Question 1

Which of the following best describes technical efficiency in the context of production?

Accepted Answer

When a firm produces the maximum output possible from a given combination of inputs.

Question 2

A firm is currently using a combination of capital and labour such that $ \frac{MP_K}{p_K} > \frac{MP_L}{p_L} $. What should the firm do to minimize costs?

Accepted Answer

Use more capital and less labour.

Question 3

Which equation represents the necessary condition for cost minimization when choosing between capital (K) and labour (L)?

Accepted Answer

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

Question 4

Suppose the price of labour increases while the price of capital remains unchanged. According to the principle of substitution, what is the most likely response by a profit-maximizing firm?

Accepted Answer

The firm will use relatively more capital and less labour.

Question 5

What does the long-run average cost (LRAC) curve show?

Accepted Answer

The lowest possible cost of producing each level of output when all inputs can be varied.

Question 6

At which point on the LRAC curve has a firm realized all available economies of scale?

Accepted Answer

At the minimum efficient scale.

Question 7

If a firm is operating at a level of output where the LRAC curve is flat, what is the firm experiencing?

Accepted Answer

Constant returns to scale.

Question 8

Which of the following best describes economies of scale?

Accepted Answer

A reduction in long-run average costs as the scale of a firm's operations increases.

Question 9

A firm is producing at a level of output greater than its minimum efficient scale and finds that its LRAC is rising. What is the firm experiencing?

Accepted Answer

Diseconomies of scale.

Question 10

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

Accepted Answer

No short-run cost curve can fall below the LRAC curve.

Question 11

Jacob Viner's historical mistake in drawing the LRAC curve was to:

Accepted Answer

Connect all minimum points of the SRATC curves instead of constructing the lower envelope of all SRATC curves.

Question 12

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

Accepted Answer

Increasing the price of inputs.

Question 13

Suppose a bakery faces a sudden increase in the price of flour, a key input. In the very long run, which of the following is a possible response according to the study materials?

Accepted Answer

The bakery may innovate to use less flour or substitute away from flour.

Question 14

Which of the following best defines productivity as used by economists?

Accepted Answer

Output produced per unit of some input.

Question 15

Why must successful innovation in the very long run produce large profits for firms?

Accepted Answer

Because invention and innovation are subject to great uncertainties and high costs.

Question 16

Which of the following is a real-world example of the principle of substitution?

Accepted Answer

A car manufacturer automates more of its assembly line after wages increase.

Question 17

If a firm is producing at a point where output increases less than in proportion to inputs, what is this situation called?

Accepted Answer

Decreasing returns to scale.

Question 18

Which of the following would cause a downward shift in the LRAC curve?

Accepted Answer

A technological advancement that increases productivity.

Question 19

Why do we not distinguish between AVC, AFC, and ATC in the long run?

Accepted Answer

Because all costs are variable in the long run.

Question 20

Which of the following best explains why Thomas Malthus's predictions about population and output were proven wrong?

Accepted Answer

Technological advancements increased output and populations did not expand as quickly as predicted.

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

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