PRACTICE TEST 1, MULTIPLE-CHOICE QUESTIONS Select the option that provides the single best answer. 1. Four workers produce 160 units of output and five workers produce 180. The marginal product of the fifth worker is (@) 32 units of output. ©) 4 units of output. © 20units of output. @ 36 units of output.(Chapier 7: The Production Process: The Behavior of Profit Maximizing Firms 177 ‘The retum on investment that is just sufficient to satisfy the owners of a business is, called (@) normal profit. (b) marginal profit. (©) economic profit. @ excess profit. ‘The law of diminishing returns (@) _epplies in the short run but not in the long run. (©) requires that all factors of production must diminish in equal proportions. (©) requires that all factors of production must diminish in unequal proportions. (@ states that marginal product must always be less than average product, ‘The demand curve faced by a perfectly competitive firm is (@) always downward sloping. (©) horizontal (©) perfectly inelastic. (@ downward sloping if the law of demand applies. The short run is @ period of time during which (@) _allresources are fixed. (b) —allresources are variable. “(0 ~ the scale of production is fixed. (@ the scale of production is variable, If diminishing returns have set in, a firm that doubles the number of workers will see total production q (@) decrease. (b) less than double. (©) more than double (@) decrease by 50%. ‘Andy increases the amount of capital his workers use, The average product of labor will ‘and the marginal product of tabor will _ (@ increase; increase (b) decrease; decrease (©) increase; decrease (@ decrease; increase ‘Which of the following is most likely to reach the long run soonest? (@ — Anice cream vendor (b) — Anaircraft manufacturer (©) A private college (@ — Astate university178 Study Guide to Principles of Microeconomics Use the following tablé to answer the next two questions. Number of Workers Marginal Product 1 19 2 26 "1 3 24 4 20 5 18 8 _ \ 9. Total product, if four workers are employed, is (2) 20 units of output. (b) 69 units of output (© 89 units of output. @ 107 units of output 10. Average product, if three workers are employed, is, (@) 24 units of output () 23 units of output. (©) 26 units of output. (@) 8 units of output. : 11, Each of the following is a decision that must be made by a perfectly competitive firm except (@) which price level to set for its output. (b) _ how much of each input to demand. (©) how to produce its output. : (@ how much output to supply. i 12, Inthe short run which of the following is incorrect? (@ Existing firms cannot leave the industry. (b) New firms cannot enter the industry. (©) The firm is operating under a fixed scale of production. (@ ___ Finns have no variable factors of production. 13. The cost-minimizing combination of labor and capital occurs when the MRTS of capital for labor equals (@ the MRTS of labor for capital. i (b) the ratio of MP, /MPx.. (© the ratio of the price of labor to the price of capital. (@) the ratio of the price of capital to the price of labor. 14, Ona given isoquant a firm is hiring too much capital (and not enough labor). (@ The firm is failing to minimize costs. ‘ (b) The marginal product of capital is greater than the marginal product of labor. i (©) The price of capital will fall. ; (@ The marginal product of capital is less than the marginal product of labor. Note: Try drawing this one! eT |15, 16. 17. 18, 19. 20. (Chapter 7: The Production Process: The Behavior of Profit Maximizing Firms 179 Based on the diagram, the marginal product of labor for the fifth worker is (@) 22 units of output () 19 units of output. (© Baunits of output. (@ Smits of output. Based on the diagram, the total product of labor when there are two workers is (@ 22 units of output. (&) 38 units of output. © 41 units of output. @ — 44units of output. Based on the diagram, the average product of labor when there are four workers is (@) 5.5 units of output. (&) 6 units of output. (© 21.75 units of output. @ 87 units of output. Based on the diagram above, diminishing returns set in with the @ first worker. (b) second worker. (©) third worker. (@) fourth worker ‘The cost-minimizing equilibrium condition is (MP; /P.=MPe! Pr. (bt) — MP, /MPr=- Pt! Pr. (©) MP; / P.= MPx/ Pr. (Pel Pr=-MP,/MPr. ‘When marginal product is zero, total product is _ and average product is (@ maximized; maximized (o) maximized; decreasing (©) decreasing; maximized (@ decreasing; decreasing180 Study Guide to Principles of Microcconomics 23. 