Microeconomics Theory and Applications With Calculus 4th Edition Perloff Test Bank

Microeconomics Theory and
Applications with Calculus 4th Edition

Perloff Test Bank
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Microeconomics: Theory and Applications with Calculus, 4e (Perloff)

Chapter 6 Firms and Production
6.1 The Ownership and Management of Firms
1) Economists typically assume that the owners of firms wish to

A) produce efficiently.
B) maximize sales revenues.
C) maximize profits.
D) All of the above.
Answer: C
Topic: The Ownership and Management of Firms
Skill: Analytical thinking
Status: Old
2) An organization that converts inputs (like Labor, Capital etc.) into output is called a
A) firm.
B) sole proprietorship.
C) corporation.
Answer: D
Status: Old
3) Efficient production occurs if a firm

A) cannot produce its current level of output with fewer inputs.
B) given the quantity of inputs, cannot produce more output.
C) maximizes profit.
Answer: D
Status: Old
4) Limited liability is a benefit to

A) sole proprietorships.
B) partnerships.
C) corporations.
Answer: C
Status: Old
1
Copyright © 2017 Pearson Education, Inc.

5) A firm where owners are usually not managers and not personally liable for the firm's debts is
a
A) sole proprietorship.
B) general partnership.
C) corporation.
D) None of above.
Answer: C
Topic: The Ownership of For-Profit Firms
Status: Old
For the following, please answer "True" or "False" and explain why.
6) Only corporations benefit from limited liability.

Answer: True. Individuals in sole proprietorships and partnerships are personally responsible for
debt.
Status: Old
7) What do we mean by efficient production?

Answer: Efficient production implies that no inputs are wasted. If a given number of output is
efficiently produced it is not possible to produce the same amount with less inputs.
Status: Old
6.2 Production
1) Which of the following statements best describes a production function?

A) the maximum profit generated from given levels of inputs
B) the maximum level of output generated from given levels of inputs
C) all levels of output that can be generated from given levels of inputs
D) all levels of inputs that could produce a given level of output
Answer: B
Topic: Production
Status: Old
2

2) With respect to production, the short run is best defined as a time period
A) lasting about six months.
B) lasting about two years.
C) in which all inputs are fixed.
D) in which at least one input is fixed.
Answer: D
Topic: Production
Status: Old
3) In the long run, all factors of production are

A) variable.
B) fixed.
C) materials.
D) rented.
Answer: A
Topic: Production
Status: Old
4) Joey cuts grass during the summer. He owns one lawn mower. For him, the short run is equal
to
A) the amount of time it takes to acquire more customers.
B) the amount of time it takes to hire an additional employee.
C) the amount of time it takes to hire an additional employee and buy another lawn mower.
D) the amount of time it takes to mow one lawn.
Answer: C
Topic: Production
Skill: Application of knowledge
Status: Old
5) Joey cuts grass during the summer. He rents a lawn mower from his dad. Which of the
following statements best illustrates the difference between the short run and the long run for
Joey?
A) Joey's friends say they will help him, but when he calls them, they say they have other things
to do.
B) When Joey acquires more customers, he responds by working more hours. Next year, he will
buy a lawn mower and split the work with his brother.
C) Some customers pay Joey immediately; others wait till the following week.
D) Joey has had to turn away some customers because he is already too busy.
Answer: B
Topic: Production
Status: Old
3

6) Automobile manufacturers view the assembly-line workers as

A) capital services.
B) labor services.
C) materials.
D) None of above.
Answer: B
Topic: Production
Status: Old
7) For De Beers, the diamond company, diamond mines are ________ for their production.
A) capital services
B) labor services
C) materials
D) None of above.
Answer: C
Topic: Production
Status: Old
8) The length of the short run is the same for all firms.
Answer: False. Firms differ in their ability to change the amount of capital they employ.
Therefore, the short-run period is likely different for firms in different industries.
Topic: Production
Status: Old
9) Explain why labor might not always be a variable input.

