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The Theory and Estimation of

Production and Costs




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Question 1
1) The term Production Function refers to the:
a) Use of machinery and equipment in
production
b) Relationship between costs and output
c) Relationship between inputs and output
d) Role of labor unions

Question2
2) The production period in which at least one
input is fixed in quantity is the:
a) Production run
b) Long run
c) Short run
d) Planning horizon

Question 3
3) The difference between the short-run and the
long-run is:
A) three months or one business quarter.
B) the time it takes for firms to change all
production on inputs.
C) the time it takes for firms to change only
their variable inputs.
D) More information is required to answer this
question.

Question4
4) In a call center, which of the following situations
be considered as a variable input in the short-
run?
A) the level of computer-telephony software
being utilized
B) the number of call center representatives on
duty at the center
C) the number of call center managers or
supervisors
D) the size (e.g., square footage) of the call center

Question 5
5) Which of the following holds true?

a) When the Marginal Product (MP) is rising, Marginal cost
(MC) is rising; and when MP is falling, MC is falling.
b) When MP is rising, MC is falling, and when MP is falling,
MC is rising.
c) When MP is rising, MC is constant, and when MP is falling,
MC is negative
d) There is no relationship between MP and MC.


Question6
6). The marginal product of the variable input:
a) is always positive
b) typically falls then rises
c) is equal to the total product divided by the
total amount of the variable input employed
d) none of the above

Question 7
7) Which of the following statements about the short-run
production function is true?
A) MP always equals AP at the maximum point of MP.
B) MP always equals zero when TP is at its maximum
point.
C) TP starts to decline at the point of diminishing
returns.
D) When MP diminishes, AP is at its minimum point.
E) None of the above is true.


Question 8
8) Output (Total Product) is maximized when
A) average productivity is at its maximum.
B) the "law of diminishing returns" sets in.
C) marginal productivity is zero.
D) marginal productivity is at its maximum.


Question 9
If a firm finds itself operating in Stage I, it
implies that
A) variable inputs are extremely expensive.
B) it overinvested in fixed capacity.
C) it underinvested in fixed capacity.
D) fixed inputs are extremely expensive.
Question 10
A firm that operates in Stage III of the short-run
production function
A) has too much fixed capacity relative to its variable
inputs.
B) has too little fixed capacity relative to its variable
inputs.
C) has greatly overestimated the demand for its
output.
D) should try to increase the amount of variable input
used.


Question 11
Stage III of the short-run Production Function is
A) the most efficient mix of inputs.
B) the least costly level of output.
C) where additional units of inputs will lead to
less output.
D) where additional units of inputs will lead to
more output.

Question 12
In the long run, a firm is said to be experiencing
decreasing returns to scale if a 10 percent
increase in inputs results in
A) an increase in output from 100 to 110.
B) a decrease in output from 100 to 90.
C) an increase in output from 100 to 105.
D) a decrease in output from 100 to 85.

Question 13
An isoquant indicates
A) different combinations of two inputs that can
be purchased for the same amount of money.
B) different combinations of two inputs that can
produce the same amount of output.
C) different combinations of output that can be
produced with the same amount of input.
D) different combinations of output that cost the
same amount to produce.

Question 14
Marginal rates of technical substitution (MRTS)
represent
A) the optimum combinations of inputs.
B) cost minimizing combinations of inputs.
C) the degree to which one input can replace
another without output changing.
D) All of the above.
Question 15
The following is not one of the strengths of the Cobb-
Douglas production function:
A) Both marginal product and returns to scale can be
estimated from it.
B) It can be converted into a linear function for ease of
calculation.
C) It shows a production function passing through
increasing returns to constant returns and then to
decreasing returns.
D) The sum of the exponents indicates whether returns
to scale are increasing, constant or
decreasing.

Question 16
The following Cobb-Douglas production
function, Q = 1.8L
0.74
K
0.36
, exhibits
A) increasing returns.
B) constant returns.
C) decreasing returns.
D) Both A and B.

Question 17
When is it not in the best interest of a company to
hire additional workers in the short run?
A) when the average good of labor is decreasing
B) when the firm is in Stage II of the production
process
C) when the marginal revenue good equals zero
D) when the wage rate is equal to or greater than
labor's marginal revenue good

Question 18
Which of the following combination of inputs is
most closely reflective of decreasing marginal
rate of technical substitution (MRTS)?
A) oil and natural gas
B) sugar and high fructose corn syrup
C) computers and clerks
D) keyboards and computers

Question 19
Isocost curves represent
A) least cost combinations of inputs.
B) combinations of inputs that can be
purchased given their prices and the funds
available.
C) a producers cost function.
D) None of the above.

Question 20
If a firm used a combination of inputs that was
to the left of its isocost line, it would indicate
that
A) it is exceeding its budget.
B) it is not spending all of its budget.
C) it is operating at its optimal point because it
is saving money.
D) None of the above.

Question 21
Which of the following cost relationships is not
true?
A) AFC = AC - MC
B) TVC = TC - TFC
C) The change in TVC/the change in Q = MC.
D) The change in TC/ the change in Q = MC.

Question 22
The distinction between sunk and incremental
costs is most helpful in answering which
question?
A) How many more people should be added to
the production process?
B) What is the correct price to charge?
C) Should we begin to build a new factory?
D) Should we continue developing a new
software application that we began last year?

Question 23
The relationship between MC and AC can best
be described as follows:
A) when AC increases, MC starts to increase.
B) when MC increases, AC starts to increase.
C) when MC decreases, AC decreases.
D) when MC exceeds AC, AC starts to increase.

Question 24
MC increases because
A) MC naturally increases as firm nears
capacity.
B) labor is paid overtime wages when volume
increases.
C) in the short run, MC always increases.
D) the law of diminishing returns takes effect.
Second roundQ1
Industry supply and demand are given by:
QD = 1000 - 2P and QS = 3P
a. What is the equilibrium price and
quantity?
b. At a price of $100, will there be a shortage
or a surplus, and how large will it be?
c. At a price of $300, will there be a shortage
or a surplus, and how large will it be?


solution
a.P = $200, Q = 600.
b. At a price of $100, there will be a shortage.
The quantity demanded will be 800, and the
quantity supplied will be 300, and thus there
will be a shortage of 500 units.
c. At a price of $300, there will be a surplus.
The quantity demanded will be 400, and the
quantity supplied will be 900, and thus there
will be a surplus of 600 units.

Q2
A good's Demand Curve is: Qd = 25 - P, and its
Supply Curve is: Qs = 10 + 2P.

a. When P = $20, what is the difference, if any,
between Qd and Qs?
b. When P = $3, what is the difference, if any,
between Qd and Qs?
c. What are the equilibrium values of P and Q?


solution
a. Qd = 5 and Qs = 50
b. Qd = 22 and Qs = 16
c. Q = 20 and P = $5


Q 3
List the major non-price
determinants of demand.

solution
Consumer preferences (tastes),
income,
prices of related goods (complements and
substitutes),
future expectations, and
number of buyers.

Q 4
List the major non-price
determinants of supply.

solution
Input costs, technology,
prices of other goods that can be sold by the
firm(complements and substitutes),
future expectations,
weather conditions, and
number of sellers.