Question 1

In the long run, which of the following statements is TRUE regarding the factors of production?

Accepted Answer

All factors of production are variable.

Question 2

A firm is technically efficient if:

Accepted Answer

It produces the maximum output for a given combination of inputs.

Question 3

Which condition must be met for a firm to minimize costs when using two inputs, capital (K) and labour (L)?

Accepted Answer

$$ \frac{MP_L}{P_L} = \frac{MP_K}{P_K} $$

Question 4

If the price of labour increases relative to capital, what will a profit-maximizing firm do in the long run?

Accepted Answer

Use more capital and less labour.

Question 5

The principle of substitution states that:

Accepted Answer

Firms substitute towards the cheaper input when relative input prices change.

Question 6

The long-run average cost (LRAC) curve represents:

Accepted Answer

The lowest attainable cost for each output level when all inputs are variable.

Question 7

What does the minimum efficient scale represent on the LRAC curve?

Accepted Answer

The output level where LRAC is at its minimum.

Question 8

If a firm is operating where the LRAC curve is rising, it is experiencing:

Accepted Answer

Diseconomies of scale.

Question 9

Which of the following best describes the relationship between the LRAC and SRATC curves?

Accepted Answer

The LRAC curve is tangent to each SRATC curve at the output level where the fixed factor is optimal.

Question 10

Jacob Viner’s historical mistake in drawing the LRAC curve was:

Accepted Answer

Connecting all minimum points of the SRATC curves.

Question 11

In the very long run, what causes the LRAC curve to shift?

Accepted Answer

Changes in technology and available production techniques.

Question 12

Which of the following is NOT an aspect of technological change?

Accepted Answer

Increased government regulation.

Question 13

Suppose a firm faces a sudden increase in the price of a key input. In the very long run, the firm is most likely to:

Accepted Answer

Innovate or invent new production methods to reduce reliance on the expensive input.

Question 14

Which formula best measures productivity as discussed in the chapter?

Accepted Answer

$$ 	ext{Productivity} = \frac{	ext{Output}}{	ext{Input}} $$

Question 15

Thomas Malthus’ dire predictions about economic growth were proven wrong primarily because:

Accepted Answer

Technological advancements increased output.

Question 16

A firm is currently using a combination of inputs such that $$ \frac{MP_L}{P_L} \u003c \frac{MP_K}{P_K} . $$What should the firm do to minimize costs?

Accepted Answer

Use more capital and less labour.

Question 17

Which of the following best describes economies of scale?

Accepted Answer

A reduction in long-run average costs as the scale of production increases.

Question 18

If a firm is producing at a point where output increases more than in proportion to inputs, it is experiencing:

Accepted Answer

Increasing returns to scale.

Question 19

Which of the following is TRUE about the LRAC curve?

Accepted Answer

It is the lower envelope of all possible SRATC curves.

Question 20

A real-world example: A car manufacturer adopts robots to replace some assembly line workers after wages rise. This is an example of:

Accepted Answer

The principle of substitution.

Producers in the Long Run: Cost, Efficiency, and Technological Change

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