Q: A firm’s economic profit is calculated as:

$$\text{Economic profit} = \text{Total revenue} - \text{Total economic cost}$$

Q: A firm is considering 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 10 units of capital and 2 units of labor. If the price of labor ($$P_L) is$$ $$1 and the price of capital (P_K$) is 5$$, which technology should the firm choose?

Technology B, because its total cost is $$10 \times 5 + 2 \times 1 = 52$$

Question 1

A firm’s economic profit is calculated as:

Accepted Answer

$$	ext{Economic profit} = 	ext{Total revenue} - 	ext{Total economic cost}$$

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, marginal product eventually decreases.

Question 3

A firm is considering 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 10 units of capital and 2 units of labor. If the price of labor ($$P_L) is$$ $$1 and the price of capital (P_K$) is 5$$, which technology should the firm choose?

Accepted Answer

Technology B, because its total cost is $$10 	imes 5 + 2 	imes 1 = 52$$

Question 4

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

Accepted Answer

At least one factor of production is fixed.

Question 5

If the marginal product of labor is greater than the average product of labor, what happens to the average product as more labor is added?

Accepted Answer

The average product increases.

Question 6

A firm’s optimal method of production is defined as:

Accepted Answer

The method that minimizes cost for a given level of output.

Question 7

Suppose a firm’s production function is $$Q = f(L, K)$$, where $$L is $$labor and $$K is $$capital. If the marginal product of labor ($$MP_L) is 10 $$and the marginal product of capital ($$MP_K) is 5$$, and the price of labor ($$P_L) is$$ $$2$$ and the price of capital ($$P_K) is$$ $$1$$, is the firm minimizing costs?

Accepted Answer

No, because $$\frac{MP_L}{P_L} \u003e \frac{MP_K}{P_K}$$

Question 8

Which of the following best describes an isoquant?

Accepted Answer

A curve showing all combinations of capital and labor that yield the same level of output.

Question 9

If a firm’s total revenue is $$30,000, its explicit costs are 29$$,000, and its opportunity cost of capital is $2,000, what is its economic profit?

Accepted Answer

$$-1,000$$

Question 10

The marginal rate of technical substitution (MRTS) is defined as:

Accepted Answer

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

Question 11

Which of the following is NOT a basic decision that all firms must make?

Accepted Answer

How to set government policy

Question 12

A capital-intensive technology is one that:

Accepted Answer

Relies heavily on capital instead of human labor.

Question 13

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

Accepted Answer

$$2$$

Question 14

Which of the following would NOT be considered an explicit cost for a firm?

Accepted Answer

The opportunity cost of the owner’s time

Question 15

A firm’s isocost line shifts outward (away from the origin) if:

Accepted Answer

The firm’s total cost increases

Question 16

Suppose a firm is currently using a labor-intensive technology because labor is cheap. If the wage rate increases significantly, what is the likely effect on the firm’s choice of technology?

Accepted Answer

The firm will switch to a more capital-intensive technology.

Question 17

If a firm’s marginal product of labor is zero, what does this imply about adding more labor?

Accepted Answer

Adding more labor will not change total output.

Question 18

Which of the following best explains why firms include a normal rate of return as part of their economic cost?

Accepted Answer

To account for the opportunity cost of capital.

Question 19

In the long run, which of the following is true?

Accepted Answer

All factors of production are variable.

Question 20

A firm’s cost-minimizing equilibrium condition is given by:

Accepted Answer

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

The Production Process: The Behavior of Profit-Maximizing Firms

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