Answer: In the real world, units of labor are not identical. Many firms employ highly specialized
units of labor. Their supply might be very inelastic so that the firm cannot easily increase the
amount of this type of labor.
Topic: Production
Status: Old
4

6.3 Short-Run Production: One Variable and One Fixed Input
1) Homer's Donut Shoppe has the production function q = 10L + 20L2 - 5L3. The marginal
product of labor is
A) MP = 10 + 40L -15L2
B) MP = 10 + 20L -5L2
C) MP = 10L
D) MP = 10 + 20L
Answer: A
Topic: Short-Run Production: One Variable and One Fixed Input
Status: Old
2) Homer's Donut Shoppe has the production function q = 10L +20L2 - 5L3. The average
product of labor is
A) AP = 10 + 20L - 5L2
B) AP = 10 + 40L - 15L2
C) AP = 10L
D) AP = 10 + 20L
Answer: A
Status: Old
3) If the average product of labor equals the marginal product of labor, then
A) the average product of labor is at a maximum.
B) the marginal product of labor is at a maximum.
C) Both A and B above.
D) Neither A nor B above.
Answer: A
Status: Old
4) The average product of labor is

A) the change in total product resulting from an extra unit of labor, holding other factors
constant.
B) the ratio of output to the number of workers used to produce that output.
C) the amount of output that can be produced by a given amount of labor.
D) equal to the marginal product of labor when the average product is increasing.
Answer: B
Status: Old
5

5) Total product is
constant.
Answer: C
Status: Old
6) Total product is maximized where

A) average product is maximized.
B) marginal product is maximized.
C) average product is equal to 0.
D) marginal product is equal to 0.
Answer: D
Status: Old
7) The marginal product of labor is

constant.
Answer: A
Status: Old
8) Average productivity will fall as long as

A) marginal productivity is falling.
B) it exceeds marginal productivity.
C) it is less than marginal productivity.
D) the number of workers is increasing.
Answer: B
Status: Old
6

9) If the marginal product of labor is constant for all levels of output, then the average product of
labor
A) is constant.
B) equals the marginal product of labor.
C) Both A and B above.
D) Either A or B above but not both.
Answer: C
Status: Old
10) Joey cuts lawns during the summer. Let q equal the number of acres mowed per day, and let
L equal the number of hours worked per day. Joey never works more than eight hours per day,
and during that time his short-run production function is q = 0.2 ∗ L. Which of the following
statements is FALSE?
A) Joey's marginal productivity equals his average productivity.
B) Joey's marginal productivity diminishes by 0.2 for each additional hour worked.
C) Joey's average productivity is constant.
D) Joey's marginal productivity is constant.
Answer: B
Status: Old
11) At any given point on the curve, the slope of the total product curve always equals
A) the ratio of the marginal product and the average product.
B) the change in input divided by the change in output.
C) the average product of the input.
D) the marginal product of the input.
Answer: D
Status: Old
12) If marginal productivity is increasing, then total product is

A) increasing at an increasing speed.
B) increasing at a constant speed.
C) increasing at a decreasing speed.
D) decreasing at an increasing speed.
Answer: A
Status: Old
7

13) When diminishing marginal returns set in, total product will
A) increase at an increasing speed.
B) increase at a decreasing speed.
C) decrease at an increasing speed.
D) decrease at a decreasing speed.
Answer: B
Status: Old
14) The slope of the line from the origin to a given point on the curve equals
A) the increase in output.
B) the change in input divided by the change in output.
C) the average product of the input.
D) the marginal product of the input.
Answer: C
Status: Old
15) Which of the following statements best summarizes the law of diminishing marginal returns?
A) In the short run, as more labor is hired, output diminishes.
B) In the short run, as more labor is hired, output increases at a diminishing rate.
C) In the short run, the amount of labor a firm will hire diminishes as output increases.
D) As more labor is hired, the length of time that defines the short run diminishes.
Answer: B
Status: Old
16) Which situation is most likely to exhibit diminishing marginal returns to labor?
A) a factory that obtains a new machine for every new worker hired
B) a factory that hires more workers and never increases the amount of machinery
C) a factory that increases the amount of machinery and holds the number of worker constant
D) None of these situations will result in diminishing marginal returns to labor.
Answer: B
Status: Old
8

