Microeconomics Goolsbee 1st Edition Test Bank

Microeconomics Goolsbee 1st Edition Test Bank

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 1. The production process is an extremely complicated task, so economists make a number
of simplifying assumptions. Which of the following assumptions do economists make in
their basic model of producer behavior?

I. Multiproduct firms: All firms produce at least two goods.

II. Firms only use two inputs in the production process: capital and labor.
III. Cost minimization: Firms attempt to produce a fixed quantity of output at the
lowest possible total cost.
IV. Firms can produce more output by using more inputs.
A) I and IV
B) I, II, III, and IV
C) II, III, and IV
D) I and III

2. A basic assumption of the short run is that a firm:

A) can employ more workers and add more capital to the production process.
B) cannot adjust its workforce or the amount of capital it uses.
C) can reduce the number of workers it uses, but it cannot adjust how much capital it
uses.
D) can freely adjust the amount of labor and capital that it employs.

3. A basic assumption of the long run is that a firm:

A) cannot change the amount of labor or capital that it employs.
B) can change the amount of labor and capital that it employs.
C) can change the amount of capital that it employs but not the amount of labor.
D) cannot change the amount of capital that it employs but can change the amount of
labor.

Use the following to answer question 4:

Table 6.1

Production Process 1 Production Process 2 Production Process 3

Units of Units Additional Units Units Additional Units Units Additional
capital of output of of output of of output
labor produced capital labor produced capital labor produced
3 5 10 12 15 80 1 4 12
3 6 7 12 16 84 2 4 9
3 7 4 12 17 87 3 4 7

Page 1
4. (Table 6.1) Diminishing marginal returns to labor occur in Production Process ______,
and diminishing marginal returns to capital occur in Production Process ______.
A) 1; 3
B) 2; 1
C) 2; 3
D) 1; 1

5. A basic assumption of production is that the firm:

A) cannot borrow money to finance its input expenditures.
B) can buy as much labor and capital as it desires at fixed prices.
C) must bid up the prices of labor and capital in order to produce more output.
D) has a downward-sloping budget constraint.

6. Which of the following is an example of a Cobb–Douglas production function?

A) Q = f(K, L)
B) Q = 5K + 2.5L
C) Q = K0.50L0.75
D) Q = 2K/3L

7. Which of the following are examples of production functions?

I. Q = 56K + 18L
II. Q = 2K0.8L0.2
III. Q = KL
A) II and III
B) I, II, and III
C) II only
D) I only

8. A donut shop has a production function given by Q = 50K1/3L1/2, where Q is the number
of donuts produced per hour, K is the number of donut fryers (which is fixed at eight in
the short run), and L is the number of employed workers. How many donuts can be
produced per hour with four workers in the short run?
A) 200
B) 167
C) 320
D) 84

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 9. Suppose a firm's short-run production function is given by Q = 16L0.80. What is the
marginal product of the fourth worker?
A) 36
B) 10
C) 49
D) 1.85

10. Suppose the slope of a short-run production function is given by 2/L0.5. Which of the
following statements is TRUE?

I. The marginal product of the fifth worker is 0.20.

II. The production function exhibits increasing marginal
returns.
III. The marginal product of the sixteenth worker is 0.50.
IV. The production function's slope eventually changes from
positive to negative, as the firm produces more and more
units of output.
A) II and III
B) I and IV
C) III only
D) I, II, and IV

Use the following to answer questions 11-12:

Figure 6.1

Page 3
11. (Figure 6.1) The average product at L = 2 and L = 8 are and
respectively.
A) 2; 1.13
B) 0.5; 0.89.
C) 8; 72
D) 1.5; 0.5

12. (Figure 6.1) Which of the following statements is TRUE?

I. At L = 5, MPTL > APL.

II. At L = 2, MPL = APL.
III. For this production function, MPL is greater at L = 2 than at L = 8.
IV. For this production function, MPL is always greater than APL.
A) I and II
B) III only
C) I and IV
D) II only

13. The short-run production function for a firm is given by Q = 40L2/3. What is the average
product?
A) APL = 16.67L
B) APL = 40/L
C) APL = 40/L1/3
D) APL = 1/40L

14. The short-run production function for a firm is given by Q = 10L0.5. What is the
marginal product?
A)

B)

C)

D)

Page 4
Use the following to answer question 15:

Table 6.2

Units of Capital, K Units of Labor, L Output, Q

6 0 0.0
6 1 100.0
6 2 186.6
6 3 268.8

15. (Table 6.2) Which of the following statements is TRUE?

