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 currently using a combination of labour and capital such that $\frac{MP_K}{P_K} > \frac{MP_L}{P_L}$. To minimize costs, what should the firm do?

Accepted Answer

Use more capital and less labour.

Question 3

Which of the following best describes the principle of substitution in the context of production?

Accepted Answer

Firms substitute toward inputs whose prices have fallen and away from those whose prices have risen.

Question 4

Suppose a firm faces the following input prices: $P_K = 10$, $P_L = 5$, and marginal products: $MP_K = 40$, $MP_L = 20$. Is the firm minimizing costs, and if not, what should it do?

Accepted Answer

No, the firm should use more labour and less capital.

Question 5

Which of the following is the correct formula for cost minimization when using two inputs, capital ($K$) and labour ($L$)?

Accepted Answer

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

Question 6

A firm is operating at a point where its long-run average cost (LRAC) is falling as output increases. Which of the following is TRUE?

Accepted Answer

The firm is experiencing economies of scale.

Question 7

What is the minimum efficient scale (MES) of a firm?

Accepted Answer

The smallest output at which LRAC reaches its minimum.

Question 8

If a firm increases all its inputs by 50% and its output increases by 30%, what is the firm experiencing?

Accepted Answer

Decreasing returns to scale.

Question 9

Which of the following statements about the long-run average cost (LRAC) curve is correct?

Accepted Answer

The LRAC curve is the lower envelope of all possible SRATC curves.

Question 10

Technological change in the very long run can be best described as:

Accepted Answer

A movement to a new LRAC curve.

Question 11

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

Accepted Answer

A decrease in the price of existing inputs.

Question 12

Suppose a firm faces a rise in the price of labour. In the short run, it cannot change its capital, but in the long run, it can. What is the most likely response in the long run?

Accepted Answer

The firm will substitute capital for labour.

Question 13

Which of the following best explains why profit-maximizing firms are motivated to innovate?

Accepted Answer

To reduce costs and increase profits.

Question 14

If a firm is producing at a point where $\frac{MP_K}{P_K} < \frac{MP_L}{P_L}$, what should it do to minimize costs?

Accepted Answer

Use more labour and less capital.

Question 15

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

Accepted Answer

The LRAC curve is tangent to each SRATC curve at the output level for which the quantity of the fixed factor is optimal.

Question 16

Which of the following real-world scenarios best illustrates the concept of economies of scale?

Accepted Answer

A bakery reduces its average cost per loaf by doubling its production and using larger ovens.

Question 17

Which of the following is an example of a firm 'innovating away' from an input whose price has risen?

Accepted Answer

A car manufacturer automates its assembly line after wages increase.

Question 18

Which of the following best describes 'technical efficiency'?

Accepted Answer

Combining inputs in such a way as to maximize output for a given number of inputs.

Question 19

Suppose a firm is producing at its minimum efficient scale. Which of the following is TRUE?

Accepted Answer

All economies of scale have been realized.

Producers in the Long Run: Cost Minimization, Substitution, and Technological Change

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