21. ‘The perfectly competitive firm has no choice regarding (@) the price that may be charged. (b) how much outpat to produce. (©) the choice of technology. (@ how much of each input to hire. ‘Ms. Prudence Juris decides to open a law office. She quits her job as an assistant district attorney (annual salary: $25,000), borrows $50,000 at 10% annual interest, hires a secretary at $20,000 per year and rents office space at $55,000 per year. During her first yeat, she receives revenues of $100,000. Assuming costs and revenues as represented, ‘what is her economic profit for the year? (a) $20,000 (b) Zero, but she does earn a normal profit (© -$5,000 (@ — -$50,000 Because of the law of diminishing returns, the general appearance of the production function graph is that it (@) increases at an increasing rate. (b) increases at a decreasing rate. (©) decreases at an increasing rate. (@ decreases at a decreasing rate. Use the following information for the next two questions. Russell is making plans to open a car wash. His research has isolated four distinct methods of production, each of which will produce the same number of gleaming clean cars. 24, 25, ‘Technology Units of Capital Units of Labor A 2 20 B 4 15 Cc 6 i D 8 g If the hourly price of a unit of capital is $60 and the hourly wage is $6, which production technology should Russell choose in order to minimize costs? @ A ) 8B @ ¢ @ »D Which is the most labor-intensive method of production? @ A @) B © Cc @ DL 1 FRAUHILE 131 SOLUTIONS Solutions to Multiple-Choice Questions © @ @ 0) ‘Marginal product is the change in total product that occurs when an additional unit of a resource is added. See p. 147 for a discussion of this point. A normal rate of return is included in the costs of production. This law requires that a variable resource is added to a given quantity of a fixed resource. Fixed resources can occur only in the short run, .. Each firm is a price taker facing a perfectly elastic (horizontal) demand curve.10. uL 12. 13. 14, 15, 16. 17, 18, 19, 20. a. © ) @ @ © © @ @ © (a) ) ©) ©) @ @ ®) @ (Chapter 7: The Production Process: The Behavior of Profit Maximizing Firms 187 In the short run, at least one factor must be fixed, thus locking the firm into a given scale of production. Unless marginal product is negative (which is unlikely), an increase in resources will result in an increase in output. Because each new worker is producing less than previous ‘workers, output will increase but not double. Each worker-will become more productive, causing marginal product to increase. If each ‘worker produces more, average product will also increase. ‘The ice cream vendor has few resource requitements and those s/he does have can be adjusted rapidly, as opposed to, say, a college, which may have severe limitations on land availability. ‘Total product is the sum of the preceding marginal products—19 + 26 + 24 + 20 89. ‘Average product is total product divided by the number of workers—(19 + 26 + 24)/3 = 23. ‘The perfectly competitive firm is, by definition, « price taker and cannot set the price for its output, . ‘In the short run, firms can neither enter nor leave an industry, nor can they adjust their scale of production, However, not all resources are fixed. ‘The MRTS equals ~ MP, / MPx. See p. 160. We don’t know anything about the marginal product of capital relative to the marginal product of labor. However, the marginal product per dollar for capital is less than the ‘marginal product per dollar of labor. The firm could achieve the same level of output by reducing capital and increasing labor. ‘The diagram graphs marginal product. Read off the value for the fifth worker, whit 19. ‘Ad the contributions of the first two workers (19 + 22), ‘Total product is 87 (19 + 22 +24 +22). Average product is 87/4. The third worker coritributes 24 extra units of output; the fourth worker’s contribution is only 22. See p. 162. ‘When marginal product becomes negative, total product passes its peak and begins to fall, Given that average product has been positive, an extra (nonproductive) worker will drag down the average. ‘The perfectly competitive firm isa price taker.[ 188 23. 24, 25. ‘Study Guide to Principles of Microeconomics © 0) @ @ Prudence makes an economic loss of $5000. Her costs are $(25,000 + 5,000 + 20,000 + 55,000). Although initially the production function may increase at an increasing rate, because of the law of diminishing returns it increases at a decreasing rate. ‘The total cost is (2 x $60) + (20 x $6), or $240. See p. 151 for a discussion of this point.