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Economics for Managers 3rd Edition
Farnham Test Bank

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-3rd-edition-farnham-test-bank/
Economics for Managers, 3e (Farnham)
Chapter 6 Production and Cost Analysis in the
the Long Run
1) In the case of a short-run production function:

A) all of the inputs are variable.
B) the amount of labor employed is held constant.
C) at least one of the inputs is fixed.
D) all of the inputs are fixed.
Answer: C
Diff: 1
Topic: Short run versus long
long run
2) A labor-intensive method of production is one that:

A) requires employees to work harder than they would in other occupations.
B) relies exclusively on labor.
C) relies on large quantities of labor and smaller quantities of capital equipment.
D) combines a small but sophisticated labor force with a large amount of capital.
Answer: C
Diff: 1
Topic: Production function
3) A production method that relies on large quantities of machines and equipment and smaller
quantities of labor is referred to as a:
A) variable-input-intensive method of production.
B) labor-intensive method of production.
C) technology-intensive method of production
D) capital-intensive method of production.
Answer: D
Diff: 1
4) In which of the following situations would a firm be more likely to rely on a capital-intensive
method
A) Whenofthe
production?
rate of technological innovation
inno vation is low.
B) When capital is relatively expensive.
C) When the firm's output cannot be produced using the assembly line method of production.
D) When labor supply is limited relative to the available amount of capital.
Answer: D
Diff: 2
Topic: Choosing among production funct
functions
ions
1
Copyright © 2014 Pearson Education, Inc.
5) Which of the following would have the least amount of influence on a manager's choice of
which inputs to employ in a production process?
A) The price of a competitor's output.
B) The technology of the production process.
C) The marginal productivity of the inputs that can be used in the pproduction
roduction process.
D) The prices of the inputs that can
c an be used in the production process.
Answer: A
Diff: 1
Topic: Choosing among production funct functions
ions
6) Assume a firm is currently employing 20 units of capital and

an d 100 units of labor in its
production process. Assume also that the marginal product of the 20th unit of capital is 40 units
of output, the marginal product of the 100th unit of labor is 10 units
u nits of output and the per unit
prices of capital and labor are $20 and $10, respectively. In this case, in order to minimize its
costs of production the firm should:
A) hire more capital and less labor.
B) hire more labor and less capital.
C) hire less capital and less labor.
D) hire more capital and more labor.
Answer:
Diff: 3 A
Topic: Cost minimization
7) Assume a firm uses two inputs, capital and labor.

labo r. All else constant, an increase in the price of
labor would create an incentive for the firm to:
A) substitute labor for capital in its production function.
B) substitute capital for labor in its production function.
C) hire more capital and labor.
D) hire less capital while holding the amount of labor employed constant.
Answer: B
Diff: 2
Topic: Input substitution
8) In which of the following examples

ex amples cited in the text is there the least am
amount
ount of evidence of
the potential for input substitution?
A) Automobile production.
B) Pipe organ production.
C) French fry production.
D) Production of health care services.
Answer: B
Diff: 2
2
9) According to the text there appear
app ear to be very limited opp
opportunities
ortunities for input substitution in the
production of pipe organs. Which of the following is the most plausible explanation for this
observation?
A) Capital costs have made it too expensive to purchase more capital stock.
B) It requires a large amount of highly trained labor to produce a single pipe organ.
C) The marginal productivity of additional trained workers is zero.
D) The capital used in producing pipe organs is much more expensive than the labor inputs.
Answer: B
Diff: 2
10) The evidence on the potential for input substitution in the service sector suggests that:
A) there may be more opportunities
oppo rtunities for input substitution than was previously thought, especially
in areas such as health care, financial services, and the even the fine arts.
B) the traditional view that the potential for input substitution is extremely limited is correct.
C) while one or two areas of the service sector may see a small amount of input substitution,
most areas will see little or none.
D) input substitution will only be feasible so long as the production process requires a relatively
small amount of labor to begin with.
Answer: A
Diff: 2
11) All else constant, as the price of petroleum increases relative to the prices of other inputs to
the production process, in their effort to minimize their total costs of production,
produ ction, we can expect
to see firms employ:
A) less of each of the inputs of production.
B) more petroleum and less of the other inputs to production.
C) less petroleum and more of the other inputs to production.
D) the same amount of petroleum since there are no substitutes for petroleum.
Answer: C
Diff: 2

