MC Questions:

Chapters 6 – 8

Eco200, Summer 2008

Moritz Ritter
University of Toronto

Question 1.
A farmer uses L units of labor and K units of capital to produce Q units of corn using a production
function F(K,L). A production plan that uses K’=L’=10 to produce Q’ units of corn where Q’<F(10,10)
is said to be
a. technically feasible and efficient.
b. technically unfeasible and efficient.
c. technically feasible and inefficient.
d. technically unfeasible and inefficient.
e. none of the above.

Question 2.
The marginal product of an input is
a. total product divided by the amount of the input used to produce this amount of output.
b. the addition to total output that adds nothing to total revenue.
c. the addition to total output that adds nothing to profit.
d. the addition to total output due to the addition of one unit of all other inputs.
e. the addition to total output due to the addition of the last unit of an input, holding all other
inputs constant.

Question 3.
What describes the graphical relationship between average product and marginal product?
a. Average product cuts marginal product from above, at the maximum point of marginal product.
b. Average product cuts marginal product from below, at the maximum point of marginal product.
c. Marginal product cuts average product from above, at the maximum point of average product.
d. Marginal product cuts average product from below, at the maximum point of average product.
e. Average and marginal product do not intersect.
Question 4.
In a certain textile firm, labor is the only short term variable input. The manager notices that the
marginal product of labor is the same for each unit of labor, which implies that
a. the average product of labor is always greater than the marginal product of labor.
b. the average product of labor is always equal to the marginal product of labor.
c. the average product of labor is always less than the marginal product of labor.
d. as more labor is used, the average product of labor falls.
e. there is no unambiguous relationship between labor’s marginal and average products.

Question 5.
If the law of diminishing returns applies to labor then
a. the marginal product of labor must eventually become negative.
b. the average product of labor must eventually become negative.
c. the marginal product of labor must rise and then fall as employment rises.
d. the average product of labor must rise and then fall as employment rises.
e. after some level of employment, the marginal product of labor must be decreasing.

Question 6.
A firm’s marginal product of labor is 4 and its marginal product of capital is 5. If the firm adds one
unit of labor, but does not want its output quantity to change, the firm should
a. use five fewer units of capital.
b. use 0.8 fewer units of capital.
c. use 1.25 fewer units of capital.
d. add 1.25 units of capital.

Question 7.
A straight-line isoquant
a. is impossible.
b. would indicate that the firm could switch one output to another costlessly.
c. would indicate that the firm could not switch from one output to another.
d. would indicate that capital and labor cannot be substituted for each other in production.
e. would indicate that capital and labor are perfect substitutes in production.

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Question 8.
If input prices are constant, a firm with increasing returns to scale can expect
a. costs to double as output doubles.
b. costs to more than double as output doubles.
c. costs to go up less than double as output doubles.
d. to hire more and more labor for a given amount of capital, since marginal product increases.
e. to never reach the point where the marginal product of labor is equal to the wage.

Question 9.
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. The
total variable cost is ... and the marginal cost is ... .
a. 200, 5.
b. 200, 5Q.
c. 5Q, 5.
d. 5Q, 5 + 200/Q.
e. 5 + 200/Q, 5.

Question 10.
Use the following two statements to answer this question:
I. The average cost curve and the average variable cost curve reach their minima at the same level of
output.
II. The average cost curve and the marginal cost curve reach their minima at the same level of output.

a. Both I and II are true.

b. I is true, and II is false.
c. I is false, and II is true.
d. Both I and II are false.

Question 11.
In a short-run production process, the marginal cost is rising and the average variable cost is falling as
output is increased. Thus,
a. average fixed cost is constant.
b. marginal cost is above average variable cost.
c. marginal cost is below average fixed cost.
d. marginal cost is below average variable cost.

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Question 12.
Suppose 5 laborers working on 10 acres of land are able to produce 4000 bushels of corn and 6 laborers
working on 12 acres of land produce 5000 bushels of corn. Production is characterized by
a. constant returns to scale.
b. increasing returns to scale.
c. decreasing returns to scale.
d. increasing marginal returns.
e. diminishing marginal returns.

Question 13.
Consider the following two statements in answering this question:
I. A firm’s marginal cost curve does not depend on the level of fixed costs.
II. As output increases the difference between a firm’s average total cost and average variable cost curves
cannot rise.

a. I is true, and II is false.

b. I is false, and II is true.
c. I and II are both true.
d. I and II are both false.

Question 14.
With its current levels of input use, a firm’s MRTS is 0.5 (when capital is on the vertical axis and labor
is on the horizontal axis). This implies
a. the firm could produce 0.5 more units of output if it increased its use of capital by one unit (holding
labor constant).
b. the firm could produce 0.5 more units of output if it increased its use of capital by one unit (holding
capital constant).
c. if the firm reduced its capital stock by one unit, it would have to hire 2 more workers to maintain
its current level of output.
d. if it used one more unit of both capital and labor, the firm could produce 0.5 more units of output.
e. the marginal product of labor is 2 times the marginal product of capital.

