Practical - chapter 8 questions & answers PDF

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Previous Exam Question & Answer Ch8 1. If total product is at a maximum, then a) average product must be falling and be equal to zero. b) average product must equal marginal product. c) marginal product must be greater than zero and must be falling. d) marginal product must be falling and be equal to zero. 2. If factor prices increase, a) a firm will move to a lower point on its long-run average cost curve only. b) there will be no change in the cost curves in the long run. c) there will be a downward shift in the long-run average cost curve but not in the short-run average cost curve. d) both the long-run and short-run average cost curves will shift upward. 3. Which of the following statements about the relationship between marginal product and average product is correct? a) When average product exceeds marginal product, marginal product must be rising. b) Average product equals marginal product when marginal product is at its maximum. c) When marginal product is falling and average product is below marginal product, then average product is rising. d) Average product equals marginal product at marginal product's lowest point. 4. If a firm doubles all its inputs and output as a result triples then the firm is experiencing a) increasing returns to scale. b) decreasing returns to scale. c) economies of scale. d) the law of diminishing returns. 5. It is almost always the case that initial plant size expansion leads to a decrease in cost. This is due to: a. technological improvement. b. increase in capital stock. c. technology exhibiting economies of scale. d. due to A and B both. e. none of the above. 6. Which of the following statements about the relationship between marginal product and average product is correct? a. when average product exceeds marginal product, marginal product must be rising. b. average product equals marginal product when marginal product is at its maximum. c. when marginal product is falling, average product is falling. d. average product equals marginal product at marginal product's lowest point. e. when marginal product exceeds average product, average product must be rising. 7. Assuming marginal product increases at the initial level of production and starts to decrease eventually after reaching its peak implies: a. average variable cost curve increases initially then reaches a peak and after that starts to decline. b. average variable cost curve initially declines, reaches a minimum and then will steadily rise up. c. what pattern followed by the AC curve depends on the pattern of marginal cost curve which in turn is related to marginal product. 1

d. average cost curve pattern has nothing to do with marginal cost curve. e. both B and C are correct. 8. A firm should remain in business in the short run: a. if the firm’s capital cost is sunk and it can cover part of this sunk cost above the variable costs. b. if the firm’s capital cost is fixed and it can cover part of its fixed costs above the variable costs. c. no matter whether its capital cost is sunk or fixed, so long the firm can cover its variable cost it will remain in business. d. if and only if the firm can cover its total cost in the short run. e. whether or not the capital cost is sunk or fixed is irrelevant to make such decision in the short run. 9. If a firm triples all its inputs and output only doubles then the firm is experiencing a. constant returns to scale. b. increasing returns to scale. c. decreasing returns to scale. d. economies of scale. e. the law of diminishing returns. 10. Luigi owns an Italian restaurant. The production function relating the number of meals served per day (Q) and the number of employees hired per day (L) is shown in the table. The marginal cost of serving a meal is lowest when Luigi increases the number of meals served per day from ___. The average variable cost of serving a meal is lowest when Luigi serves __ meals per day. [Note: You may wish to use the following table for your answer] L Q MPL APL 0 0 Blank Blank 1 10 10 10 2 28 14 18 3 45 15 17 4 56 14 11 5 65 13 9 a) 45 to 56; 65. b) 28 to 45; 56. c) 10 to 28; 45. d) 10 to 28; 28. e) 28 to 45; 45. 11. Nimbus Inc. makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus’s output in a given day: Workers Output Marginal Total Average Marginal per Day Product Cost Total Cost Cost 0 0 N/A 200 N/A N/A 1 20 20 200 2 50 25 200 3 90 30 200 4 120 30 200 5 140 28 200 6 150 25 200 7 155 22.14 200 2

(i)

Fill in the column of marginal products. Is the marginal product increasing or decreasing or both? Which law explains the decrease in marginal product? (2 marks) Marginal product first increases but then decreases. The law of diminishing returns explains the decrease in marginal product of labor holding the other inputs unchanged. Workers Output Marginal Total Average Marginal Product of Cost Total Cost Labor Cost 0 0 N/A 200 N/A N/A 1 20 20 300 15 100/20 = 5 2 50 30 400 8 100/30 = 3.3 3 90 40 500 5.6 100/40 = 2.5 4 120 30 600 5 100/30 = 3.3 5 140 20 700 5 100/20 = 5 6 150 10 800 5.3 100/10 = 10 7 155 5 900 5.8 100/5 = 20

(ii) A worker costs $100 a day, and the firm has fixed costs of $200. Use this information to fill in the column for total cost. Fill in the column for average total cost (ATC) rounding any decimal to the nearest tenth. (2 marks) (iii) Now fill in the column for marginal cost rounding any decimal to the nearest tenth. (2 marks) (iv) Compare the column for marginal product and for marginal cost. Comment on the relationship linking these two variables. Why does the MC eventually rise? (3 marks) Marginal product and marginal cost move in opposite directions: when MP rises, MC falls and vice versa. Mathematically: MC = ΔTC/ΔQ = ΔL*Wage/ΔQ = Wage/(ΔQ/ΔL) = Wage/MP. Because of the law of diminishing returns, MP will eventually fall meaning that MC will eventually rise. (v) Is there a relationship between the marginal cost and the average cost? If yes, use the relationship to explain why the ATC curve is U-shaped. (4 marks) Yes there is a relationship between MC and ATC. In fact MC determines the shape of ATC: Whenever MC is below the AC, AC keeps falling. MC eventually starts rising due to the law of diminishing returns. When MC becomes equal to the ATC, the ATC reaches its minimum value. When MC rises above ATC, ATC keeps rising. Thus ATC gets its U-shape.

