1

Midterm3 Practice 1

1) A function that indicates the maximum output per unit of time that a firm can produce, for
every combination of inputs with a given technology, is called
A) an isoquant.
B) a production possibility curve.
C) a production function.
D) an isocost function.
Answer: C

2) Use the following two statements to answer this question:

I. Production functions describe what is technically feasible when the firm operates efficiently.
II. The production function shows the least cost method of producing a given 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.
Answer: B

3) Joe owns a small coffee shop, and his production function is q = 3KL where q is total output
in cups per hour, K is the number of coffee machines (capital), and L is the number of employees
hired per hour (labor). If Joe's capital is currently fixed at K=3 machines, what is his short-run
production function?
A) q = 3L
B) q = 3L2
C) q = 9L
D) q = 3K2
Answer: C
 2

4) The above figure shows the short-run production function for Albert's Pretzels. The marginal
productivity of labor for the third worker is
A) 6.
B) 8.
C) 24.
D) not known from the information provided.
Answer: A

5) If the average productivity of labor equals the marginal productivity of labor, then
A) the average productivity of labor is at a maximum.
B) the marginal productivity of labor is at a maximum.
C) Both A and B above.
D) Neither A nor B above.
Answer: A

6) 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

7) When the average product is decreasing, marginal product

A) equals average product.
B) is increasing.
C) exceeds average product.
D) is decreasing.
E) is less than average product.
Answer: E
 3

8) 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 increases.
E) after some level of employment, the marginal product of labor must fall.
Answer: E

9) Assume that average product for six workers is fifteen. If the marginal product of the seventh
worker is eighteen,
A) marginal product is rising.
B) marginal product is falling.
C) average product is rising.
D) average product is falling.
Answer: C

10) Joe owns a coffee house and produces coffee drinks under the production function q = 5KL
where q is the number of cups generated per hour, K is the number of coffee machines (capital),
and L is the number of employees hired per hour (labor). What is the average product of labor?
A) AP = 5
B) AP = 5K
C) AP = 5L
D) AP = 5K/L
Answer: B

11) The rate at which one input can be reduced per additional unit of the other input, while
holding output constant, is measured by the
A) marginal rate of substitution.
B) marginal rate of technical substitution.
C) slope of the isocost curve.
D) average product of the input.
Answer: B
Diff: 1
Section: 6.3

12) If capital is measured on the vertical axis and labor is measured on the horizontal axis, the
slope of an isoquant can be interpreted as the
A) rate at which the firm can replace capital with labor without changing the output rate.
B) average rate at which the firm can replace capital with labor without changing the output rate.
C) marginal product of labor.
D) marginal product of capital.
Answer: A
 4

13) The diagram below shows an isoquant for the production of wheat.

Which point has the highest marginal productivity of labor?

A) Point A
B) Point B
C) Point C
D) Point D
Answer: D

14) 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.
Answer: B

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

A) as labor increases and capital decreases, MPL rises while MPK falls.
B) as labor increases and capital decreases, MPL falls while MPK rises.
C) as labor increases and capital decreases, MPL and MPK both fall.
D) as labor increases and capital decreases, MPL and MPK both rise.
Answer: B
 5

16) 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

17) Suppose that at a point on an isoquant, the following information is true: MPL = 3 and MPK
= 2. Then if K falls by 5, L must increase by:
A) 0.30.
B) 0.67.
C) 3.33.
D) 1.50.
Answer: C

18) Suppose that at a point on an isoquant, the following information is true: L increases by 5; K
falls by 3; MPL = 4, then MPK must be:
A) 3.33.
B) 0.67.
C) 1.67.
D) 6.67.
Answer: D
 6

Figure 6.2

19) Refer to Figure 6.2. The situation pictured is one of

A) constant returns to scale, because the line through the origin is linear.
B) decreasing returns to scale, because the isoquants are convex.
C) decreasing returns to scale, because doubling inputs results in less than double the amount of
output.
D) increasing returns to scale, because the isoquants are convex.
E) increasing returns to scale, because doubling inputs results in more than double the amount of
output.
Answer: E

20) Does it make sense to consider the returns to scale of a production function in the short run?
A) Yes, this is an important short-run characteristic of production functions.
B) Yes, returns to scale determine the diminishing marginal returns of the inputs.
C) No, returns to scale is a property of the consumer's utility function.
D) No, we cannot change all of the production inputs in the short run.
Answer: D

21) Why do firms tend to experience decreasing returns to scale at high levels of output?
A) Firms face more problems with coordinating tasks and communications among managers and
workers at very high levels of output.
B) Government tax policy tends to discourage large-scale production operations.
C) Firms face fewer problems with inventory management and marketing as output reaches very
high levels.
D) Firms tend to use more capital and less labor at higher levels of output.
Answer: A
 7

22) Table 7-4 shows the shows the quantities of labor and capital required to produce various
levels of output.