A) At L = 1, marginal product is greater than average product.
B) At L = 3, the quantity of output produced per unit of labor is 82.2.
C) The additional output produced by using the second unit of labor is 86.6.
D) At L = 2, the APL = L/Q = 0.011.

16. Which situation will likely give rise to diminishing marginal product of labor?
A) Plasma television manufacturers are going out of business because of increased
competition from LCD televisions.
B) Hell's Kitchen, which has enough counter space for three cooks per shift, decides to
hire a fourth cook per shift.
C) Nevaeh's Kitchen undertakes a massive expansion, doubling both the size of its
kitchen and number of cooks.
D) A landscaping firm replaces all of its self-propelled lawnmowers with push
mowers.

17. Brenda's Pastry employs three workers who produce 6 dozen pastries per hour. After
Brenda hires a fourth worker, the number of pastries produced increases to 7 dozen per
hour. Which of the following statements is TRUE?
A) Because the marginal product of the fourth worker is greater than the average
product of three workers, the average product must fall.
B) Because the marginal product of the fourth worker is less than the average product
of three workers, the average product must rise.
C) Because the marginal product of the fourth worker is greater than the average
product of three workers, the average product must rise.
D) Because the marginal product of the fourth worker is less than the average product
of three workers, the average product must fall.

Page 5
Use the following to answer question 18:

Figure 6.2

18. (Figure 6.2) Which of the following statements is TRUE?

I. This production function exhibits diminishing marginal product.

II. At L = 3, MPL = 1.88 and APL = 4.
III. At L = 6, APL > MPL.
IV. At L = 3, MPL = 4 and APL = 1.88.
A) II and III
B) I, II, and III
C) I, III, and IV
D) I and II

Use the following to answer questions 19-20:

Table 6.3

Units of Labor, L
Units of 1 2 3 4
Capital, 1 50.0 66.7 75.5 80.0
K 2 66.7 100.0 120.0 133.3
3 75.0 120.0 150.0 171.4
4 80.0 133.3 171.4 200.0

Page 6
 19. (Table 6.3) This table illustrates a:
A) short-run production function because capital and labor are used in equal
increments.
B) long-run production function because labor and capital can both be varied.
C) long-run production function because capital and labor are used in equal
increments.
D) short-run production function because labor and capital can both be varied.

20. (Table 6.3) Which of the following statements is TRUE?

I. A combination of 4 units of capital and 2 units of labor produces the

same amount of output as a combination of 3 units of capital and 3
units of labor.
II. If labor is fixed at 3 units, adding more capital increases output at an
increasing rate.
III. If capital is fixed at 2 units, adding more labor results in diminishing
returns.
IV. A combination of 3 units of capital and 4 units of labor produces 171.4
units of output.
A) I, II, III, and IV
B) II, III, and IV
C) III and IV
D) IV only

Use the following to answer question 21:

Table 6.4

Units of Labor, L
Units of 1 2 3 4
Capital, 1 100.00 168.18 227.95 282.84
K 2 118.92 200.00 271.08 336.36
3 131.61 221.34 300.00 372.24
4 141.42 237.84 322.37 400.00

21. (Table 6.4) What is the equation for this firm's production function?
A) Q = 100KL
B) Q = 100K0.5L0.5
C) Q = 100K0.25L0.75
D) Q = 100K2L

Page 7
 22. Which of the following statements violates the basic assumptions of isoquants?
A) Isoquants cannot cross.
B) Isoquants closer to the origin correspond to lower output levels.
C) Diminishing marginal products imply that isoquants are concave to the origin.
D) Isoquants show all combinations of two inputs that can produce a particular
quantity of output.

Use the following to answer question 23:

Figure 6.3

23. (Figure 6.3) Which of the following statements is TRUE?

I. More output is produced at point A than at point B.

II. The ratio of the marginal product of labor to the marginal
product of capital is higher at point A than at point B.
III. The MRTSLK is equal at points A and B.
A) I, II, and III
B) II only
C) III only
D) II and III

Page 8
Use the following to answer question 24:

Figure 6.4

24. (Figure 6.4) Which of the following statements is TRUE?