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Previous Exam Question & Answer Ch8 1. If total product is at a maximum, then a) average product must be falling and be equal to zero. b) average product must equal marginal product. c) marginal product must be greater than zero and must be falling. d) marginal product must be falling and be equal to zero. 2. If factor prices increase, a) a firm will move to a lower point on its long-run average cost curve only. b) there will be no change in the cost curves in the long run. c) there will be a downward shift in the long-run average cost curve but not in the short-run average cost curve. d) both the long-run and short-run average cost curves will shift upward. 3. Which of the following statements about the relationship between marginal product and average product is correct? a) When average product exceeds marginal product, marginal product must be rising. b) Average product equals marginal product when marginal product is at its maximum. c) When marginal product is falling and average product is below marginal product, then average product is rising. d) Average product equals marginal product at marginal product's lowest point. 4. If a firm doubles all its inputs and output as a result triples then the firm is experiencing a) increasing returns to scale. b) decreasing returns to scale. c) economies of scale. d) the law of diminishing returns. 5. It is almost always the case that initial plant size expansion leads to a decrease in cost. This is due to: a. technological improvement. b. increase in capital stock. c. technology exhibiting economies of scale. d. due to A and B both. e. none of the above. 6. Which of the following statements about the relationship between marginal product and average product is correct? a. when average product exceeds marginal product, marginal product must be rising. b. average product equals marginal product when marginal product is at its maximum. c. when marginal product is falling, average product is falling. d. average product equals marginal product at marginal product's lowest point. e. when marginal product exceeds average product, average product must be rising. 7. Assuming marginal product increases at the initial level of production and starts to decrease eventually after reaching its peak implies: a. average variable cost curve increases initially then reaches a peak and after that starts to decline. b. average variable cost curve initially declines, reaches a minimum and then will steadily rise up. c. what pattern followed by the AC curve depends on the pattern of marginal cost curve which in turn is related to marginal product. 1

d. average cost curve pattern has nothing to do with marginal cost curve. e. both B and C are correct. 8. A firm should remain in business in the short run: a. if the firm’s capital cost is sunk and it can cover part of this sunk cost above the variable costs. b. if the firm’s capital cost is fixed and it can cover part of its fixed costs above the variable costs. c. no matter whether its capital cost is sunk or fixed, so long the firm can cover its variable cost it will remain in business. d. if and only if the firm can cover its total cost in the short run. e. whether or not the capital cost is sunk or fixed is irrelevant to make such decision in the short run. 9. If a firm triples all its inputs and output only doubles then the firm is experiencing a. constant returns to scale. b. increasing returns to scale. c. decreasing returns to scale. d. economies of scale. e. the law of diminishing returns. 10. Luigi owns an Italian restaurant. The production function relating the number of meals served per day (Q) and the number of employees hired per day (L) is shown in the table. The marginal cost of serving a meal is lowest when Luigi increases the number of meals served per day from ___. The average variable cost of serving a meal is lowest when Luigi serves __ meals per day. [Note: You may wish to use the following table for your answer] L Q MPL APL 0 0 Blank Blank 1 10 2 28 3 45 4 56 5 65 a) 45 to 56; 65. b) 28 to 45; 56. c) 10 to 28; 45. d) 10 to 28; 28. e) 28 to 45; 45. 11. Nimbus Inc. makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Nimbus’s output in a given day: Workers Output Marginal Total Average Marginal per Day Product Cost Total Cost Cost 0 0 N/A 200 N/A N/A 1 20 2 50 3 90 4 120 5 140 6 150 7 155 2

(i)

Fill in the column of marginal products. Is the marginal product increasing or decreasing or both? Which law explains the decrease in marginal product? (2 marks) Marginal product first increases but then decreases. The law of diminishing returns explains the decrease in marginal product of labor holding the other inputs unchanged. Workers Output Marginal Total Average Marginal Product of Cost Total Cost Labor Cost 0 0 N/A 200 N/A N/A 1 20 20 300 15 100/20 = 5 2 50 30 400 8 100/30 = 3.3 3 90 40 500 5.6 100/40 = 2.5 4 120 30 600 5 100/30 = 3.3 5 140 20 700 5 100/20 = 5 6 150 10 800 5.3 100/10 = 10 7 155 5 900 5.8 100/5 = 20

(ii) A worker costs $100 a day, and the firm has fixed costs of $200. Use this information to fill in the column for total cost. Fill in the column for average total cost (ATC) rounding any decimal to the nearest tenth. (2 marks) (iii) Now fill in the column for marginal cost rounding any decimal to the nearest tenth. (2 marks) (iv) Compare the column for marginal product and for marginal cost. Comment on the relationship linking these two variables. Why does the MC eventually rise? (3 marks) Marginal product and marginal cost move in opposite directions: when MP rises, MC falls and vice versa. Mathematically: MC = ΔTC/ΔQ = ΔL*Wage/ΔQ = Wage/(ΔQ/ΔL) = Wage/MP. Because of the law of diminishing returns, MP will eventually fall meaning that MC will eventually rise. (v) Is there a relationship between the marginal cost and the average cost? If yes, use the relationship to explain why the ATC curve is U-shaped. (4 marks) Yes there is a relationship between MC and ATC. In fact MC determines the shape of ATC: Whenever MC is below the AC, AC keeps falling. MC eventually starts rising due to the law of diminishing returns. When MC becomes equal to the ATC, the ATC reaches its minimum value. When MC rises above ATC, ATC keeps rising. Thus ATC gets its U-shape.

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