substitution and cost minimization
12) The fact that supermarkets, a land-intensive form of o f organization, have become the dominant
form of grocery store in the United States suggests that:
A) there is little or no potential for input substitution in the grocery
g rocery store business.
B) transportation costs are insignificant in the grocery store business.
C) land is a relatively inexpensive input in the grocery store business.
D) labor is relatively inexpensive in the grocery store business.
Answer: C
Diff: 2
3
13) X-inefficiency refers to the situation in which:
A) highly competitive firms have less incentive to minimize their costs of production than other
firms because the highly competitive firms have almost no chance to earn above-average
above -average profits.
B) firms are unable to minimize their costs of production because there is no potential for input
substitution.
C) firms that use labor-intensive production methods tend to be less efficient than firms that use
capital-intensive production methods.
D) firms with market power have less incentive to minimize their costs of production than more
competitive firms.
Answer: D
Diff: 1
Topic: X-inefficiency
14) In which of the following market structures would X-inefficiency

X -inefficiency be most likely to exist?
A) Perfect competition.
B) Monopolistic competition.
C) Oligopoly.
D) Monopoly.
Answer: D
Diff: 2
15) An increase in the amount of competition with other firms that employ "best practices"
would be likely to cause a particular firm's labor productivity to:
A) increase
B) stay the same.
C) decrease.
D) cannot be determined without additional information.
Answer: A
Diff: 2
Topic: Labor productivity
16) Which of the following is least likely to limit the ability of a firm to minimize production
costs?
A) Resistance by labor.
B) The fact that the firm is a nonprofit organization.
C) An increase in the amount of competition faced by the firm.
D) Legislated input combinations for firms in particular industries, e.g, health care.
Answer: C
Diff: 1
4
17) Which of the following statements is correct?
A) Evidence strongly suggests that legislatively mandated input combinations havehav e greatly
reduced production costs in many industries.
B) Legislating input combinations in a particular industry can bias
b ias the decision making of the
firm's managers and lead to higher-than-necessary costs of production.
C) Legislating input combinations in a particular industry has little or no effect on the decision
making of the firm's managers.
D) Legislating input combinations in a particular industry is preferred to relying on market forces
to determine the cost-minimizing combination of inputs to a production process.
Answer: B
Diff: 1
18) Long-run average cost is defined as:

A) the minimum average cost of producing any level of output when all inputs are variable.
B) the minimum average cost of producing any level of output when the amount of capital is
varied and all other inputs are held constant.
C) the average of the short-run costs associated with each amount of capital employed by the
firm.
D) the minimum average cost of producing any level of output when all inputs are fixed.
Answer: A
Diff: 1
Topic: Long-run average cost
19) Which of the following statements concerning the long-run average cost (LRAC) curve is
correct?
A) The LRAC curve represents the least-cost input combination of inputs for producing each
level of output.
B) The LRAC curve is derived from a series of short-run marginal cost curves.
C) The short-run cost curve at the minimum point of the LRAC curve represents the least-cost
plant size for all levels of output.
D) As output increases, the amount of capital employed by the firm is held con
constant
stant along the
LRAC
Answer: curve.
A
Diff: 1
20) The negatively-sloped part of the long-run average total cost curve is d
due
ue to which of the
following?
A) Diseconomies of scale.
B) Diminishing returns.
C) The difficulties encountered in coordinating the many activities of a large firm.
D) The increase in productivity that results from specialization.
Answer: D
Diff: 2
5
21) The positively-sloped part of the long-run average
av erage total cost curve is due to which of the
following?
A) Diseconomies of scale.
B) Diminishing returns.
C) The firm being able to take advantage of large-scale production techniq
techniques
ues as it expands its
output.
D) The increase in productivity that results from specialization.
Answer: A
Diff: 1
22) If an industry is characterized by substantial diseconomies of scale, as a particular firm in the

industry expands its production capacity we will observe:
A) a decrease in marginal costs.
B) an increase in the marginal product of labor.
C) a decrease in the total fixed costs of production.
D) an increase in the average total costs of production.
Answer: D
Diff: 1
Topic: Economies of scale
23) Economies of scale are illustrated by:

A) a downward sloping long-run average cost curve.
B) a flat long-run average cost curve.
C) an upward-sloping long-run average cost curve.
D) a downward-sloping short-run average total cost curve.
Answer: A
Diff: 1
24) Diseconomies of scale are illustrated by:

A) a downward sloping long-run average cost curve.
B)
C) aanflat long-run average
upward-sloping cost curve.
long-run average cost curve.
D) an upward-sloping short-run average total cost curve.
Answer: C
Diff: 1
Topic: Diseconomies of scale
6
25) The list of the major factors that create economies
econo mies of scale includes all of the following
except:
A) specialization and division of labor.
B) quantity discounts.
C) an increase in demand for the firm's output.
D) the use of automation devices.
Answer: C
Diff: 1
26) Generally speaking, the inclusion of transportation costs in the total costs of production has
the effect of causing the LRAC curve to:
A) shift down.
B) flatten out.
C) shift up.
D) become steeper over the range on economies of scale.
Answer: C
Diff: 1
Topic: Changes in long-run average costs
27) Which of the following is most likely to create diseconomies of scale?

A) concentration of production in a small number of very large plants.
B) the use of automation devices.
C) technological advance.
D) division of labor.
Answer: A
Diff: 1
28) All else constant, an improvement in technology

techno logy at each scale o
off operation would cause:
A) a movement up an industry's
ind ustry's LRAC curve.
B) a movement down an industry's LRAC curve.
C) an upward shift of an industry's
indu stry's LRAC curve.
D) a downward shift of an industry's
indu stry's LRAC curve.
Answer: D
Diff: 2
29) "Learning by doing" has the effect of causing:

A) a movement down the LRAC curve.
B) a movement up the LRAC curve.
C) the LRAC curve to shift up.
D) the LRAC curve to shift down.
Answer: D
Diff: 1
7
30) Which of the following would cause a firm's LRAC curve to shift up?
A) An increase in the amount of "learning by doing."
B) An increase in the price of labor, all else constant.
C) An increase in the amount of output produced by the firm.
D) A decrease in the amount of capital employed by the firm.
Answer: B
Diff: 2
31) The "minimum efficient scale" of operation in an industry is defined as:

A) the smallest plant size that can be operated
op erated by firms in the industry.
B) the scale of operation at which economies of scale are exhausted.
C) the smallest number of firms that could effectively meet demand for an industry's output.
D) the scale of operation by firms in an industry that is least efficient.
Answer: B
Diff: 1
Topic: Minimum efficient scale
32) In which of the following situations would consideration

co nsideration of the minimum efficient scale of
operation suggest that the market should be served by a single firm to minimize production
costs?
A) When the LRAC curve slopes downward over the relevant range of output.
B) When the LRAC curve hits its minimum point at a relatively low level of output aand nd then
increases and the demand for output is quite large.
C) When the LRAC curve hits its minimum point at a relatively low level of output b but
ut then
remains constant as the scale of operation is increased and the demand for output
ou tput is quite large.
D) When the LRAC curve initially increases and thent hen decreases beyond some point.
Answer: A
Diff: 2
33) Assume the LRAC curve for a particular industry hits its minimum point at a relatively low
level of output and then increases, and the demand for industry output is quite large. In this case,
consideration of the minimum efficient scale of operation suggest that the market should be
served by:
A) a large number of small firms to minimize production costs.
B) a small number of large firms to minimize production costs
C) a large number of large firms to minimize production costs.
D) an indeterminate number of firms of indeterminate size to minimize
m inimize production costs.
Answer: A
Diff: 2
8
34) In which of the following situations would the minimum efficient scale of operation provide
little or no guidance regarding how many firms should serve the market to minimize production
costs?
A) When the LRAC curve slopes downward over the relevant range of output.
B) When the LRAC curve hits its minimum point at a relatively low level of output aand nd then
increases and the demand for output is quite large.
C) When the LRAC curve hits its minimum point at a relatively low level of output b but
ut then
remains constant as the scale of operation is increased and the demand for output
ou tput is quite large.
D) When the LRAC curve initially increases and thent hen decreases beyond some point.
Answer: C
Diff: 2
35) The technique that estimates long-run costs and the minimum efficient scale by determining
the scale of operation at which most firms in an industry are concentrated is called the:
A) engineering estimation technique.
B) statistical cost estimation technique.
C) survivor approach.
D) back-of-the-envelope approach.
Answer: C
Diff: 1
36) The use of surveys of experts