A) It is easier for a small amount of additional labor to replace a large amount of
capital at point A than at point B.
B) It is easier for a small amount of additional labor to replace a large amount of
capital at point B than at point A.
C) The MRTSLK at point A equals MPK/MPL.
D) The MRTSLK at point B is greater the MRTSLK at point A.

25. If a firm is using a lot of capital and just a little labor, the marginal product of labor is:
A) low relative to the marginal product of capital, making it more difficult to
substitute labor for capital.
B) high relative to the marginal product of capital, making it easier to substitute labor
for capital.
C) high relative to the marginal product of capital, making it more difficult to
substitute labor for capital.
D) low relative to the marginal product of capital, making it easier to substitute labor
for capital.

26. Suppose that a community health center finds that, regardless of the number of
physicians or nurse practitioners employed, it can always replace one family practice
physician by using two additional nurse practitioners without affecting the quantity (and
quality) of patient office visits. This finding implies that:
A) physicians and nurse practitioners are perfect substitutes in production.
B) physicians and nurse practitioners are perfect complements in production.
C) diminishing returns will occur as the health center hires more nurse practitioners.
D) the marginal product of physicians will increase by two with every nurse
practitioner hired.

Page 9
Use the following to answer question 27:

Figure 6.5

27. (Figure 6.5) Put these four panels in order from the easiest case of input substitutability
to the hardest case of input substitutability.
A) panel (b), panel (a), panel (c), and panel (d)
B) panel (a), panel (c), panel (d), and panel (b)
C) panel (d), panel (c), panel (a), and panel (b)
D) panel (a), panel (d), panel (c), and panel (b)

Page 10
 28. Which of the following statements is TRUE?

I. If labor and capital are perfect substitutes in production, the isoquant is a

downward-sloping line.
II. If a company needs to use inputs in fixed proportion such that the capital
to labor ratio is always 2, the firm's isoquants are “L-”shaped.
III. If the production function is given by Q = min(14, 7), the firm can
produce, at minimum, 21 units of output.
A) I, II, and III
B) I only
C) III only
D) I and II

29. Why are the slopes of isocost lines constant?

A) because firms must use capital and labor inputs in fixed proportions
B) because firms can hire as much of an input as they desire without changing wages
or rental rates
C) because firms must use less labor if employing more capital
D) because the marginal rate of technical substitution of labor for capital is constant

Use the following to answer question 30:

Figure 6.6

Page 11
 30. (Figure 6.6) Suppose a firm spends $4,000 per day producing a good. The wage rate per
worker is $200 per day and rental rate per unit of capital is $500 per day. The firm's
isocost line at the current expenditure level is represented by:
A) C1.
B) C2.
C) C3.
D) C4.

Use the following to answer question 31:

Figure 6.7

31. (Figure 6.7) Based on the isocost line, the ratio of the wage rate (W) to rental rate of
capital (R) is:
A) 1.5.
B) 4.0.
C) 0.67.
D) 0.50.

32. Suppose the wage rate is $25 per hour and the rental rate of capital is $50 per hour. The
equation for the isocost line is given by:
A) C = 75LK.
B) C = 25L + 50K.
C) C = 75(L + K).
D) C = 2K/L.

Page 12
Use the following to answer question 33:

Figure 6.8

33. (Figure 6.8) The movement in the isocost line is caused by a(n):
A) increase in the rental rate of capital.
B) decrease in the rental rate of capital.
C) decrease in the wage rate.
D) increase in the wage rate.

Use the following to answer question 34:

Figure 6.9

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 34. (Figure 6.9) The movement in the isocost line is caused by a(n):
A) decrease in the wage rate.
B) increase in the wage rate or rental rate of capital.
C) increase in the wage rate.
D) decrease in the rental rate of capital.

35. Which of the following statements best exemplifies the firm's constrained minimization
problem?
A) The firm desires to produce a given quantity of output by choosing values of W and
R that minimize RK + WL.
B) The firm desires to produce as much output as possible subject to the constraint
that C = RK + WL.
C) The firm desires to produce as much output as possible by choosing values of L
and K that minimize RK + WL.
D) The firm desires to produce a given quantity of output by choosing values of L and
K that minimize RK + WL.

Use the following to answer question 36:

Figure 6.10

36. (Figure 6.10) Which of the following statements is TRUE?

