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FINAL EXAM 2: The Theory and Estimation of Production

Multiple-Choice Questions

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

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

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.

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

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.

6) The "Law of Diminishing Returns" states that


A) additional inputs will reduce output.
B) additional inputs will decrease average productivity.
C) the supply of inputs is becoming scarce.
D) additional inputs will lead to less additional output.

7) When the law of diminishing returns takes effect


A) firms must add increasingly more input if they are to maintain the
same extra amount of output.
B) firms must add decreasingly more input if they are to maintain the
same extra amount of output.
C) more input must be added in order to increase its output.
D) a firm must always try to add the same amount of input to the
production process.

8) Assume a firm employs 10 workers and pays each $15 per hour. Further
assume that the MP of the 10th worker is 5 units of output and that the price
of the output is $4. According to economic theory, in the short run,
A) the firm should hire additional workers.
B) the firm should reduce the number of workers employed.
C) the firm should continue to employ 10 workers.
D) More information is required to answer this question.

9) 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.

10) Increasing Returns to Scale results when


A) in the long-run, an increase in inputs will lead to an increase in the
average products of inputs.
B) in the long run, an increase in inputs will lead to an equivalent increase
in output.
C) labor becomes more skilled.
D) All of the above.

11) In the short run, finding the optimal amount of variable input involves
which relationship?
A) MP = MC B) AP = MP C) MP = 0 D) MRP = MFC

12) The perfect substitution of two inputs implies that


A) two inputs can be substituted at a ratio of 1 to 1.
B) one input can be substituted for another up to some point.
C) two inputs can be substituted at some constant ratio.
D) one input can be substituted for another.

13) If MRP > MLC, it means that a firm should


A) use less labor. B) use more labor.
C) increase its fixed capacity. D) decrease its fixed capacity.
14) In economic theory, if an additional worker adds less to the total output
than previous
workers hired, it is because
A) there may be less that this person can do, given the fixed capacity of
the firm.
B) he/she is less skilled than the previously hired workers.
C) everyone is getting in each other's way.
D) the firm is experiencing diminishing returns to scale.

15) 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.

16) 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.

17) Which of the following is the best example of two inputs that would exhibit a
constant
marginal rate of technical substitution?
A) trucks and truck drivers
B) natural gas and oil
C) personal computers and clerical workers
D) company employed computer programmers and temporary supplemental
computer
programmers

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

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.
20) An advantage of using the cross-sectional regression method in estimating
production is that
A) the problem of technological change over time is overcome.
B) there is no need to adjust data, which are in monetary terms for geographical
differences.
C) we can assume that all plants operate at their most efficient input
combinations.
D) All of the above.

Analytical Question

Given the Production Function: Q = 72X + 15X2 - X3, where Q = Output and X =
Input
What is the Marginal Product (MP) when X = 8?

Reference:
Chapter 6 - The Theory and Estimation of Production
Keat, Paul and Philip K.Y. Young (2003). Managerial Economics: Economic Tools for
Today’s Decision Makers.