Question 1

Which of the following best describes economic efficiency in the context of production?

Accepted Answer

Minimizing the value of inputs required to produce a given output.

Question 2

A firm is currently using capital (K) and labor (L) such that $$ \frac{MP_K}{P_K} = 5 $$ and $$ \frac{MP_L}{P_L} = 10 . $$What should the firm do to minimize costs for its current level of output?

Accepted Answer

Use more labor and less capital.

Question 3

Which equation represents the condition for cost minimization when a firm uses two inputs, capital (K) and labor (L)?

Accepted Answer

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

Question 4

Suppose a Canadian airline faces a significant increase in labor costs. Which of the following is a very long-run response to this change?

Accepted Answer

Investing in the development of new, labor-saving production techniques.

Question 5

The long-run average cost (LRAC) curve is typically U-shaped because:

Accepted Answer

Firms experience increasing returns to scale at low output and decreasing returns to scale at high output.

Question 6

If a firm doubles all its inputs and output more than doubles, the firm is experiencing:

Accepted Answer

Increasing returns to scale.

Question 7

Which of the following would cause the LRAC curve to shift downward?

Accepted Answer

A decrease in the price of labor.

Question 8

What is the minimum efficient scale (MES)?

Accepted Answer

The smallest level of output at which LRAC reaches its minimum.

Question 9

Which of the following is NOT a cause of productivity growth?

Accepted Answer

Growth in the price of raw materials.

Question 10

A firm is currently producing at a point where its LRAC is rising. This implies that:

Accepted Answer

The firm is experiencing decreasing returns to scale.

Question 11

Which of the following best illustrates the principle of substitution in production?

Accepted Answer

A firm uses more of a cheaper input and less of a more expensive input when relative prices change.

Question 12

Which of the following statements about the relationship between the SRATC and LRAC curves is correct?

Accepted Answer

Each SRATC curve is tangent to the LRAC curve at the output level where the fixed factor is used optimally.

Question 13

Which of the following is an example of process innovation?

Accepted Answer

Developing a new method for assembling cars that reduces labor time.

Question 14

Suppose a firm faces the following: $$ \frac{MP_K}{P_K} = 6 $$ and $$ \frac{MP_L}{P_L} = 3 . $$What should the firm do to minimize costs?

Accepted Answer

Use more capital and less labor.

Question 15

Which of the following is NOT a long-run response to an increase in labor costs for a Canadian manufacturer?

Accepted Answer

Reducing output in the short run.

Question 16

If a technological improvement occurs, what is the expected effect on the LRAC curve?

Accepted Answer

The LRAC curve shifts downward.

Question 17

Which of the following best describes constant returns to scale?

Accepted Answer

Output increases by the same percentage as inputs.

Question 18

Why is decreasing returns to scale in the long run NOT the same as diminishing marginal returns in the short run?

Accepted Answer

Decreasing returns to scale involves all inputs being variable, while diminishing marginal returns involves at least one fixed input.

Question 19

Which of the following is an example of product innovation?

Accepted Answer

A company introduces a new smartphone model with unique features.

Question 20

A firm is considering two production methods. Method A uses more labor and less capital, while Method B uses more capital and less labor. If the price of labor rises relative to capital, what should the firm do according to the principle of substitution?

Accepted Answer

Switch to Method B.

Chapter 8 - Producers in the Long Run: Cost, Efficiency, and Technological Change

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