17) Thomas Malthus' prediction of mass starvation resulting from diminishing marginal returns
has not been fulfilled because
A) the law of diminishing marginal returns did not hold in this case.
B) Malthus ignored other factors like technological change.
C) relative to Malthus' day, a larger percentage of today's labor works in the agricultural sector.
Answer: B
Status: Old
18) Were it not for the law of diminishing marginal returns, we could grow the world's food
supply from a flowerpot.
Answer: True. Given the current state of technology, the law of diminishing marginal returns
limits the amount of additional output yielded from additional labor working the flowerpot.
Revoking the "law" would allow output to increase at a non-decreasing rate when more labor is
applied to the flowerpot.
Status: Old
19) A firm operating with diminishing total returns cannot be profit maximizing.
Answer: True. This firm could produce more output with fewer inputs. This cannot be profit
maximizing.
Status: Old
20) The actual time length of the short run is determined by when diminishing marginal returns
start.
Answer: False. The actual time length of the short run is a function of how long it would take to
adjust all inputs.
Status: Old
21) If marginal productivity is decreasing as more labor is hired, then average productivity must
be decreasing as well.
Answer: False. The change in average productivity is not determined by the change in marginal
productivity. Average productivity can be increasing even when marginal productivity is
decreasing. Average productivity can only be decreasing when marginal productivity is below
average productivity.
Status: Old
9

22) At low levels of production, marginal productivity of labor increases as labor increases. At
high levels of production, marginal productivity of labor decreases as labor increases. Are these
two statements contradictory? Explain.
Answer: No. At low levels of production, marginal productivity of labor can increase due to
specialization. Eventually, however, diminishing marginal productivity will commence.
Status: Old
23) Explain the difference between diminishing returns to labor and diminishing marginal returns
to labor.
Answer: Diminishing returns to labor means that an increase in the number of labor units will
decrease the amount of output. Diminishing marginal returns means that additional units of labor
increase output at a decreasing rate.
Status: Old
24) Each additional worker produces two extra units of output until the first three units are
produced for some production function. After the third unit is produced each additional worker
produces one extra unit of output. What are the total product of labor, average product of labor
and marginal product of labor for the first five units of production associated with this
production function?
Answer:

Status: Old
25) Consider the following short-run production function: q = 5 - 1/3 . At what level of L do
diminishing marginal returns begin? At what level of L do diminishing returns begin?
Answer: MP = 10L - . Marginal product peaks when L = 5 and equals zero when L = 10. Thus
diminishing marginal returns begin when L = 5, and diminishing returns begin when L = 10.
Status: Old
10

26) Describe the relationship between marginal productivity and average productivity. Use
calculus or a graph to support your answer.
Answer: AP = Q(L)/L. dAP/dL = ([L ∗ MP] - Q) /L2 = MP - AP/L. Thus if MP = AP, AP is
constant. If MP > AP, AP will rise. If MP < AP, AP will fall.
Status: Old
27) Suppose the production function for T-shirts can be represented as q = L0.25 K0.75. Show
that the marginal productivity of labor diminishes in the short run.
Answer: In the short run, MPL = 0.25 ∗ (q/L). The change in MP with respect to L equals
d(MP)/dL = -0.25 ∗ q/L2. Thus for all levels of labor hired, MP falls as L increases.
Status: Old
28) Blowdryer businessman Max Power is starting a new hairdryer business. Max estimates his
production function to be q = KL0.5. Max has 60 units of capital (K = 60). Derive Max's MP and
AP of labor for the current level of capital.
Answer: The AP = q/L = 6/L0.5. The MP = dq/dL = 3/L0.5.
Status: Old
29) A small firm in Indonesia has the following estimated production function:
ln(q) = 10 + 2.6ln(L) - 0.4(ln(L))2
Derive the firm's marginal and average product of labor as functions of q and L. What is the
elasticity of output with respect to labor?
Answer:
Total differentiate both sides of the function with respect to L:
(1/q)(dq/dL) = (2.6 - 0.8ln(L))(1/L)
Rearrange to get:
MP = (q/L)(2.6 - 0.8ln(L))
The AP = q/L.
The elasticity is (dq/dL)(L/q) = MP/AP = 2.6 - 0.8ln(L).
Status: Old
11

30) Ed's building company has the following production function

q = 20L - L2
where q is the number of houses built and L is the quantity of labor Ed employs.
a. Derive the MP and AP.
b. For what values of L is the MP > 0? For what values of L is the MP diminishing?
c. Draw the MP and AP on a graph.
Answer:
a. MP = dq/dL = 20 – 2L; AP = 20 – L
b. MP > 0 if and only if 20 - 2L > 0, or L < 10.
dMP/dL = –2, so the MP is diminishing for all values of L.
c.

