PRODUCTION

Multiple Choice

M1 Production can be thought of as

a. Transforming inputs into outputs of goods and services.
b. Transforming ideas into actions.
c. Factories at work.
d. Combining inputs such as labor and capital.
e. Creating manufactured goods.

M2 Which of the following is the best definition of a production function?

a. A function that lists all possible production methods.
b. A function showing the maximum output the firm can produce for any
combination of inputs.
c. A measure of the firm’s production costs for a given set of inputs.
d. A measure of the minimum technology needed to produce a given level of output.
e. A function that shows maximum outputs obtained from a production facility.

M3 Are production technologies fixed in the short run?

a. Yes, they do not change.
b. Yes mainly, but technologies can change slowly over the course of years.
c. No, but changes tend to be small and predictable.
d. No, but when analyzing a given production function, we assume that technology
is fixed and is the best available at the time.
e. Though technologies change, it is impossible to predict these changes.

M4 In the short run, is it possible for a firm to change inputs?

a. Yes, any and all inputs can be changed.
b. Yes, although only small input changes are possible.
c. No, all inputs are fixed in the short run.
d. Not completely; one or more inputs are fixed.
e. It depends on the duration of the short run.

M5 As labor usage increases, the marginal product of labor

a. First falls, then rises.
b. First falls, reaches a flat portion, then rises rapidly.
c. First rises, then falls.
d. First rises, then reaches a plateau.
e. First rises, then falls, then rises again.

M6 In the short run, a firm should expand the use of a variable input until
a. Its marginal product is zero.
b. Its marginal revenue product is zero.
c. Its marginal revenue product is at a maximum.
d. Its marginal revenue product equals the input’s marginal cost.
e. None of the above answers is correct.
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M7 Firm X sells output at P = $4 per unit and pays labor a wage of $20 per hour. The marginal
product of labor is given by: MPL = 30 - .1L. The profit-maximizing quantity of labor is:
a. L = 100 hours.
b. L = 180 hours.
c. L = 250 hours.
d. L = 300 hours.
e. L = 320 hours.

M8 In the long run, do firms face trade-offs in how they produce?

f. No, they have fully adjusted to all relevant factors; there are no more trade-offs.
g. No, their options to modify production are limited.
h. Yes, but the trade-offs only involve fixed inputs.
i. Yes, because they have the maximum flexibility to trade off inputs.
j. Yes, but only when there is a major change in technology.

M9 In the long run, the firm produces a given level of output at least cost by
a. Equating the ratios of marginal products to input prices across all inputs.
b. Ensuring equality of marginal products across inputs.
c. Using a greater proportion of the cheaper input.
d. Intensively applying more and more labor to its fixed plant.
e. None of these answers is correct.

M10 Which of the following is likely to be a cause of increasing returns to scale?

a. A change to production methods not feasible at low levels of output.
b. Increased specialization of labor.
c. A one-time fall in labor costs.
d. Answers a and b are both correct.
e. Answers a, b, and c are all correct.

M11 Under constant returns to scale,

a. A given percentage change in one input implies an equal change in total output.
b. A given percentage change in all inputs implies constant marginal products for all
inputs.
c. A given percentage change in all inputs causes an equal percentage change in
output.
d. The production function varies linearly with all inputs.
e. A constant level of output is achieved with various combinations of inputs.

M12 In the long-run, a profit-maximizing firm produces such that

a. The marginal products of all inputs are zero.
b. The ratios of marginal products to input prices are equal across all inputs.
c. Each input’s marginal revenue product equals the input’s marginal cost.
d. Marginal products are equal for all inputs.
e. Both b and c are correct.

M13 The slope of an isoquant is referred to as the

a. Marginal efficiency of production.
b. Marginal product of each input.
 Production Chapter 5

c. Marginal rate of technical substitution.

d. Marginal rate of factor efficiency.
e. Ratio of input prices.

Short Problems and Questions

S1 Draw a graph that shows total product and marginal product in a short-run production
setting with one fixed input and one variable input. Carefully explain the shape of the
graph.

S2 Carefully explain why a firm should employ a variable input up to the point that its
marginal revenue product equals its marginal cost: MRP = MC.

S3 Suppose that a firm is producing in the short run with output given by:
Q = 10L - .25L2,
The firm hires labor at a wage of $16 per hour and sells the good in a competitive market
at P = $8 per unit. Find the firm’s optimal use of labor and associated level of output.

S4 Explain how a firm in the short run will respond to each of the following changes:
a. An increase in the price of the good or service that it sells.
b. An increase in the marginal cost of the variable input.
c. An increase in the productivity of the variable input.

S5 Carefully define and distinguish between short run and long run. Explain how each is
important to production decisions.

Longer Problems and Discussion Questions

L1 Thayer Corporation. is a major defense contractor, producing artillery shells for the
Marine Corps landing craft. A recent study of production over the past year shows the
following relationship between labor inputs and output:
Month Labor Output
1 10 450
2 9 440
3 2 300
4 5 375
5 8 428
6 6 395
7 7 413
8 1 270
9 4 353
10 3 328
a. Prepare a table that shows the average and marginal product of labor for Thayer,
over the range of labor inputs indicated above.
b. The Marine Corp has agreed to buy an unspecified number of shells from Thayer
at a price of $2 per shell. Labor costs are $38 per hour including fringe benefits.
How many shells should Thayer produce, and how much labor should it hire?
Managerial Economics Study Guide

L2 Suppose that production at a facility uses a fixed amount of capital, and a variable
amount of labor. Output has been measured as: Q = 30L - .3L2.
a. Determine the amount of labor at which total output is maximized.
b. If labor can be hired at $24 per hour and the good sells at $4 per unit, determine
the optimal use of labor, the optimal level of output, and the firm’s final profit.

Labor