Question 1

Suppose a firm can use one of four production techniques (A, B, C, D) to produce 1000 units of output. Technique A uses 25 units of labour and 50 units of capital, B uses 35 units of labour and 35 units of capital, C uses 50 units of labour and 25 units of capital, and D uses 30 units of labour and 60 units of capital. If the price of labour is $$5 and the price of capital is 10$$, which technique minimizes the cost of production?

Accepted Answer

Technique A

Question 2

If the price of labour is $$10 and the price of capital is 5$$, which production technique from the previous question minimizes the cost of producing 1000 units of output?

Accepted Answer

Technique C

Question 3

A firm is choosing between four production techniques to minimize costs. If both labour and capital cost $10 per unit, which technique should the firm choose?

Accepted Answer

Technique B

Question 4

Which of the following production techniques is obviously technically inefficient?

Accepted Answer

Technique D

Question 5

When there is no other way of producing a given level of output with a smaller total input of factors, the production method is said to be:

Accepted Answer

Technically efficient

Question 6

Which of the following conditions indicates cost minimization, assuming two inputs, labour (L) and capital (K)?

Accepted Answer

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

Question 7

Suppose a firm faces the following marginal products for capital (MPK) and labour (MPL): Method A: $$MPK = 45$$, $$MPL = 8$$; Method B: $$MPK = 40$$, $$MPL = 12$$; Method C: $$MPK = 35$$, $$MPL = 16$$; Method D: $$MPK = 30$$, $$MPL = 20. If $$capital costs $$80$$ per unit and labour costs $$24$$ per unit, which method minimizes the cost of producing 1000 toys per day?

Accepted Answer

Method D

Question 8

Canada has a much lower population density than Japan. Therefore, the price of land, relative to the price of labour, is lower in Canada than in Japan. If a Canadian firm and a Japanese firm both produce rice using the same technology, and both minimize costs, the Canadian firm will use land and labour in such a way that the land/labour ratio is:

Accepted Answer

Higher than that of the Japanese firm

Question 9

Refer to the figure showing four LRAC curves for Firms A, B, C, and D. Which firm is displaying decreasing returns to scale at all output levels?

Accepted Answer

Firm C

Question 10

Refer to the same LRAC figure. Which firm is displaying constant returns to scale at all output levels?

Accepted Answer

Firm B

Question 11

Refer to the same LRAC figure. For which of the four firms is output increasing more than in proportion to inputs for all output levels?

Accepted Answer

Firm A

Question 12

Suppose Rio Tinto Alcan is considering the construction of a new aluminum smelter in Northern Quebec, a project which requires a great deal of electricity. If the firm decides to embark on new research and development which leads to the development of a production technique that uses less electricity per ton of aluminum produced, this is an example of:

Accepted Answer

Innovation resulting from increases in factor prices

Question 13

Suppose Commercial Footwear Inc. is making a cost-minimizing decision about the level of output to produce with a given technology. Which of the following is a long-run decision?

Accepted Answer

Should we build a larger shoe manufacturing facility?

Question 14

Which of the following statements most accurately makes the distinction between the long run and the very-long run with respect to the long-run average cost (LRAC) curve?

Accepted Answer

In the long run, the firm is moving along the existing LRAC curve, whereas in the very-long run, the LRAC curve is shifting down.

Question 15

Refer to the isoquant map for golf tees. The cost-minimizing factor combination for producing 2000 golf tees is:

Accepted Answer

6 units of capital and 25 units of labour

Question 16

Suppose a firm is producing 3000 golf tees and is at point F on the isoquant map. Which of the following is true?

Accepted Answer

$$ \frac{MP_K}{MP_L}  is $$equal to $$ \frac{P_K}{P_L} $$

Question 17

Suppose there is a change in relative factor prices and the cost-minimizing method of producing 2000 golf tees is now at point D. If the total cost of producing 2000 golf tees is still $60, it must be the case that:

Accepted Answer

The price of labour fell and the price of capital remained constant.

Question 18

A firm is using capital and labour such that $$ \frac{MP_K}{P_K} = 10 $$ and $$ \frac{MP_L}{P_L} = 20 . To $$minimize costs, the firm should:

Accepted Answer

Use more labour and less capital

Question 19

Suppose the price of capital falls to $$4 per unit and the price of labour rises to 6 $$per unit. Given the following marginal products: Method A: $$MP_K = 14$$, $$MP_L = 4$$; Method B: $$MP_K = 12$$, $$MP_L = 6$$; Method C: $$MP_K = 10$$, $$MP_L = 10$$; Method D: $$MP_K = 8$$, $$MP_L = 16$$; Method E: $$MP_K = 6$$, $$MP_L = 18$$; Method F: $$MP_K = 4$$, $$MP_L = 20$$; Method G: $$MP_K = 2$$, $$MP_L = 21. $$Which method now minimizes costs?

Accepted Answer

Method D

Production Theory, Cost Minimization, and Returns to Scale: week 7 Microeconomics Study Guide

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