I. The firm minimizes the cost of producing 10,000 units of output at point C.
II. If the firm chooses an input combination that lies on C3, the firm will be able to
produce 10,000 units of output at a lower cost than at point A.
III. The cost of producing 10,000 units of output is greater at point B than at point A.
A) I and III
B) II and III
C) I only
D) I, II, and III

Page 14
37. Which of the following statements is TRUE, assuming the firm is choosing the optimal
bundle of inputs that minimizes the cost of producing a given quantity of output?

I. The marginal product per dollar spent on labor equals the marginal product
per dollar spent on capital.
II. APL = APK
III.

IV. MPL × W = MPK × R

A) I and II
B) I, II, III, and IV
C) IV only
D) I and III

38. Suppose a firm is producing 2,475 units of output by hiring 50 workers (W = $20 per
hour) and 25 units of capital (R = $10 per hour). The marginal product of labor and
marginal product of capital are 40 and 25, respectively. Is the firm minimizing the cost
of producing 2,475 units of output?
A) Yes, the ratio of the number of workers to the wage equals the ratio of the number
of units of capital to the rental rate.
B) No, the firm should use more labor and less capital.
C) No, the firm should use more capital and less labor.
D) No, the firm should use more of both labor and capital.

39. Suppose a firm with a production function given by Q = 30 K0.5L0.5 produces 1,500 units
of output. The firm pays a wage of $40 per unit and pays a rental rate of capital of $640
per unit. How many units of labor and capital should the firm employ to minimize the
cost of producing 1,500 units of output?

(Note: )
A) L = 200; K = 12.5
B) L = 625; K = 4.
C) L = 275; K = 8.75
D) L = 150; K = 10

Page 15
40. Suppose a firm with a production function given by Q = K0.25L0.75 produces 1,500 units
of output. The firm pays a wage of $50 per unit and pays a rental rate of capital of $50
per unit.
3K 0.25 L0.75
(Note: MRL = 0.25 ; MPK = ).
4L 4 K 0.75
To minimize the cost of producing 1,500 units of output, the firm should use:
A) 3 times as many units of labor as units of capital.
B) equal amounts of labor and capital.
C) 1.25 times as many units of capital as units of labor.
D) 16 units of capital and 6,814 units of labor.

41. Suppose a firm with a production function given by Q = 4K0.25L0.75 produces 100 units
of output. The firm pays a wage of $30 per units and pays a rental rate of capital of $10
per unit.

(Note: ).
The minimum cost of producing 100 units of output is:
A) $3,000.
B) $2,250.
C) $800.
D) $1,000.

42. Suppose that the marginal product of labor and marginal product of capital are given by
K and L, respectively. What happens to the firm's cost minimizing capital-to-labor ratio
if the price of capital falls by 50%?
A) The capital-to-labor ratio will decrease by 50%.
B) The capital-to-labor ratio will double.
C) The capital-to-labor ratio will increase by 50%.
D) The capital-to-labor ratio will increase fivefold.

Page 16
Use the following to answer question 43:

Figure 6.11

43. (Figure 6.11) Which of the following statements is TRUE?

I. If labor is relatively cheaper than capital, the firm will produce at point B.
II. If capital is relatively more expensive than labor, the firm will produce at
point A.
III. At point A, the MRTSLK = W/R.
A) II and III
B) III only
C) I and III
D) I and II

Use the following to answer question 44:

Figure 6.12

Page 17
 44. (Figure 6.12) Which of the following statements is TRUE?

I. Panel (a) illustrates constant returns to scale.

II. Panel (b) illustrates decreasing returns to scale.
III. Panel (a) illustrates increasing returns to scale
IV. Panel (b) illustrates constant returns to scale.
A) I and IV
B) II and III
C) III and IV
D) I and III

45. The production function given by Q = 10(0.7K2 + 0.3L2)0.5 has ______ returns to scale.
A) constant
B) instant
C) increasing
D) decreasing

46. Which of the following production functions exhibit constant returns to scale?

I.
Q=
II. Q = 2K + L
III. Q = K0.8L0.2
A) II and III
B) I and II
C) III only
D) I, II, and III

Use the following to answer question 47:

Figure 6.13

Page 18
47. (Figure 6.13) A technological change is represented by the movement from point
______ to point ______.
A) X; Z
B) Z; X
C) W; Z
D) Z; W