exp erts to estimate long-run production costs may be u
undermined
ndermined by
the fact that:
A) it is a time-consuming process.
B) it is dependent on the judgments of individuals closely connected with the industry.
C) reporting biases can occur.
D) all of the above.
Answer: D
Diff: 1
Topic: Estimating long-run average
average costs
37) Much of the research on the minimum efficient scale suggests that for many firms the LRAC
curve is:
A) downward sloping over the relevant range of output.
B) upward sloping over the relevant range of output.
C) U-shaped.
D) flat over a relatively large range of output levels.
Answer: D
Diff: 1
9
38) Much of the research on the minimum efficient scale suggests that for many firms,
economies of scale are:
A) relatively modest.
B) nonexistent.
C) substantial.
D) heavily dependent on the minimum efficient scale of the firm's production process.
Answer: A
Diff: 1
39) Which of the following statements about the beer

b eer industry is correct?
A) Over the last 30 years, technological change has resulted in substantial diseconomies of scale
in the industry.
B) In 2000, the minimum efficient scale in the industry was approximately 18 million barrels per
year.
C) As a result of an increase in the number of microbreweries, the five largest firms in the
industry control less than 50 percent of the market.
D) The market share of microbreweries was estimated to be 20 2 0 percent in 1990.
Answer: B
Diff: 1
Topic: Beer industry
40) Which of the following is not cited as one of the factors that accounts for the large-scale
production that exists in many sectors of the economy?
A) Economies of scale.
B) Advertising and image differentiation.
C) The minimum efficient scale of operation in many industries is quite high relative to market
demand.
D) Risk spreading.
Answer: C
Diff: 2
Topic: Large-scale production
41) Regarding the production of health care, more recent studies suggest that:
A) economies of scale exist up to a hospital size of approximately 500 beds.
B) hospitals of many different sizes can compete effectively with each other on the basis of cost.
C) the LRAC curve exhibits significant diseconomies of scale beginning with a hospital size of
approximately 100 beds.
D) the LRAC for hospitals exhibits a very distinct U shape.
Answer: B
Diff: 1
Topic: Production of health care
10
42) Which of the following statements about production isoquants is correct?
A) They show all the combinations
combin ations of two inputs that result in the same level of output.
B) They are usually concave to the origin.
C) They show all the combinations of two inputs that yield the same cost of production.
D) They represent lower levels of output the farther they are from the origin.
Answer: A
Diff: 1
Topic: Isoquants
43) Why are isoquants negatively sloped?

A) Along a single isoquant, the firm can substitute the use of one input for another while holding
the total level of output constant.
B) Due to the effects of diseconomies of scale.
C) Because the farther the isoquant is from the origin, the higher the level of output.
D) Because price and quantity demanded are inversely related.
Answer: A
Diff: 2
Topic: Isoquants
44) Isoquants are convex to the origin due to:

A) the law of diminishing marginal utility.
B) the assumption of the diminishing marginal productivity of each input.
C) the fact that as less capital is used, its marginal productivity falls.
D) the fact that as more labor is used, its marginal productivity rises.
Answer: B
Diff: 2
Topic: Isoquants
45) The marginal rate of technical substitution (MRTS) along an a n isoquant:

A) is equal to the price ratio at all points along an isoquant.
B) is equal to the ratio of the marginal utilities of the two goods.
C) is equal to the ratio of the marginal products of the two inputs.
D) remains
Answer: C constant as we alter the combinations of the two inputs.
Diff: 2
Topic: Marginal rate
rate of technical substitution
substitution
46) A movement down along a given isoquant causes the marginal rate of technical substitution
to:
A) increase.
B) stay the same.
C) decrease.
D) cannot be determined without additional information.
Answer: C
Diff: 2
Topic: Marginal rate
rate of technical substitution
substitution
11
47) For the simple case of a production function with two inputs in which the inputs are perfect
complements, each isoquant is represented by:
A) a vertical line.
B) a horizontal line
C) a downward sloping straight line.
D) a line that forms a right angle.
Answer: D
Diff: 2
Topic: Isoquants and perfect substitutes
48) An isocost line represents:

A) all the combinations of inputs to a production process that result in the same total costs of
production.
B) all the combinations of inputs that result in the same amount of output.
C) all of the combinations of two inputs for which the amount of money spent on o n each of the
inputs is equal.
D) all of the levels of output that result in the same total cost.
Answer: A
Diff: 2
Topic: Isocost line
49) The slope of the isocost line:

A) changes as the combination of o f labor and capital is altered by the firm.
B) is equal to the ratio of the marginal productivities at all points along the isocost line.
C) is equal to the negative of the ratio of the prices of the outputs.
D) is equal to the negative of
o f the ratio of the prices of the inputs.
Answer: D
Diff: 2
Topic: Isocost line
50) Graphically, all else constant, a decrease in the price of labor would be illustrated by:
A) a parallel shift of the isocost line in toward the origin.
B)
C) rotating
a parallelthe isocost
shift of theline awayline
isocost from the origin
away aloorigin.
along
from the ng the labor axis.
D) rotating the isocost line in toward the origin along the capital axis.
Answer: B
Diff: 2
Topic: Isocost line
12
51) Assume a firm produces 500 units of a good by using two inputs, capital and labor, whose
per unit prices are $10 and $4. Assume also that the marginal physical product of the last unit of
capital is 30 and the marginal physical product of the last unit of labor is 10.
1 0. Is this firm
minimizing its costs of producing 500 units of output?
A) No, because the marginal products
p roducts of the two inputs are not equal.
B) No, because the MRTS and the price ratio for the two inputs are not equal.
C) No, because the prices of the two inputs are not equal.
D) The answer cannot be determined without more information.
Answer: B
Diff: 2
1 0. To minimize costs
this firm should employ:
A) the existing combination of resources.
B) more labor and less capital.
C) more capital and less labor.
D) both more
Answer: C labor and more capital.
Diff: 2
1 0. What will change to
move the firm to a new cost-minimizing equilibrium?
A) The marginal product of capital will fall and the marginal product of labor will increase.
B) The marginal product of labor will fall and the marginal product of capital will increase.
C) The price of labor will rise.
D) The price of capital will rise.
Answer:
Diff: 2 A
54) All else constant, an increase in the price of labor would cause the total amount of output that
can be produced with a fixed amount of spending to ________. This would result in a movement
to a ________ isoquant.
A) increase; lower
B) increase; higher
C) decrease; lower
D) decrease; higher
Answer: C
Diff: 2
Topic: Production and cost minimization
minimization
13
55) In the long-run production function, all of the inputs to the production p
process
rocess are allowed to
vary.
Answer: TRUE
Diff: 1
Topic: Long run
56) The fact that a firm is using a capital-intensive method of production means that input
substitution is not possible.
Answer: FALSE
Diff: 2
57) A firm is more likely to use a labor-intensive method of production when the relative amount
of available labor is greater than the available
av ailable amount of capital.
Answer: TRUE
Diff: 2
58) A change in technology

technolo gy or the relative prices of the inputs used in a production process
would
Answer: cause a manager's choice of inputs to use in the production process to change as well.
TRUE
Diff: 2
Topic: Input prices and cost minimization
59) All else constant, a decrease in the per unit price of labor would create an incentive for a firm
manager to substitute labor for capital in the firm's production process.
Answer: TRUE
Diff: 2
60) Assuming capital and labor are substitutes, an improvement in technology that affects only
the productivity of capital would cause a firm to employ more capital but leave the amount of
labor employed
Answer: FALSEunchanged.
Diff: 2
61) Studies and recent experience suggest that there is considerable potential for substitution
between doctors and nurses in the production of health care services.
Answer: TRUE
Diff: 1
14
62) Studies and experience suggest that labor and capital are highly complementary inputs to the
production of pipe organs.
Answer: TRUE
Diff: 2
63) The fact that supermarkets, a land-intensive form of

