(Q1, 2, 3, 4, 5, 6, 7, 8: MCQs - 1M each, Q9: Short Answer - 2M each)
Q1. Assume that for a particular production process, capital and labor are perfect complements. If
the price of labor increases, holding the price of capital and the level of output constant, the firm
should
(A) use the same amounts of capital and labor.
(B) use more capital and less labor.
(C) eliminate all use of labor.
(D) use more labor and less capital
Q2. Suppose there is an increase in the quantity of output. This will cause the cost minimizing
quantity of an input to go ________ if the input is a normal input and will cause the cost minimizing
quantity of the input to go _________ if the input is an inferior input.
(A) down; up
(B) up; down
(C) down; down
(D) up; up
Q3. Identify the curve that shows how the firm’s cost-minimizing quantity of capital varies with the
price of capital is the firm’s
(A) Capital demand curve.
(B) Price-expansion curve.
(C) Labor demand curve.
(D) Elasticity of demand curve.
Q4. A long-run total cost curve
(A) never has a constant slope.
(B) is always downward sloping.
(C) is always upward sloping.
(D) always has a constant slope.
Q5. The long-run total cost curve shows
(A) the minimum total cost to produce any level of output, holding input prices fixed, and choosing
all inputs to minimize cost.
(B) the various combinations of capital and labor that will produce different levels of output at the
same cost.
(C) for a fixed level of capital, the minimum cost to produce a given level of output.
(D) the various combinations of capital and labor that will produce the same level of output.
Q6. Assume that the total cost be TC(Q) = 10Q2 for a firm. Which of the following is an
expression for the output elasticity of total cost?
(A) ϵTC,Q = 20Q.
(B) ϵTC,Q = 2Q.
(C) ϵTC,Q = 2.
(D) ϵTC,Q = 10Q.
Q7. When the output elasticity of total cost is less than one,
(A) Marginal cost is greater than average cost and average cost decreases as Q increases.
(B) Marginal cost is less than average cost and average cost increases as Q increases.
(C) Marginal cost is less than average cost and average cost decreases as Q increases.
(D) Marginal cost is greater than average cost and average cost increases as Q increases.
Q8. The average cost curve exhibits ____________ if the output elasticity of total cost is 1.5
(A) economies of scale.
(B) increasing returns to scale.
(C) neither economies nor diseconomies of scale.
(D) diseconomies of scale.
Q9. Suppose a typical firm’s production function is given as [Q = min (K, 2L)], where Q is the number
of units of output produced using K units of capital and L units of labor. The factor prices are w = 4
(for labor) and r = 1 (for capital). Assume that with L on the horizontal axis and K on the vertical
axis, indicate the optimal choices of K and L required to produce for Q = 12. Also calculate the total
cost.
ANS. TC = 4L + K
12 = min (K, 2L)
if K = 12, TC = 4(K/2) + K = 3K = 36
if 2L = 12, TC = 24+12 = 36
So, total cost = 36
(K, L) combination is (12, 6)