48. Consider the production function Q = Af(K, L). Which of the following statements is/are
TRUE?

I. An increase in total factor productivity growth is represented by an

increase in K or L.
II. An increase in total factor productivity growth means that the same
amount of output can be produced using fewer inputs.
III. If A increases by 10%, the amount of output produced will increase
by 10%, holding the quantity of inputs fixed.
A) II only
B) I, II, and III
C) II and III
D) I only

49. Between 1994 and 2008, the share of the workforce employed in manufacturing ______
and manufacturing output ______.
A) decreased; decreased
B) increased; increased
C) decreased; increased
D) increased; decreased

Page 19
 50. Here is a copy of your friend's class notes on the nine basic assumptions of producer
behavior:
1. The firm produces two goods.
2. The firm has already decided which product to produce.
3. The firm's goal is to produce as much output as possible at minimum cost.
4. The firm uses only capital and labor inputs in making its product.
5. In the short run and long run, both labor and capital inputs cannot be increased or
decreased.
6. In general, the more inputs a firm uses, the more output it produces.
7. There are constant marginal returns to labor and capital.
8. As the firm buys more labor and capital inputs, the increased demand raises input prices.
9. The firm's budget constraint is negatively sloped.

Because your friend was half-asleep during class, she may have errors in her notes.
Correct the errors in her notes where necessary.

51. Define a production function and give an example of a Cobb–Douglas production

function with constant returns to scale.

Use the following to answer question 52:

Table 6.5

Units of Units of Labor, Output, Q Marginal Average

Capital, K L Product of Product of
Labor Labor
3 0 0.0 — —
1 50.0
2 40
3 100.0
4 10

52. (Table 6.5) The short-run production situation for a firm is listed on this table. Complete
the table.

Page 20
 53. The production function for laser eye surgery is given by Q = 20K0.5L0.5, where Q is the
number of laser eye surgeries performed per day, K is the number of eye surgery
machines (which is fixed at 2 in the short run), and L is the number of employees.

a. Write the equation for the firm's short-run production function.

b. Write the equation for the firm's short-run average product of labor
function.
c. Calculate the average product of labor for L = 9 and L = 16.
d. Calculate the marginal product of labor for L = 1, L = 2, and L = 3.

54. Suppose the firm's production function is Q = 2KL, where Q is units of output, K is units
of capital (which are fixed at 2), and L is units of labor.

a. Graph the firm's short-run production function.

b. Graph the firm's APL and MPL functions.
c. Does this firm experience diminishing marginal returns? Explain your answer.

55. Answer the following questions.

a. Why would the average product of labor decrease as a firm hires more workers?
b. If capital inputs cannot be adjusted, what must eventually happen to the marginal
product of labor as the firm hires more workers?
c. Graph a production function that exhibits diminishing marginal product of labor.

Use the following to answer question 56:

Figure 6.14

Page 21
 56. (Figure 6.14) Refer to the production function, which has a slope of 1/L0.5.
a. Calculate the average product of labor for L = 1, L = 2, and L = 3.
b. Calculate the marginal product of labor for L = 1, L = 4, and L = 16,
assuming that labor is infinitely divisible.

Use the following to answer question 57:

Table 6.7

Units of Labor, L
1 2 3 4
1 100.00 131.95 155.18 174.11
Units of
2 141.42 186.61 219.46 246.23
Capital, K
3 173.21 228.55 268.79 301.57
4 200.00 263.90 310.37 348.22

57. (Table 6.7) Consider the production function that this table shows.
a. Does this production function exhibit constant return to scale? Explain your
answer.
b. How many units of output are produced with 4 units of labor and 2 units of
capital?
c. Suppose the firm is using 3 units of capital and 2 units of labor and then decides
to employ a third worker. What is the marginal product of the third worker?
d. Suppose the firm is using 1 unit of labor and 1 unit of capital. What is the
marginal product of capital for K = 2, K = 3, and K = 4? Does capital experience
diminishing returns?

Use the following to answer question 58:

Figure 6.15

Page 22
 58. (Figure 6.15) Answer the following questions.
a. Define an isoquant.
b. In this figure, what are the things that are wrong with the isoquants?

Use the following to answer question 59:

Figure 6.16

59. (Figure 6.16) Consider the production function Q = L0.5K0.5, with MPK = L0.5/K0.5 and
MPL = K0.5/L0.5.
a. Define the marginal rate of technical substitution.
b. Calculate the marginal rate of technical substitution for K = 5 and L = 10.
c. Figure 6.16 shows an isoquant based on the production function referred to in
the question. Calculate the slope of the isoquant at point A and point B.