Quantity of Quantity
Output
Capital of Labor
6 2 40
12 4 100
24 8 220
48 16 440
96 32 800

Refer to Table 7-4. When the firm increases production from 24 units of capital and 8 units of
labor to 48 units of capital and 16 units of labor, the production function exhibits:
A) decreasing marginal rate of technical substitution.
B) constant returns to scale.
C) increasing returns to scale.
D) diminishing marginal returns
Answer: B

23) Which of the following contributes to the increasing returns to scale in production as a firm
expands capacity?
A) Specialization of labor
B) Increase in average cost and decrease in output
C) Increase labor while keeping capital constant
D) Increase in marginal utility
Answer: A

Scenario 7.1:
The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant
at $0.10 for all cookies produced.

24) Refer to Scenario 7.1. The total cost to produce 100 cookies is
A) $0.10
B) $0.25
C) $25.00
D) $100.00
E) indeterminate
Answer: C
 8

25) Your firm owns an old truck that is used to make local deliveries. The truck is fully
depreciated and only costs $1.20 per hour to operate, but you could rent it to another firm for
$15.00 per hour. What is the opportunity cost of operating this truck in your business?
A) $1.20 per hour
B) $15.00 per hour
C) $16.20 per hour
D) Less than $1.20 per hour
Answer: B

26) 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.
Answer: D

27) Which always increase(s) as output increases?

A) Marginal Cost only
B) Fixed Cost only
C) Total Cost only
D) Variable Cost only
E) Total Cost and Variable Cost
Answer: E

28) Suppose the short-run production function is q = 10 * L. If the wage rate is $10 per unit of
labor, then AVC equals
A) q.
B) q/10.
C) 10/q.
D) 1.
Answer: D

29) A firm's cost curve is determined by

A) congressional laws.
B) whether the firm hires engineers or not.
C) natural laws.
D) the firm's production function.
Answer: D
 9

30) Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and
capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of
capital is $25 per hour, the slope of the isocost curve will be
A) 500.
B) 25/500.
C) -4/5.
D) 25/20 or 1.25.
Answer: C

31) A firm's expansion path is

A) the firm's production function.
B) a curve that makes the marginal product of the last unit of each input equal for each output.
C) a curve that shows the least-cost combination of inputs needed to produce each level of output
for given input prices.
D) none of the above
Answer: C

Figure 7.2

32) A movement from A to C in Figure 7.2 may represent

A) economies of scale.
B) diseconomies of scale.
C) learning.
D) economies of scope.
E) diseconomies of scope.
Answer: C
 10

33) Assume that labor is plotted on the horizontal axis and capital is plotted on the vertical axis.
A firm plans to spend $1,000 per week on inputs and confronts a wage rate of $10 per hour and a
capital rental rate of $20 per hour. Given this information, what will be the slope of the isocost
curve?
A)–2
B) –1/2
C) –100
D)–50
Answer: B

34) Suppose the wage rate is $15 per hour and the rental rate of capital is $10 per hour. If the
marginal product of labor is 60 and the marginal product of capital 10, the profit maximizing
firm should:
A) hire more labor and less capital.
B) utilize more capital and less labor.
C) maintain its current input mix of capital and labor.
D) employ more of both capital and labor.
Answer: A

35) Suppose a firm that uses labor and capital as the only inputs in production is currently on the
long-run expansion path. The marginal product of labor and capital at this least cost combination
are 60 units and 80 units respectively and the wage rate of labor is $6. Calculate the rental cost of
capital borne by the firm.
A) $10
B) $8
C) $5
D) $12
Answer: B

36) The minimum efficient scale is:

A) the level of output at which average cost per unit is smallest.
B) the scale of operations at which marginal cost is minimized.
C) the scale of operations at which average fixed cost per unit is minimized.
D) the level of output at which total cost is minimized.
Answer: A

37) Economies of scope exist if:

A) it is cheaper to have only one firm in an industry.
B) it is cheaper for one firm to produce two products jointly than for separate firms to produce
them separately.
C) it is more expensive to have one firm in an industry.
D) it is cheaper for two firms to work together to make two products than for one firm to make
both by itself.
Answer: B
 11

38) The slope of the isocost line tells the firm how much
A) capital must be reduced to keep total cost constant when hiring one more unit of labor.
B) capital must be increased to keep total cost constant when hiring one more unit of labor.
C) more expensive a unit of capital costs relative a unit of labor.
D) the isocost curve will shift outward if the firm wishes to produce more.
Answer: A

39) If the marginal rate of technical substitution for a cost minimizing firm is 10, and the wage
rate for labor is $5, what is the rental rate for capital in dollars?
A) .5
B) 1
C) 2
D) 10
Answer: A

40) The total cost of producing one unit is $50. The total cost of producing two units is $75. At a
production level of two units, the cost function exhibits
A) economies of scale.
B) rising average costs.
C) increasing marginal costs.
D) constant returns to scale.
Answer: A