Managerial Economics, 7e (Keat)
Chapter 6 The Theory and Estimation of Production (Appendices 6A, 6B, and 6C)
Multiple-Choice Questions
1) The term Production Function refers to the
A) use of machinery and equipment in production.
B) relationship between costs and output.
C) relationship between inputs and output.
D) role of labor unions.
2) The production period in which at least one input is fixed in quantity is the
A) production run.
B) long run.
C) short run.
D) planning horizon.
3) The difference between the short-run and the long-run is
A) three months, or one business quarter.
B) the time it takes for firms to change all inputs in the production process.
C) the time it takes for firms to change only their variable inputs.
D) More information is required to answer this question.
4) In a call center, which of the following situations can be considered as a variable input in the
short run?
A) the level of computer software being utilized
B) the number of call center representatives on duty at the center
C) the number of call center managers or supervisors
D) the size (e.g., square footage) of the call center
5) Which of the following holds true?
A) When the Marginal Product (MP) is rising, Marginal cost (MC) is rising; and when MP is
falling, MC is falling.
B) When MP is rising, MC is falling, and when MP is falling, MC is rising.
C) When MP is rising, MC is constant, and when MP is falling, MC is negative.
D) There is no relationship between MP and MC.
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6) The marginal product of the variable input
A) is always positive.
B) typically falls then rises.
C) is equal to the total product divided by the total amount of the variable input employed.
D) None of the above
7) Which of the following statements about the short-run production function is true?
A) MP always equals AP at the maximum point of MP.
B) MP always equals zero when TP is at its maximum point.
C) TP starts to decline at the point of diminishing returns.
D) When MP diminishes, AP is at its minimum point.
E) None of the above is true.
Answer the questions based on the following information.
Number of Workers Units of Output
0 0
1 40
2 90
3 126
4 150
8) The marginal product of the fourth worker is
A) 150 units of output.
B) 24 units of output.
C) negative.
D) 36 units of output.
9) Average product is at a maximum when the number of workers that are hired is
A) 1.
B) 2.
C) 3.
D) 4.
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10) Output (Total Product) is maximized when
A) average productivity is at its maximum.
B) the “law of diminishing returns” sets in.
C) marginal productivity is zero.
D) marginal productivity is at its maximum.
11) If a firm finds itself operating in Stage I, it implies that
A) variable inputs are extremely expensive.
B) it overinvested in fixed capacity.
C) it underinvested in fixed capacity.
D) fixed inputs are extremely expensive.
12) A firm that operates in Stage III of the short-run production function
A) has too much fixed capacity relative to its variable inputs.
B) has too little fixed capacity relative to its variable inputs.
C) has greatly overestimated the demand for its output.
D) should try to increase the amount of variable input used.
13) Which of the following indicates when Stage I ends and Stage II begins in the short-run
production?
A) when AP = 0
B) when MP = 0
C) when MP = AP
D) when MP starts to diminish
14) Which of the following indicates when Stage II ends and Stage III begins in the short-run
production function?
A) when AP = 0
B) when MP = 0
C) when MP = AP
D) when MP starts to diminish
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15) Stage III of the short-run Production Function is
A) the most efficient mix of inputs.
B) the least costly level of output.
C) where additional units of variable inputs will lead to less output.
D) where additional units of variable inputs will lead to more output.
16) A firm using two inputs, X and Y, is using them in the most efficient manner when
A) MPx = MPy.
B) Px = Py and MPx = MPy.
C) MPx/Py = MPy/Px.
D) MPx/MPy = Px/Py.
17) The “Law of Diminishing Returns” states that
A) additional inputs will reduce output.
B) additional inputs will decrease average productivity.
C) the supply of inputs is becoming scarce.
D) additional inputs will lead to less additional output.
18) Which of the following is not true about the law of diminishing returns?
A) It is a short-run phenomenon.
B) It refers to diminishing marginal product.