60. Answer the following questions.

a. At Dippy's Amusement Park, it takes two workers to operate an amusement park ride.
Each amusement park ride is capable of providing 400 rides per day. Draw the
production isoquant corresponding to 2,000 amusement park rides.
b. Draw two production isoquants: one showing that labor and capital are close
substitutes and the other showing that labor and capital are not close substitutes.
c. Draw a production isoquant corresponding to the production function Q = 2K + L.

Page 23
61. Answer the following questions.
a. Suppose that a firm spends $5,000 producing 80 units of output. The rental rate of
capital is $500 per hour and the wage rate is $50 per hour. Graph the firm's isocost
line and show the values of the horizontal intercept and vertical intercept.
b. The cost function for a firm is given by C = 25K + 50L. What is the slope of the
isocost line for C = $10,000 and C = $18,000?
c. Graphically illustrate the effect of a rise in the price of labor on a firm's isocost line.
d. Why do isocost lines have a constant slope?

62. Suppose that a firm's production function is given by Q = KL(MPK = L and MPL = K),
where Q is quantity of output, K is units of capital, and L is units of labor. The price per
unit of labor and capital are $30 and $20, respectively.
a. How many units of labor and capital should the firm use if it wants to minimize the
cost of producing 600 units of output?
b. Suppose that the firm experiences a technological change, transforming its
production function to Q = 1.23KL (MPK = L and MPL = K). What is the minimum
cost of producing 600 units of output?

63. L
For the following questions assume that the marginal product of capital = and
( L + K )2
K
the marginal product of labor = .
( L + K )2
a. If the firm is hiring 10 workers at $100 per worker and 5 units of capital at $50 per
unit, is the firm minimizing its cost of production? If not, what should the firm do?
b. If the firm is hiring 10 workers at $100 per worker and 5 units of capital at $200
per unit, is the firm minimizing its cost of production? If not, what should the firm
do?
c. If the firm is minimizing its costs of production by hiring an equal number of
workers and units of capital, what is the slope of the isocost line?

64. The production function for a firm is Q = min(2K, L), and the price per unit of capital is
$40 and the price per unit of labor is $60.
a. What is the minimum cost of producing 10 units of output?
b. Using an isoquant and isocost line, illustrate the cost-minimizing input
choice of the firm producing 10 units of output.

Page 24
65. L2 / 3
Suppose the firm's production function is Q = K1/3L1/3, where the MPK = and
3K 2 / 3
L2 / 3
MPL = .
3K 2 / 3

a. If the rental rate of capital R = $30 and the wage rate W = $40, what is the cost-minimizing
capital-to-labor ratio?
b. If the rental rate of capital R = $35 and the wage rate W = $70, how many units of labor and
capital should the firm use to produce 12 units of output?

66. Consider the following production functions along with its corresponding marginal
product of labor function.

I. Q = 15KL, where MPL = 15K

II. 1.2K 0.4
Q = 2K0.4L0.6, where MPL = 0.4
L
III. Q = 8K + L, where MPL = 1

a. In all three cases, what happens to the marginal product of labor as the firm
uses more labor?
b. In all three cases, what happens to the marginal product of labor as the firm
uses more capital?

67. For each of the following production functions, determine whether they exhibit
constant, decreasing, or increasing returns to scale.
a. Q = 4KL
b. Q = K1/3L2/3
c. Q = K1/3L1/3
d. Q = min(K, 4L)
e. Q = 6K + 3L

68. Consider the production function Q = (0.5K1/3 + 0.5L1/3)3 with a corresponding MRTS =
K2/3/L2/3.
a. Prove that this production function exhibits constant returns to scale.
b. Suppose the firms want to minimize the cost of producing 8 units of output,
and pays a wage rate of W = $40 and rental rate of capital of $10. How
many units of labor and capital should the firm use?

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69. Answer the following questions.
a. Complete the following table by filling in the missing output values.
Assume the production function is given by Q = KL, where Q is units of
output, K is units of capital, and L is units of labor.

Table 6.8
Units of Labor, L
1 2 3 4
1
Units of
2
Capital, K
3
4

b. If total factor productivity increases by 50%, write the equation for the new
production function and complete the following table.