o f organization, have become the dominant
form of grocery store in the United States suggests that there is little or no potential for input
substitution in the grocery store business.
Answer: FALSE
Diff: 2
64) X-inefficiency refers to the situation in which firms with market power are operating
ope rating in the
upward-sloping segment of their long-run average cost curve.
cu rve.
Answer: FALSE
Diff: 1
65) Evidence
increases, the suggests
amount ofthat as the amountwill
X-inefficiency of market power possessed by the firms in an industry
decrease.
Answer: FALSE
Diff: 2
66) All else constant, an increase in the level of competition among firms would be expected to
reduce the amount of X-inefficiency that exists in a particular industry.
Answer: TRUE
Diff: 2
67) Labor resistance can be a major impediment to increased productivity in many firms.
Answer: TRUE
Diff: 1
Topic: Labor resistance
resistance and productivity
68) One of the major motivations for labor resistance to productivity enhancing changes in a
production process is the resulting threat to job security.
Answer: TRUE
Diff: 1
resistance and productivity
15
69) An increase in the number of people in the United States with health insurance could cause
the cost of providing health care services to increase as the incentive for health care p
providers
roviders to
minimize costs decreases.
Answer: TRUE
Diff: 2
70) There is considerable evidence to support the assertion that legislated input combinations
have reduced the costs of production in affected industries.
Answer: FALSE
Diff: 2
71) In the long-run average cost function, only the amount of capital is allowed to vary.
Answer: FALSE
Diff: 1
72) When a firm is experiencing economies of scale,

s cale, the minimum point of the firm's short-run
average
Answer:total
TRUEcost curve shifts down as it expands its scale of production.
Diff: 1
73) Assume that as a firm expands its scale ofo f operation, the minimum point of its short-run
average total cost curve is unchanged.
unchan ged. In this case, we would say that the firm is experiencing
diseconomies of scale.
Answer: FALSE
Diff: 2
74) Diseconomies of scale are illustrated graphically by an upward shift of the firm's long-run
average cost curve.
Answer: FALSE
Diff: 1
75) One of the primary sources of diseconomies of scale is the inefficiencies associated with
managing large scale operations.
Answer: TRUE
Diff: 1
16
76) "Learning by doing" results in decreased average costs of production and is illustrated by a
downward shift of the firm's long-run average cost curve.
Answer: TRUE
Diff: 2
77) Failure to account for the increased transportation costs that would result from building
fewer and more centrally located production facilities could result in firm managers selecting a
scale of operation that is larger than the optimum.
Answer: TRUE
Diff: 2
78) The "minimum efficient scale" of operation in an industry is defined as the scale of op
operation
eration
in an industry that is least efficient.
Answer: FALSE
Diff: 1
79) Consideration
production of the
costs, the minimum
market shouldefficient
be servedscale
by aoflarge
operation
numberwould suggest
of small that,
firms whento minimize
the LRAC
curve slopes downward over the relevant range of output.
Answer: FALSE
Diff: 2
80) The text considers three methods that can be used to obtain empirical estimates of long
long-run
-run
costs in different industries. Of those three, surveys of expert opinion are considered
co nsidered to be most
reliable because they are less subject to bias than the other two methods.
Answer: FALSE
Diff: 2
Topic: Cost estimation
81) Most of the empirical research on long-run costs suggests that the long-run average cost
curve for most firms has a very pronounced U-shape.
Answer: FALSE
Diff: 1
82) Over the past several decades, technological change has led to a significant amount of
consolidation in the U.S. brewing industry.
Answer: TRUE
Diff: 1
Topic: Beer industry
17
83) Empirical evidence suggests that economies of scale, advertising and image differentiation,
and risk spreading all help account for
fo r the large-scale production that exists in many sectors of
the economy.
Answer: TRUE
Diff: 2
Topic: Large-scale production
84) Regarding the production of health care, more recent studies suggest that economies of scale
exist up to a hospital size of approximately 200 beds.
Answer: TRUE
Diff: 1
Topic: Health care costs
85) An isoquant identifies all of the combinations of two inputs that result in the same total costs
of production.
Answer: FALSE
Diff: 1
Topic: Isoquants
86) As the price of labor increases relative to the price of capital, the firm will move to a more
labor-intensive production method to minimize costs.
Answer: FALSE
Diff: 2
87) If the inputs to a production process are perfect complements, the firm can choose from a
virtually infinite array of combinations of the two inputs to minimize the costs of producing a
given level of output.
Answer: FALSE
Diff: 2
88) If the inputs

