Question 1

Which of the following best describes the main goal of a for-profit firm according to microeconomic theory?

Accepted Answer

To maximize profit, defined as $$\pi = R - C$$ where $$R is $$revenue and $$C is $$cost.

Question 2

A firm is said to be technologically efficient if:

Accepted Answer

It produces the maximum output with the minimum possible inputs, given current technology.

Question 3

Which of the following is NOT a characteristic of a corporation?

Accepted Answer

It is always government-owned.

Question 4

Given the production function $$q = f(L, K)$$, what does $$L$$ represent?

Accepted Answer

Units of labor.

Question 5

In the short run, which of the following statements is true?

Accepted Answer

At least one input is fixed.

Question 6

The marginal product of labor (MPL) is defined as:

Accepted Answer

The change in output resulting from a one-unit increase in labor, holding other inputs constant: $$MPL = \frac{\Delta q}{\Delta L}.$$

Question 7

If a firm experiences diminishing marginal returns to labor, what happens as more labor is added (holding capital constant)?

Accepted Answer

Marginal product of labor eventually decreases.

Question 8

Which of the following best describes an isoquant?

Accepted Answer

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

Question 9

The marginal rate of technical substitution (MRTS) between labor and capital is:

Accepted Answer

The rate at which a firm can substitute labor for capital while keeping output constant: $$MRTS = -\frac{\Delta K}{\Delta L}.$$

Question 10

Suppose a firm’s production function is $$q = AL$$^{0.6}$$K^{0.4}$. What type of returns to scale does this function exhibit?

Accepted Answer

Constant returns to scale.

Question 11

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

Accepted Answer

Decreasing returns to scale.

Question 12

Which of the following is an example of a neutral technical change?

Accepted Answer

A new machine allows the firm to produce more output with the same ratio of labor to capital.

Question 13

A firm’s average product of labor (APL) is given by:

Accepted Answer

$$APL = \frac{q}{L}$$

Question 14

Which of the following is true about isoquants?

Accepted Answer

Isoquants farther from the origin represent higher output levels.

Question 15

If the Cobb-Douglas production function is $$q = AL$$^{0.3}$$K^{0.5}$$, what is the sum $$\gamma = \alpha + \beta$ and what does it imply?

Accepted Answer

$$\gamma = 0.8$$, implying decreasing returns to scale.

Question 16

A public sector firm is best described as:

Accepted Answer

A firm owned by government or government agencies.

Question 17

Suppose a firm’s production function is $$q = f(L, K)$$ and the marginal product of labor is negative. What does this imply?

Accepted Answer

Adding more labor decreases total output.

Question 18

Which of the following is a correct statement about the law of diminishing marginal returns?

Accepted Answer

As more of one input is added, holding others constant, the marginal product of that input will eventually decrease.

Question 19

If a firm can substitute labor for capital while keeping output constant, this is an example of:

Accepted Answer

Long-run production.

Question 20

A nonprofit firm is characterized by which of the following?

Accepted Answer

It is neither government-owned nor intended to earn a profit.

Chapter 6: Firms and Production – Microeconomics Study Notes

Study Guide - Practice Questions