Status: Old
12

6.4 Long-Run Production: Two Variable Inputs
1) At Joey's Lawncutting Service, a lawn mower cannot cut grass without a laborer. A laborer
cannot cut grass without a lawn mower. Which graph in the above figure best represents the
isoquants for Joey's Lawncutting Service when Capital per day is on the vertical axis and Labor
per day is on the horizontal axis?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: A
Topic: Long-Run Production: Two Variable Inputs
Status: Old
2) In the above figure, Graph D with Capital on the vertical axis and Labor on the horizontal
axis implies that
A) the marginal product of labor is increasing as more labor is employed.
B) the marginal product of labor is decreasing as more labor is employed.
C) the capital and labor are perfect substitutes.
D) capital and labor have to be employed in fixed proportions.
Answer: A
Status: Old
13

3) The production function for hamburgers can be written as q = 0.1X + 0.1Y, where X is
Canadian ground beef and Y is U.S. beef, both measured in pounds. Which graph in the figure
best represents the isoquants for the hamburger production when U.S. ground beef is on the
vertical axis and Canadian ground beef is on the horizontal axis?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: C
Topic: Isoquants
Status: Old
4) At Joey's Lawncutting Service, the production function is represented as: q = min(m, l), where
q is the quantity of lawns mowed. The inputs are m, the lawn mower, and l, the laborer. Which
graph in the above figure best represents the isoquants for Joey's Lawncutting Service when
Capital per day is on the vertical axis and Labor per day is on the horizontal axis?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: A
Topic: Isoquants
Status: Old
5) Lectures in microeconomics can be delivered either by an instructor (labor) or a movie

(capital) or any combination of both. Each minute of the instructor's time delivers the same
amount of information as a minute of the movie. Which graph in the above figure best represents
the isoquants for lectures in microeconomics when Capital per day is on the vertical axis and
Labor per day is on the horizontal axis?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: C
Status: Old
14

6) Lectures in microeconomics can be delivered either by an instructor (labor) or a movie

(capital) or any combination of both. Yet the it gets harder and harder to substitute more movies
for an instructor the more movies are already used. Which graph in the above figure best
represents the isoquants for lectures in microeconomics when Capital per day is on the vertical
axis and Labor per day is on the horizontal axis?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: B
Status: Old
7) Which graph in the above figure represents the isoquants where, as the amount of labor used
increases and the amount of capital used decreases, the marginal product of labor rises when
Capital per day is on the vertical axis and Labor per day is on the horizontal axis?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: D
Status: Old
8) To say that isoquants are convex is to say that

A) the marginal rate of technical substitution falls as labor increases.
B) capital and labor are perfect substitutes.
C) labor, but not capital, is subject to the law of diminishing marginal returns.
D) there are constant returns to scale.
Answer: A
Status: Old
9) One way to explain the convexity of isoquants is to say that

A) as labor increases and capital decreases, rises while falls.
B) as labor increases and capital decreases, falls while rises.
C) as labor increases and capital decreases, and both fall.
D) as labor increases and capital decreases, and both rise.
Answer: B
Status: Old
15

10) An isoquant represents levels of capital and labor that

A) have constant marginal productivity.
B) yield the same level of output.
C) incur the same total cost.
Answer: B
Status: Old
11) Suppose the production of paved roadways can be represented as q = L0.5 + K0.5. Which of
the following statements is (are) TRUE?
A) Labor is subject to diminishing marginal productivity in the short run.
B) Labor and capital are imperfect substitutes.
C) The isoquants for paved roadways are convex.
Answer: D
Status: Old
12) L-shaped isoquants imply that production requires that the inputs
A) are perfect substitutes.
B) are imperfect substitutes.
C) cannot be used together.
D) must be used together in a certain proportion.
Answer: D
Status: Old
13) Isoquants that are downward-sloping straight lines imply that the inputs
A) are perfect substitutes.
B) are imperfect substitutes.
C) cannot be used together.
D) must be used together in a certain proportion.
Answer: A
Status: Old
16

14) Isoquants that are downward-sloping straight lines exhibit

A) an increasing marginal rate of technical substitution.
B) a decreasing marginal rate of technical substitution.
C) a constant marginal rate of technical substitution.
D) a marginal rate of technical substitution that cannot be determined.
Answer: C
Status: Old
15) The slope of an isoquant tells us

