Question 1

Which of the following best describes the condition for cost minimization in the long run for a firm using labour (L) and capital (K)?

Accepted Answer

$$\frac{MP_L}{p_L} = \frac{MP_K}{p_K}$$

Question 2

A firm finds that $$\frac{MP_K}{p_K} \u003c \frac{MP_L}{p_L}. $$What should the firm do to minimize costs for a given level of output?

Accepted Answer

Use more labour and less capital

Question 3

Suppose a firm can produce 100 units of output using either 2 machines and 8 workers or 4 machines and 2 workers. If the price of labour rises, what is the likely response of the profit-maximizing firm?

Accepted Answer

Substitute capital for labour and use more machines

Question 4

Which of the following best explains why the long-run average cost (LRAC) curve is often 'saucer-shaped'?

Accepted Answer

It reflects economies of scale at low output, constant returns at intermediate output, and diseconomies of scale at high output

Question 5

If a firm is operating at the minimum efficient scale, what does this imply about its long-run average cost?

Accepted Answer

The firm is producing at the lowest possible average cost

Question 6

Why can no short-run average total cost (SRATC) curve fall below the long-run average cost (LRAC) curve?

Accepted Answer

The LRAC represents the lowest attainable cost for each output when all inputs are variable

Question 7

Which of the following is NOT a reason for diseconomies of scale?

Accepted Answer

Increased opportunities for specialization

Question 8

Suppose the marginal product of capital is 40, the price of capital is 10, the marginal product of labour is 20, and the price of labour is 2. Is the firm minimizing costs? What should it do?

Accepted Answer

No; the firm should use more labour and less capital

Question 9

What does the principle of substitution imply for firms when the price of one input rises?

Accepted Answer

Firms will use relatively more of the cheaper input and less of the more expensive input

Question 10

Why might methods of producing the same product differ across countries?

Accepted Answer

Differences in factor scarcities and prices lead to different cost-minimizing production methods

Question 11

Which of the following best describes technological change in the context of microeconomics?

Accepted Answer

Any change in the available techniques of production

Question 12

If a technological innovation shifts the LRAC curve downward, what is the likely effect on the firm's costs?

Accepted Answer

The firm's costs decrease at every level of output

Question 13

Which of the following is a measure of productivity commonly used by economists?

Accepted Answer

Output per worker

Question 14

Why do profit-maximizing firms innovate?

Accepted Answer

To gain a temporary advantage and earn profits until competitors catch up

Question 15

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

Accepted Answer

A change in consumer tastes

Question 16

Suppose a firm faces the following: $$MP_K = 30$$, $$p_K = 5$$, $$MP_L = 15$$, $$p_L = 3. Is $$the firm minimizing costs? Show your reasoning.

Accepted Answer

Yes; $$\frac{MP_K}{p_K} = 6$$ and $$\frac{MP_L}{p_L} = 5$$, so the firm should use more capital and less labour

Question 17

What is the main difference between long-run decreasing returns and short-run diminishing returns?

Accepted Answer

Long-run decreasing returns are due to increased firm size, while short-run diminishing returns are due to a fixed factor

Question 18

If a firm is on a SRATC curve that is tangent to the LRAC curve at a certain output, what does this imply?

Accepted Answer

The quantity of the fixed factor is optimal for that output level

Question 19

Which of the following best explains why productivity growth is significant for living standards?

Accepted Answer

Productivity growth allows output to grow faster than population, raising material living standards

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

Study Guide - Practice Questions

Study Guide - Flashcards