substitution to a to
is equal production process
the ratio of are perfect
the prices of the substitutes
th e two inputs, and the marginal
the firm ratefrom
can choose of technical
a
virtually infinite array of combinations of the two inputs to minimize the costs of producing a
given level of output.
Answer: TRUE
Diff: 3
89) An improvement in technology would cause each of the isoquants in a firm's isoquant map to
shift out away from the origin.
Answer: FALSE
Diff: 2
18
90) Assume a firm is producing 1000 units of a good by using two inputs, capital and labor,
whose per unit prices are $50 and $20. Assume also that the marginal physical product of the last
unit of capital is 25 and the marginal physical product of the last unit of la
labor
bor is 15. In order to
minimize its costs of production, the firm should adjust its combination of inputs by employing
more labor and less capital.
Answer: TRUE
Diff: 2
91) Economists describe short-run decisions as "constrained" decisions, while long-run decisions
are described as "planning" decisions. Referring to a firm's short-run average cost function and
long-run average cost function, explain this distinction.
Answer: In the short run, at least one of the inputs in the firm's production function is fixed
fixed in
amount. As such, the manager's decision-making
de cision-making process is constrained by the available amount
of the fixed input. In contrast, in the long run, all of the inputs in the production function can be
varied. In this case, the manager can decide not only how much of each variable input to employ,
but how much of the inputs that are fixed in the short-run should be employed as well, i.e., the
manager can plan for future production needs.
Diff: 2
Topic: Short run versus long
long run
92) What are the two primary factors that influence a firm manager's choice between a labo
labor-r-
intensive and a capital-intensive method of production? How does each factor influence the
manager's choice.
Answer: The two primary factors are the technology of the production process and the prices of
the inputs of production. The technology determines the marginal productivity of the different
inputs that can be used in the production process. Combining information on the marginal
productivities with the respective prices of the inputs tells the manager how much output is
produced per dollar spent on each input. With this information, the manager can then select the
combination of inputs that yields a given level of output at least cost.
Diff: 2
93) Explain why X-inefficiency is likely to be more prevalent in an industry in which firms have
market power.
Answer: The assumed goal of firms is to maximize profits,
profits, i.e., the difference between ttotal
otal
revenues and total costs. X-inefficiency refers to the situation in which firms have fewer
incentives to minimize the costs of production.When there is less competition,
comp etition, there is not as
much downward pressure on price and, therefore, total revenues. As such, there is less pressure
on the firm to minimize costs to maintain a particular level of profit.
Diff: 2
19
94) Explain how labor resistance and political
p olitical and legislative influences reduce the ability of
firms to minimize their costs of production. What do the two have in common in this th is regard?
Answer: Both labor resistance and political
political and legislative influences constrai
constrain
n the set of
choices firm managers have when it comes to the production process. Labor resistance is often
focused on protecting existing jobs. Thus, it becomes more difficult for the manager to substitute
capital for labor or combine two or more tasks in an effort to reduce production costs. Legislative
influences often come in the form of mandated
man dated combinations of capital and labor or restrictions
on the minimum number of workers that can c an be assigned to a particular task. Once again, this has
the effect of limiting the manager's choices and may
m ay preclude certain input combinations that
would result in reduced production costs.
Diff: 2
resistance and cost minimization
minimization
95) Historically, empirical evidence showed that it was more cost effective
e ffective to have a single
generator of electricity serve a particular region's electricity needs than to have
h ave several smaller
units compete against each other. More recently, technological advances have occurred in the
generation of electricity that allow much smaller generating units to produce
p roduce electricity for the
same average cost as much larger units. Explain how this change would be reflected in the firm's
long-run average cost curve and minimum efficient scale.
Answer: Historically, the production of electricity was characterized by ssignificant
ignificant economies of
scale, i.e, the LRAC curve was downward sloping over the relevant range of output. This meant
that the minimum efficient scale was relatively large. The more recent technological advances
have had the effect of "flattening" the LRAC curve and substantially reducing the firm's
minimum efficient scale.
Diff: 1
Topic: Economies and diseconomies of scale
96) Explain how "learning by doing" and transportation costs each affect the long-run average
cost curve.
Answer: Learning by doing results in increased
increased productivity of an input. Thus, for each scale of