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Question 15.
A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $20 per
hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm
a. is producing its current output level at the minimum cost.
b. could reduce the cost of producing its current output level by employing more capital and less
labor.
c. could reduce the cost of producing its current output level by employing more labor and less capital.
d. could increase its output at no extra cost by employing more capital and less labor.
e. both b and d are true.

Question 16.
Consider the following two statements in answering this question:
I. If the cost of producing each unit of output falls $5, then the short run market price falls $5.
II. If the cost of producing each unit of output falls $5, then the long run market price falls $5.
a. I and II are true.
b. I is true, and II is false.
c. I is false, and II is true.
d. I and II are false.

Question 17.
Marginal profit is equal to
a. marginal revenue minus marginal cost.
b. marginal revenue plus marginal cost.
c. marginal cost minus marginal revenue.
d. marginal revenue times marginal cost.
e. marginal revenue divided by marginal cost.

Question 18.
The demand curve facing a perfectly competitive firm is
a. the same as its average revenue curve, but not the same as its marginal revenue curve.
b. the same as its average revenue curve and its marginal revenue curve.
c. the same as its marginal revenue curve, but not its average revenue curve.
d. not the same as either its marginal revenue curve nor its average revenue curve.
e. not defined in terms of average or marginal revenue.

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Question 19.
If a graph of a perfectly competitive firm shows that the MR=MC point occurs where MR is above AVC
but below ATC,
a. the firm is earning negative profit, and will shut down rather than product that level of output.
b. the firm is earning negative profit, but will continue to produce where MR=MC in the short run.
c. the firm is still earning positive profit, as long as variable costs are covered.
d. the firm is covering explicit, but not implicit, costs.
e. the firm can cover all of fixed costs but only a portion of variable costs.

Question 20.
In the short run, a perfectly competitive firm earning negative economic profit
a. is on the downward-sloping portion of its AVC.
b. is at the minimum of its AVC.
c. is on the upward-sloping portion of its AVC.
d. is not operating on its AVC.
e. can be at any point on its AVC.

Question 21.
When the price faced by a competitive firm was $5, the firm produced nothing in the short run. However,
when the price rose to $10, the firm produced 100 tons of output. From this we can infer that
a. the firm’s marginal cost curve must be flat.
b. the firm’s marginal costs of production never fall below $5.
c. the firm’s average cost of production was less than $10.
d. the firm’s total cost of producing 100 tons is less than $1000.
e. the minimum value of the firm’s average variable cost lies between $5 and $10.

Question 22.
The supply curve for a competitive firm is
a. its entire MC curve.
b. the upward-sloping portion of its MC curve.
c. its MC curve above the minimum point of the AVC curve.
d. its MC curve above the minimum point of the ATC curve.
e. its MR curve.

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Question 23.
Higher input prices result in
a. upward shifts of MC and reductions in output.
b. upward shifts of MC and increases in output.
c. downward shifts of MC and reductions in output.
d. downward shifts of MC and increases in output.
e. increased demand for the good and the input is used for.

Question 24.
If a competitive firm’s marginal cost always increases with output, then at the profit maximizing output
level, producer surplus is
a. zero because marginal costs equal marginal revenue.
b. zero because price equals marginal costs.
c. positive because price exceeds average variable cost.
d. positive because price exceeds average total cost.
e. positive because revenues are increasing faster than variable costs.

Question 25.
For the competitive firm, as price increases
a. output decreases.
b. output stays the same, since the size of the plant is fixed in the short run.
c. output increases.
d. output will either increase or decrease depending on the shape of the firm’s average cost curve.

Question 26.
Consider a perfectly competitive industry. As a result of an excise (per unit) tax,
a. both the short-run and the long-run prices increase by the amount of the tax.
b. the long-run price increases by more than the amount of the tax, but the short-run price increases
by less than the amount of the tax.
c. the long-run price increases by less than the short-run price.
d. the long-run price increases by more than the short-run price.

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Question 27.
XYZ Company faces a wage rate of $80 per day and a daily user cost of $120 per machine. The firm
is a price taker in both factor markets. Imagine a graph with the number of workers on the horizontal
axis and machines on the vertical axis. An isocost line for XYZ Company has a slope equal to:
a. the slope of every one of its convex isoquants.
b. -4/3.
c. -3/4.
d. -2/3.
e. -3/2.

Solutions

1. c 11. d 21. e
2. e 12. b 22. c
3. c 13. c 23. a
4. b 14. c 24. c
5. e 15. c 25. c
6. b 16. c 26. d
7. e 17. a 27. d
8. c 18. b
9. c 19. b
10. d 20. c