MP_K / MP_L$$

Question 5

If a firm’s marginal product of labor is greater than its average product of labor, what happens to the average product?

Accepted Answer

It increases

Question 6

Which of the following is NOT a decision that all profit-maximizing firms must make?

Accepted Answer

How to set government policy

Question 7

A firm’s total product function is $$Q = 10L$$, where $$Q is $$output and $$L is $$labor. What is the marginal product of labor?

Accepted Answer

$$10$$

Question 8

Which of the following best describes a capital-intensive technology?

Accepted Answer

A technology that relies heavily on capital instead of human labor

Question 9

Suppose a firm faces the following costs: total fixed costs of $$5,000$$ and total variable costs of $$3,000. $$What is the total cost?

Accepted Answer

$$8,000$$

Question 10

Which of the following is true about the short run in production?

Accepted Answer

At least one factor of production is fixed

Question 11

A firm’s isocost line is given by $$P_K K + P_L L = TC. If$$ $$P_K = 2$$, $$P_L = 1$$, and $$TC = 10$$, what is the maximum number of units of capital the firm can purchase if it buys no labor?

Accepted Answer

$$5$$

Question 12

What is the marginal rate of technical substitution (MRTS) between capital and labor?

Accepted Answer

The rate at which a firm can substitute capital for labor and hold output constant

Question 13

If the marginal product of capital ($$MP_K) is$$ $$4$$ and the marginal product of labor ($$MP_L) is$$ $$2$$, what is the slope of the isoquant?

Accepted Answer

$$MP_K / MP_L = 4 / 2 = 2$$

Question 14

Which of the following statements about economic profit is correct?

Accepted Answer

Economic profit is total revenue minus total economic cost, including opportunity costs

Question 15

A firm’s average product of labor is calculated as:

Accepted Answer

$$	ext{total product} \div 	ext{total units of labor}$$

Question 16

Which of the following is true at the point where the isoquant is tangent to the isocost line?

Accepted Answer

The firm is minimizing cost for a given level of output

Question 17

If a firm’s total revenue is $$100,000$$, total explicit costs are $$60,000$$, and the normal rate of return (opportunity cost of capital) is $$10,000$$, what is the firm’s economic profit?

Accepted Answer

$$30,000$$

Question 18

Which of the following best describes an isoquant?

Accepted Answer

A graph showing all combinations of capital and labor that can be used to produce a given amount of output

Question 19

Suppose a firm can produce 40 units of output with 4 units of labor. What is the average product of labor?

Accepted Answer

$$10$$

Question 20

Which of the following is a reason why accident rates might fall when gasoline prices rise?

Accepted Answer

Drivers may drive less or slower to save on fuel costs

Chapter 7: The Production Process and the Behavior of Profit-Maximizing Firms

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