C) It will have an impact on the firm’s marginal cost.
D) It divides Stage I and II of the production process.
E) All of the above are true.
19) When the law of diminishing returns takes effect
A) firms must add increasingly more input if they are to maintain the same extra amount of
output.
B) firms must add decreasingly more input if they are to maintain the same extra amount of
output.
C) more input must be added in order to increase its output.
D) a firm must always try to add the same amount of input to the production process.
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20) Assume a firm employs 10 workers and pays each $15 per hour. Further assume that the MP
of the 10th worker is 5 units of output and that the price of the output is $4. According to
economic theory, in the short run
A) the firm should hire additional workers.
B) the firm should reduce the number of workers employed.
C) the firm should continue to employ 10 workers.
D) More information is required to answer this question.
21) Decreasing returns to scale
A) indicate that an increase in all inputs by some proportion will result in a decrease in output.
B) must always occur at some point in the production process.
C) are directly related to the law of diminishing returns.
D) All of the above are true.
E) None of the above is true.
22) In the long run, a firm is said to be experiencing decreasing returns to scale if a 10 percent
increase in inputs results in
A) an increase in output from 100 to 110.
B) a decrease in output from 100 to 90.
C) an increase in output from 100 to 105.
D) a decrease in output from 100 to 85.
23) Increasing returns to scale result when
A) in the long-run, an increase in inputs will lead to an increase in the average products of inputs.
B) in the long run, an increase in inputs will lead to an equivalent increase in output.
C) labor becomes more skilled.
D) All of the above
24) In the short run, finding the optimal amount of variable input involves which relationship?
A) MP = MC
B) AP = MP
C) MP = 0
D) MRP = MFC
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25) The perfect substitution of two inputs implies that
A) two inputs can be substituted at a ratio of 1 to 1.
B) one input can be substituted for another up to some point.
C) two inputs can be substituted at some constant ratio.
D) one input can be substituted for another.
26) If MRP > MLC, it means that a firm should
A) use less labor.
B) use more labor.
C) increase its fixed capacity.
D) decrease its fixed capacity.
27) In economic theory, if an additional worker adds less to the total output than previous
workers hired, it is because
A) there may be less that this person can do, given the fixed capacity of the firm.
B) he/she is less skilled than the previously hired workers.
C) everyone is getting in each other’s way.
D) the firm is experiencing diminishing returns to scale.
28) When is it not in the best interest of a company to hire additional workers in the short run?
A) when the average product of labor is decreasing
B) when the firm is in Stage II of the production process
C) when the marginal revenue product equals zero
D) when the wage rate is equal to or greater than labor’s marginal revenue product
29) An isoquant indicates different combinations of
A) two inputs that can be purchased for the same amount of money.
B) two inputs that can produce the same amount of output.
C) output that can be produced with the same amount of input.
D) output that cost the same amount to produce.
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30) Marginal rates of technical substitution (MRTS) represent
A) the optimum combinations of inputs.
B) cost-minimizing combinations of inputs.
C) the degree to which one input can replace another without output changing.
D) All of the above
31) Which of the following is the best example of two inputs that would exhibit a constant
marginal rate of technical substitution?
A) trucks and truck drivers
B) natural gas and oil
C) personal computers and clerical workers
D) company-employed computer programmers and temporary supplemental computer
programmers
32) Which of the following combination of inputs is most closely reflective of decreasing
marginal rate of technical substitution (MRTS)?
A) oil and natural gas
B) sugar and high fructose corn syrup
C) computers and clerks
D) keyboards and computers
33) Isocost curves represent
A) least cost combinations of inputs.
B) combinations of inputs that can be purchased given their prices for the same total cost.
C) a producers cost function.
D) None of the above
34) If a firm used a combination of inputs that was to the left of its isocost line, it would indicate
that
A) it is exceeding its budget.
B) it is not spending all of its budget.
C) it is operating at its optimal point because it is saving money.
D) None of the above
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