Table 6.9
Units of Labor, L

1 2 3 4
1
Units of
2
Capital, K
3
4

Page 26
Answer Key
1. C
2. C
3. B
4. A
5. B
6. C
7. B
8. A
9. B
10. C
11. A
12. B
13. C
14. A
15. C
16. B
17. D
18. B
19. B
20. C
21. C
22. C
23. B
24. A
25. B
26. A
27. B
28. D
29. B
30. C
31. A
32. B
33. B
34. C
35. D
36. C
37. D
38. C
39. A
40. A
41. D
42. B
43. A
44. C

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45. A
46. A
47. A
48. C
49. C
50. 1. The firm produces only one good.
2. No change necessary.
3. The firm's goal is to minimize the costs of producing a given quantity of output.
4. No change necessary.
5. In the short run, the firm can use as much or as little labor as it desires, but it
cannot adjust its usage of capital. In the long run, both labor and capital inputs cannot
be increased or decreased.
6. No change necessary.
7. There are diminishing marginal returns to labor and capital.
8. As the firm buys more labor and capital inputs, input prices remain fixed.
9. The firm does not have a budget constraint.
51. A production function is a mathematical relationship that describes how much output
can be produced from a given quantity of inputs.
A Cobb–Douglas production function with constant returns to scale: Q = KaLb, where a
+ b =1.
52.
Marginal
Units of Capital, Units of Labor, Output, Average Product
Product of
K L Q of Labor
Labor
3 0 0.0 — —
3 1 50.0 50 50
3 2 80.0 30 40
3 3 100.0 20 33.33
3 4 110.0 10 27.5
0.5 0.5 0.5
53. a. Q = 20(2) L = 28.28L
b. APL = 28.28/L0.5
c. APL ( L = 9) = 28.28/90.5 = 9.43
APL (L = 16) = 28.28/160.5 = 7.07
d. MPL (L = 1): 28.28(1)0.5 – 28.28(0)0.5 = 28.28
MPL (L = 2): 28.28(2)0.5 – 28.28(1)0.5 = 11.71
MPL (L = 3): 28.28(3) 0.5 – 28.28(2)0.5 = 8.99
54. a. The firm's production function is Q = 4L.

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 b. APL = 4L/L = 4; MPL = slope of production function = 4

c. The firm does not experience diminishing marginal returns because the
marginal product of labor is constant at all output levels.
55. a. For APL to decrease, it must be the case that MPL is less than APL.
b. The marginal product of labor must eventually decline because each added worker
will have less capital to work with.
c.

56. a. APL = Q/L

APL (L = 1) = 1/1 = 1
APL (L = 2) = 1.41/2 = 0.705
APL (L = 3) = 1.73/3 = 0.577

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 b. MPL = slope of production function = 1/ L0.5.
MPL (L = 1) = 1/10.5= 1
MPL (L = 4) = 1 40.5= 0.50
MPL (L = 16) = 1/160.5 = 0.25
57. a. The production function exhibits decreasing returns to scale. A doubling of inputs,
say, from L= 1 and K =1 to L= 2 and K = 2 causes output to increase by less than
twofold. With constant returns to scale, a doubling of inputs will double output.
b. 246.23
c. MPL = 268.79 – 228.5 = 40.24
d. MPK (K = 2) = 141.42 – 100 = 41.42
MPK (K = 3) = 173.21 – 141.42 = 31.78
MPK (K = 4) = 200 – 173.21 = 26.79

Because the marginal product of capital decreases as the firm uses more capital
(holding labor fixed), there are diminishing returns to capital.
58. a. An isoquant is a curve showing all combinations of two inputs that can produce a
particular quantity of output.
b. The isoquants that are farther from the origin should correspond to higher output
levels because output should rise as a firm uses more inputs. The isoquants should be
convex to the origin, indicating that it becomes increasingly difficult to substitute labor
for capital as the use of labor increases.
59. a. The marginal rate of technical substitution is the rate at which labor can be
substituted for capital, so that output remains unchanged.
b. MRTS = MPL/MPK = K/L = 5/10 = 0.5
c. Slope of the isoquant = –MPK/MPL. Point A: –K/L = – 81/1 = –81. Point B: –9/9 =
–1.
60. a.

b.

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 c. MRTS = MPK/MPL = 2/1 = 2, so the slope of the isoquant = –2.