A) how much output increases when both inputs are increased.
B) the increase in MPL when capital increases.
C) the decrease in capital necessary to keep output constant when labor increases by one unit.
D) the decrease in capital necessary to keep MPL constant when labor increases by one unit.
Answer: C
Status: Old
16) The steeper an isoquant is,

A) the greater is the marginal productivity of labor relative to that of capital.
B) the greater is the substitutability between capital and labor.
C) the greater is the need to keep capital and labor in fixed proportions.
D) the greater is the level of output.
Answer: A
Status: Old
17) With capital on the vertical axis and labor on the horizontal axis, vertical isoquants imply
that
A) capital and labor are perfect substitutes.
B) capital and labor must be used together in a certain proportion.
C) capital is not productive.
D) labor is not productive.
Answer: C
Status: Old
17

18) The marginal rate of technical substitution always equals

A) the slope of the total product curve.
B) the ratio of the marginal products of inputs.
C) the change in output due to a change in the amount of one input.
D) the distance between two isoquants.
Answer: B
Status: Old
19) If the elasticity of substitution of a production function is equal to zero, then this production
function is a
A) linear production function
B) fixed proportion production function
C) Cobb-Douglas production function
D) None of above.
Answer: B
Topic: The Elasticity of Substitution
Status: New
20) Unlike indifference curves, isoquants can intersect.

Answer: False. By the same logic as with indifference curves, the intersection implies the same
level of output. Since output increases as one moves toward the northeast on the isoquant map,
moving from the intersection one isoquant shows higher output and the other shows lower. This
is contradictory.
Status: Old
21) If inputs into production cannot be substituted for each other but have to be employed in
fixed proportions, isoquants are straight, downward-sloping lines.
Answer: False. Isoquants are straight lines when inputs are perfect substitutes. When input
relations are fixed they are right angles.
Status: Old
18

22) Suppose that additional units of capital affect the marginal productivity of labor. This is not
unrealistic. Word processors increase the marginal productivity of secretaries. On the other hand,
robotic equipment can completely replace a worker and, thereby, lower the marginal productivity
of labor. Given this possibility, determine the conditions under which isoquants will not be
convex (i.e., concave).
Answer: The slope of the isoquant equals -MPL/MPK. To be concave, the slope of the isoquant
becomes steeper as L increases. For this to be the case, MPL would have to increase more than
MPK as labor increases and capital falls. That means the decrease in capital causes MPL to rise
more than the increase in labor causes MPL to fall. The large inverse relationship implies that
capital is replacing labor for this to be the case.
Status: Old
that the isoquants for this function are convex.
Answer: The slope of the isoquant is -MPL/MPK = -K/3L. As L increases and K decreases, this
value becomes absolutely smaller, implying a flatter slope.
Status: Old
24) Suppose the production function for T-shirts can be represented as q = L0.25 K0.75. When
K = 1 and q = 2, what is the slope of the isoquant? If there is insufficient information to answer
the question, describe what information is needed.
Answer: Since the slope of the isoquant is -K/3L, one needs to know the level of L. Since K = 1
and q = 2, L must equal 16. Thus the slope of the isoquant at this point is -(1/48).
Status: Old
25) Find the Marginal Rate of Technical Substitution for the following production functions:
a. q = L0.5 K0.5
b. q = L0.5 + K0.5
c. q = min{K,L}
d. q = L + K
Answer:
a. K/L
b. K/L
c. - infinity for K > L and 0 for L < K (undefined when K = L)
d. -1
Status: Old
19

26) In Sewei's lawnmowing business, in order to produce each mowed lawn, Sewei must hire
exactly one unit of capital (a lawnmower) and exactly one unit of labor. Describe the elasticity of
substitution between labor and capital.
Answer: Since substitution is not possible here, there is zero elasticity of substitution.
Status: Old
27) Justin's bank employs tellers and ATMs. Both are able to serve clients in the exact same way
and therefore are perfect substitutes. Describe the elasticity of substitution between the two
inputs.
Answer: The elasticity is infinite. The firm is able to freely substitute the goods since they are
perfect substitutes (without altering the MRTS).
Status: Old
28) Mr. Roche purchases a firm that produces widgets by employing machines and workers.
Each machine requires exactly three workers to operate. Without three workers, the machine will
not work, and any additional worker above three will just stand there doing nothing. When
operated this way, the machine produces 30 widgets an hour. Draw some isoquants for this
technology and determine the production function.
Answer: This is a case of fixed proportions—the isoquants are right angles with the bend
occurring at combinations where L = 3K. The production function is:
f(L,K) = 10 min{L,3K}

