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1. We learned in class that firms minimize costs whenever they use capital and labor such that, given the output
they are producing (and assuming only capital and labor are used in the production process), the ratio of the
marginal product of labor (MPL) to its price is equal to the ratio of the marginal product of capital (MPk) to
its price (MPL/w = MPk/i). This relationship can also be expressed as:
- A. MPL = MPk.
- B. MPL/MPk = i/w.
- C. MPL/MPk = w/i.
- D. MPL/i = MPk/w.
- E. none of the above.
2. Each of the following would, all else equal, cause a firm to use more labor except:
- A. a decrease in the price of capital.
- B. a decrease in the price of labor.
- C. an increase in the productivity of labor due to increases in the average education of the labor force.
- D. a decrease in the productivity of capital.
3. Firms advertising their product often claim that they can offer you substantial savings because "the bigger
the volume, the lower the cost, and we pass these savings on to you". This claim essentially implies that:
- A. total cost of the firm remains constant as output expands.
- B. the firm expects to experience decreasing returns to scale over the foreseeable level of output.
- C. the firm expects to experience increasing returns to scale over the foreseeable level of output.
- D. the firm expects a decrease in factor prices as it expands output and it will pass these lower costs on
to you in the form of a lower price.
- E. the larger firm, whether it intends to fulfill the bargain or not, will never be able to offer you a
lower price than smaller firms in the long-run without incurring a loss since total cost always rises.
4. If the marginal product of capital is six times as large as the marginal product of labor and the price of
capital is three times as large as the price of labor, for costs to be minimized:
- A. the price of capital must fall.
- B. more labor should be used and less capital.
- C. more capital should be used and less labor.
- D. more labor should be used but the use of capital should remain constant.
- E. the firm must increase production to reach the minimum point of the short-run average cost curve.
5. Diseconomies of scale:
- A. occur when long-run average costs decrease as the rate of output increases.
- B. emerge because marginal returns do not decline in the long-run.
- C. emerge if all advantages of specialization are realized at low levels of operation.
- D. when present, may create natural monopolies.
E. require extremely sophisticated technology.
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