operation, the cost of producing each unit of output decreases because the amount of inputs
needed to produce a unit of output decreases. Thus, the short-run and, therefore, long-run
average cost curves shift down. Including transportation costs in the long-run average cost
function causes the LRAC curve to shift up, all else constant. In addition, if average
transportation costs increase with the scale of production because goods have to be shipped over
greater distances, this will cause the quantity at which long-run average costs are minimized to
decrease as well.
Diff: 1
20
97) Assume a new technology is developed that increases the productivity of capital and an d creates
additional economies of scale. How would this affect the firm's minimum efficient scale of
operation. Illustrate this effect graphically.
Answer: The increase in the productivity of capital
capital would result in a decrease in the short-run
and long-run average costs of production. This is illustrated by a downward shift of both curves.
In addition, the increased economies of scale implies declining long-run average costs over a
greater range of output. Thus, the firm's minimum efficient scale, i.e., the level of output at
which economies of scale are exhausted, would increase. As such, the minimum point on the
firm's LRAC curve would occur at a higher level of output than before the change in technology.
Diff: 2
98) Assume that firms A and B have the same minimum efficient scale of operation and, at
current production levels, both firms are incurring the same average costs of production.
However, firm A's output is 5 times larger than firm B's output. How is this possible?
Answer: The minimum efficient scalescale of operation simply refers
refers to the level of output beyond
which there are no more economies of scale, i.e., there is no further decline in long-run average
costs as output is expanded. However, this does not mean that long-run average costs cannot then
remain constant as the scale of operation
ope ration increases. So long as long
long-run
-run average costs are the
same
range over a range
and still ofthe
incur outsame
output,
put, two firmscosts.
average could be operating at very different scales within that
Diff: 2
99) Briefly summarize the empirical literature on the long-run costs typically incurred by firms
in a variety of industries. In particular, is there reason to believe that firms' long-run cost curves
assume the typical U-shape? Why or why not?
Answer: The existing research provides evidence that ffirms irms reach the minimum efficient scale of
operation at a relatively low level of output and that economies of scale up to that point are no nott
overly large. In addition, the studies indicate that, for many
man y industries the LRAC is relatively flat
beyond the MES. Thus, the evidence does not tend to support the typical U-shaped long-run
average cost curve.
Diff: 1
100) Use the firm's long-run cost-minimizing decision rule to explain the differences
d ifferences in the
relative use of capital and labor in agriculture in the United States and the Peoples Republic of
China.
Answer: The rule for cost minimization states that inputs should be employed such that the the ratio
of marginal physical product to input price is equal
e qual across all of the inputs used in the production
process. As the price of labor rises relative
relative to the price of capital, this causes the firm to
substitute capital for labor. In the United States, labor for agriculture is scarce relative to the
amount of available capital. In China, just the reverse is true. Hence, the co cost
st of labor relative to
the cost of capital is much higher in the United States than in China. This situation leads
agriculture to be more capital intensive in the United States and more labor intensive in China.
Diff: 3
21

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Economics for Managers 3rd Edition

Farnham Test Bank

1) In the case of a short-run production function:

2) A labor-intensive method of production is one that:

6) Assume a firm is currently employing 20 units of capital and

7) Assume a firm uses two inputs, capital and labor.

8) In which of the following examples

Topic: Input substitution

14) In which of the following market structures would X-inefficiency

18) Long-run average cost is defined as:

22) If an industry is characterized by substantial diseconomies of scale, as a particular firm in the

23) Economies of scale are illustrated by:

24) Diseconomies of scale are illustrated by:

27) Which of the following is most likely to create diseconomies of scale?

28) All else constant, an improvement in technology

29) "Learning by doing" has the effect of causing:

31) The "minimum efficient scale" of operation in an industry is defined as:

32) In which of the following situations would consideration

36) The use of surveys of experts

39) Which of the following statements about the beer

43) Why are isoquants negatively sloped?

44) Isoquants are convex to the origin due to:

45) The marginal rate of technical substitution (MRTS) along an a n isoquant:

48) An isocost line represents:

49) The slope of the isocost line:

58) A change in technology

63) The fact that supermarkets, a land-intensive form of

72) When a firm is experiencing economies of scale,

88) If the inputs

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