Status: Old
20

29) JC's music production company provides artists with studio time and a backing band to
record with. In providing the rhythm track, JC can employ drum machines or drummers.
Regardless of the quantity of output JC produces, he can substitute two drummers with one drum
machine—drum machines tire out less quickly). Draw a few isoquant lines (with numbers)
reflecting this production function for the rhythm track. Determine the function representing this
production process.
Answer: The drummers and drum machines are perfect substitutes. In other words, the slope of
these isoquants has a constant slope meaning at any point on an isoquant the slope is 1/2 (with
drummers on the x-axis). Q = L + 2K (or = aL + 2aK)
Status: Old
6.5 Returns to Scale
1) Returns to scale refers to the change in output when

A) all inputs increase proportionately.
B) labor increases holding all other inputs fixed.
C) capital equipment is doubled.
D) specialization improves.
Answer: A
Topic: Returns to Scale
Status: Old
2) Decreasing returns to scale may occur as increasing the amount of inputs used
A) increases specialization.
B) always increases the amount of output produced.
C) may cause coordination difficulties.
D) increases efficiency.
Answer: C
Status: Old
3) Let the production function be q = ALaKb. Returns to scale are equal to

A) a ∗ b.
B) a + b.
C) La + Kb.
D) A ∗ L.
Answer: B
Status: Old
21

4) Let the production function be q = ALaKb. The function exhibits increasing returns to scale if
A) a + b = 1.
B) a + b > 1.
C) a + b < 1.
D) Cannot be determined with the information given.
Answer: B
Status: Old
5) Let the production function be q = ALaKb. The function exhibits decreasing returns to scale if
A) a + b = 1.
B) a+ b > 1.
C) a + b < 1.
Answer: C
Status: Old
6) Let the production function be q = ALaKb. The function exhibits constant returns to scale if
A) a + b = 1.
B) a + b > 1.
C) a + b < 1.
Answer: A
Status: Old
7) Suppose the production of VCRs can be represented by the following production function:
q = L0.4 K0.4. Which of the following statements is (are) TRUE?
A) The production function has decreasing returns to scale.
B) The marginal productivity of labor falls as labor increases in the short run.
C) Capital and labor can be substituted for one another.
Answer: D
Status: Old
22

q = L0.4 K0.4. Which of the following statements is TRUE?
A) The production function has decreasing returns to scale.
B) The production function has increasing returns to scale.
C) The production function has constant returns to scale.
D) Returns to scale vary with the level of output.
Answer: A
Status: Old
q = L0.4 K0.4. The firm currently produces units. If all inputs doubled, the new level of
output will equal
A) 20.4 q1.
B) 20.8 q1.
C) 0.8 q1.
D) 1.6 q1.
Answer: B
Status: Old
10) Returns to scale is a concept that operates

A) only in the short run.
B) only in the long run.
C) in both the long run and the short run.
D) in either the long run or the short run, but never both.
Answer: B
Status: Old
23

11) The above figure shows the isoquants for producing steel. Increasing returns to scale are
A) present when producing less than 10,000 tons.
B) present when producing less than 20,000 tons.
C) present when producing less than 30,000 tons.
D) never present.
Answer: A
Status: Old
12) The above figure shows the isoquants for producing steel. Decreasing returns to scale are
A) present when producing more than 10,000 tons.
B) present when producing more than 20,000 tons.
C) present when producing more than 30,000 tons.
D) never present.
Answer: B
Status: Old
24

13) The above figure shows the isoquants for producing steel. Constant returns to scale are
A) present when producing less than 10,000 tons.
B) present when producing between 10,000 and 20,000 tons.
C) present when producing more than 20,000 tons.
D) never present.
Answer: B
Status: Old
14) The above figure shows the isoquants for producing steel. When producing more than 20,000
tons there are
A) increasing returns to scale.
B) decreasing returns to scale.
C) constant returns to scale.
D) economies of scale.
Answer: B
Status: Old
15) The above figure shows the isoquants for producing steel. When producing less than 10,000
tons there are
D) diseconomies of scale.
Answer: A
Status: Old
16) The above figure shows the isoquants for producing steel. When producing between 10,000
and 20,000 tons there are
Answer: C
Status: Old
25