61. a. The vertical intercept is C/R = 5,000/500 = 10; the horizontal intercept is C/W =
5,000/50 = 100.

b. Slope = –W/R = –50/25 = –2

c.

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 d. It is assumed that firms can buy as many inputs as they like at a fixed price;
therefore, W/R (the slope of the isocost line) doesn't change as the firm changes its
input mix.
62. W
a. Set MRTS =
R
W
MRTS =
R

K = 1.5L (substitute into production function)

600 = 1.5L(L)
400 = L2
L = 20
K =1.5(20) = 30

b. Set MRTS = W/R:

K/L = 30/20
K = 1.5L (substitute into production function)
600 = 1.23(1.5L)(L)
325.2 = L2
L = 18
K =1.5(18) = 27
The cost of production: C = RK + WL = 20(27) + 30(18) = $1,080.
63. a. Cost minimization requires MRTS = W/R
MRTS = MPL/MPK = K/L
K/L = W/R
5/10 < 100/50.
The firm is not minimizing the costs of production. The firm should use more capital and
less labor because the marginal product per dollar spent on capital (0.0044) exceeds
the marginal product per dollar spent on labor (0.0022).
b. Cost minimization requires MRTS = W/R
MRTS = MPL/MPK = K/L
K/L = W/R
5/10 = 100/200
c. Cost minimization requires MRTS = W/R

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 MRTS = MPL/MPK = K/L
Because the firm is hiring an equal number of both inputs, K/L equals 1, so W/R
must equal 1.
The slope of the isocost line = –W/R = –1.
64. a. Q = 2K = L
10 = 2K = L
K = 5 and L =10
So Q = min(2(5), 10) = 10
C = 40(5) + 60(10) = $800.

b.

65. a. Set MRTS = W/R:

MPL/MPK = W/R
2K 1/ 3 L2 / 3
 = 40 / 30
3L1/ 3 3K 2 / 3

2K/L = 40/30
K/L = 2/3

To minimize production costs, the firm uses two-thirds as much capital as labor.

b. Set MRTS = W/R:

MPL/MPK = W/R
2K 1/ 3 L2 / 3
 = 70 / 35
3L1/ 3 3K 2 / 3

2 K/L = 70/35
K/L = 1
K = L (plug into production function)
12 = K1/3 K2/3
K = 12, L = 12
66. a.
I. The marginal product of labor is constant, equaling 15K for each successive worker
hired.

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 II. The marginal product of labor decreases as the firm adds more works because the
denominator of the MPL function is getting bigger.
III. The marginal product equals 1 for each successive worker hired.

b.
I. The marginal product of labor rises as capital increases.
II. The marginal product of labor rises as capital increases.
III. The marginal product of labor remains unchanged by increases in capital.
67. To determine returns to scale, we will evaluate each production function for L = K = 1
and for L = K = 2.
a. Q = 4(1)(1) = 4. Q = 4(2)(2) = 16. This is an example of increasing returns to scale
because output more than doubled.
b. Q = 11/312/3 = 1. Q = 21/322/3 = 2. This is an example of constant returns to scale
because output exactly doubled.
c. Q = 11/311/3 = 1. Q = 21/321/3 = 1.33. This is an example of decreasing returns to scale
because output less than doubled.
d. Q = min(1, 4(1)) = 1. Q = min(2, 4(2)) = 2. This is an example of constant returns to
scale because output exactly doubled.
e. Q = 6(1) + 3(1) = 9. Q = 6(2) + 3(2) = 18. This is an example of constant returns to
scale because output exactly doubled.
68. a. With this production function, a doubling of inputs causes output to double.
Q = (0.5(1)1/3 + 0.5(1)1/3)3 = 13 = 1
Q = (0.5(2)1/3 + 0.5(2)1/3)3 = 1.25993 = 2

b. MRTS = W/R
K = 8L (plug into production function)
8 = (0.5(8L)1/3 + 0.5L1/3)3
2 = (L1/3 + 0.5L1/3)
2/1.5 = L1/3
L = 2.37
K = 8(2.37) = 19
69. a.
Table 6.10
Units of Labor, L
1 2 3 4
1 1 2 3 4
Units of
2 2 4 6 8
Capital, K
3 3 6 9 12
4 4 8 12 16

b. Q = 1.5KL
Table 6.11
Units of Labor, L
1 2 3.5 4
Units of 1 1.5 3 4.5 6
Capital, K 2 3 6 9.5 12

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