Question 1

Which of the following best describes technical efficiency in the long run?

Accepted Answer

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

Question 2

In the long run, a profit-maximizing firm will choose the combination of labour (L) and capital (K) such that:

Accepted Answer

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

Question 3

Suppose the price of labour increases while the price of capital remains constant. According to the principle of substitution, what will a profit-maximizing firm do?

Accepted Answer

Use relatively more capital and less labour in production.

Question 4

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

Accepted Answer

It shows the lowest possible cost of producing each output level when all inputs are variable.

Question 5

A firm is operating at a point where its LRAC curve is falling as output increases. This means the firm is experiencing:

Accepted Answer

Economies of scale

Question 6

At the minimum efficient scale, a firm:

Accepted Answer

Has realized all possible economies of scale

Question 7

If a firm increases all inputs by 10% and output increases by less than 10%, the firm is experiencing:

Accepted Answer

Diseconomies of scale

Question 8

Which of the following best explains why no SRATC curve can fall below the LRAC curve?

Accepted Answer

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

Question 9

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

Accepted Answer

Connecting the minimum points of SRATC curves instead of drawing the lower envelope.

Question 10

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

Accepted Answer

Increasing the price of an input

Question 11

If a firm faces a permanent increase in the price of a key input, in the very long run it is most likely to:

Accepted Answer

Innovate or invent new production methods to reduce reliance on the expensive input.

Question 12

Which formula best represents the condition for cost minimization when using two inputs, labour (L) and capital (K)?

Accepted Answer

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

Question 13

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

Accepted Answer

A car manufacturer automates more assembly tasks when wages rise.

Question 14

Why did Thomas Malthus’s dire predictions about population and output not come true, according to the study materials?

Accepted Answer

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

Question 15

Which of the following best describes the relationship between productivity and technological change?

Accepted Answer

Technological change increases productivity by allowing more output per unit of input.

Question 16

A firm is producing at a point where the LRAC curve is flat. What does this indicate?

Accepted Answer

The firm is experiencing constant returns to scale.

Question 17

If a firm’s output increases exactly in proportion to an increase in all inputs, the firm is experiencing:

Accepted Answer

Constant returns to scale

Question 18

Which of the following is true about the LRAC curve for a given set of input prices?

Accepted Answer

There is only one LRAC curve for a given set of input prices.

Question 19

Which of the following best describes the 'lower envelope' property of the LRAC curve?

Accepted Answer

The LRAC curve is tangent to each SRATC curve at the output level where the fixed factor is optimal.

Question 20

A firm is considering two production methods for the same output. Method A uses more labour and less capital, while Method B uses more capital and less labour. If the price of labour rises, what should the firm do to minimize costs?

Accepted Answer

Switch to Method B, using more capital and less labour.

Producers in the Long Run: Cost, Efficiency, and Technological Change

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