17) The returns to scale of the production function Q = 50 L0.4 K0.2 are
A) 50.
B) .6.
C) .8.
D) 500.6.
Answer: B
Status: Old
18) The production function Q = 0.8X + 0.6Y exhibits

A) increasing return to scale.
Answer: C
Status: Old
19) Cobb-Douglas production functions can never possess varying returns to scale.
Answer: True. The Cobb-Douglas function takes the form q = Lα Kβ, where the exponents are
constant parameters. The returns to scale equals α + β which is constant for all q.
Status: Old
20) A firm may express increasing, constant and decreasing returns to scale for various levels of
output.
Answer: True. As output increases, a firm can experience all types of returns to scale.
Status: Old
21) Show that increasing returns to scale can co-exist with diminishing marginal productivity. To
do so, provide an example of a production function with IRTS and diminishing marginal returns.
Answer: A number of production functions work. A general Cobb-Douglas production function
with
a + b >1 while a < 1 and b < 1.
Status: Old
26

that the production function has constant returns to scale.
Answer: When L = L1 and K = K1, q = q1. Let L2 = γL1 and K2 = γK1 so that both L and K
have increased by the same proportion. Then, q2 = γL10.25 γK10.75 = γ0.25+0.75 L10.25
K10.75 = γq1. Thus for any γ, output changes by the same proportion that the inputs changed.
Status: Old
23) Provide a graph and an explanation to show that the production function Q = L0.5 K0.5 has
diminishing marginal product of labor but has constant returns to scale.
Answer:
See the above figure. The = .5 ∗ L-0.5 K0.5 so as the amount of labor increases the MPL
falls. The convex shape of the isoquants illustrates the diminishing marginal product of labor.
Doubling both capital and labor will result in output doubling.
Status: Old
27

24) The above figure shows the isoquants for the production of steel. In which regions of
production are there increasing, decreasing, and constant returns to scale?
Answer: When output is less than 10,000 tons, there are increasing returns to scale. Between
10,000 and 20,000 tons, there are constant returns to scale. For output greater than 20,000 tons,
there are decreasing returns to scale.
Status: Old
28

25) Production occurs using the fixed-proportion combination of one worker for every one unit
of capital. Draw the isoquants for this production function. After one unit of output is produced,
does this production function exhibit constant, increasing, or decreasing returns to scale?
Answer:
See the above figure. The production function exhibits constant returns to scale
Status: Old
26) For what values of a and b will the following production function exhibit increasing,
decreasing or constant returns to scale?
q = (La + Ka)1/b
Answer:
Let q = f(L,K). Then
f(2L,2K) = ((2L)a+(2K)a)1/b
= 2a/bf(L,K)
for a > b, IRTS
for a < b, DRTS,
and for a = b, CRTS.
Status: Old
29

27) A firm has the following production function:

q = (L1/3 + K1/3)3
a. Determine the returns to scale for this function.

b. Determine the MRTS.
c. Determine the Elasticity of Substitution.
Answer:
a. CRTS
b. MRTS = -(L/K)-2/3
c. E = 3/2
Status: Old
6.6 Productivity and Technical Change
1) Joey's lawncutting service recently traded in its push mowers for gasoline-powered mowers.
Joey still requires one worker per lawnmower; however, more grass is now cut in the same
amount of time as before. This is an example of
A) labor-saving technical change.
B) non-neutral technical change.
C) neutral technical change.
D) organizational change.
Answer: C
Topic: Productivity and Technical Change
Status: Old
2) Suppose the production function for a certain device is q = L + K. If a labor-saving technical

change has occurred, which of the following could be the new production function?
A) q = L + 5K
B) q = 5 ∗ (L + K)
C) q = 5L + K
D) All of the above are possible.
Answer: C
Status: Old
30

3) Suppose the production function for a certain device is q = L + K. If neutral technical change
has occurred, which of the following could be the new production function?
A) q = L + 5K
B) q = 5 ∗ (L + K)
C) q = 5L + K
D) All of the above are possible.
Answer: B
Status: Old
4) Albert's Pretzel Baking Company used to have four workers who were each in charge of
making their own pretzels from start to finish. Now, one worker mixes the dough, another shapes
it, the third puts the unbaked pretzels into the oven and the fourth removes the finished product.
Output has doubled. This is an example of
A) neutral technical change.
B) labor-saving technical change.
C) an organizational innovation.
Answer: C
Status: Old
5) Over a five-year span, the ABC Co. reduced the amount of labor it hired. At the same time,
the marginal productivity of labor increased. Which of the following COULD explain this
observation?
A) the law of diminishing marginal returns
B) labor saving technical change
C) organizational innovation
D) All of the above
Answer: D
Status: Old
6) The implementation of the assembly line is an example how

A) changes in the organization of production improve productivity.
B) neutral technical change improves productivity.
C) non-neutral technical change can decrease productivity.
D) labor saving technical change increases economy-wide unemployment.
Answer: A
Status: Old
31

7) Dell computers has increased production efficiency by

A) producing output with fewer inputs.
B) expanding the amount of inputs used.
C) outsourcing production.
D) relying on decreasing returns to scale.
Answer: A
Status: Old
8) Changing how production is organized cannot result in changes in productivity.

Answer: False. Henry Ford assembly line is an example of how changes in the organization of
production increased productivity.
Status: Old
9) Suppose firms A and B each make T-shirts. Firm A's production function is q = L0.5 K0.5.
Firm B's production function is q = 1.2 ∗ L0.5 K0.5. If the two firms each hire the same amounts
of capital and labor, compare the two firms in terms of APL and MPL.
Answer: Firm B's APL and MPL will equal 1.2 times the APL and MPL of firm A.
Status: Old
10) Explain how firms that each produce as efficiently as they can, may not be equally
productive.
Answer: Firm-specific characteristics may vary the level of productivity for firms even if all
firms operate as efficiently as each possibly can.
Status: Old
32

Microeconomics Theory and Applications With Calculus 4th Edition Perloff Test Bank

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Microeconomics Theory and Applications With Calculus 4th Edition Perloff Test Bank

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Microeconomics Theory and

Applications with Calculus 4th Edition

Microeconomics: Theory and Applications with Calculus, 4e (Perloff)

6.1 The Ownership and Management of Firms

1) Economists typically assume that the owners of firms wish to

3) Efficient production occurs if a firm

4) Limited liability is a benefit to

6) Only corporations benefit from limited liability.

7) What do we mean by efficient production?

1) Which of the following statements best describes a production function?

3) In the long run, all factors of production are

6) Automobile manufacturers view the assembly-line workers as

9) Explain why labor might not always be a variable input.

6.3 Short-Run Production: One Variable and One Fixed Input

4) The average product of labor is

6) Total product is maximized where

7) The marginal product of labor is

8) Average productivity will fall as long as

12) If marginal productivity is increasing, then total product is

Topic: Short-Run Production: One Variable and One Fixed Input

30) Ed's building company has the following production function

Topic: Short-Run Production: One Variable and One Fixed Input

6.4 Long-Run Production: Two Variable Inputs

5) Lectures in microeconomics can be delivered either by an instructor (labor) or a movie

6) Lectures in microeconomics can be delivered either by an instructor (labor) or a movie

8) To say that isoquants are convex is to say that

9) One way to explain the convexity of isoquants is to say that

10) An isoquant represents levels of capital and labor that

14) Isoquants that are downward-sloping straight lines exhibit

15) The slope of an isoquant tells us

16) The steeper an isoquant is,

18) The marginal rate of technical substitution always equals

20) Unlike indifference curves, isoquants can intersect.

Topic: Long-Run Production: Two Variable Inputs

6.5 Returns to Scale

1) Returns to scale refers to the change in output when

3) Let the production function be q = ALaKb. Returns to scale are equal to

10) Returns to scale is a concept that operates

18) The production function Q = 0.8X + 0.6Y exhibits

27) A firm has the following production function:

a. Determine the returns to scale for this function.

6.6 Productivity and Technical Change

2) Suppose the production function for a certain device is q = L + K. If a labor-saving technical

6) The implementation of the assembly line is an example how

7) Dell computers has increased production efficiency by

8) Changing how production is organized cannot result in changes in productivity.

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