Chapter 10: PRODUCTION AND COST ESTIMATION
Chapter 10: PRODUCTION AND COST ESTIMATION
Multiple Choice
10-1 A linear specification, Q = aK + bL, is not appropriate for estimating a production function
because
a. the marginal products of the inputs are assumed constant.
b. it does not allow the firm to substitute capital for labor.
c. the firm could produce positive levels of output at zero cost.
d. both b and c
e. all of the above
10-2 Which of the following is an estimable form of a production function?
a. Q = f(L, K)
b. Q = f(L,
K
)
c.
Q=aK3L
3+bK 2L2
d. all of the above
e. none of the above
10-3 Which of the following represents a short-run cubic production function?
a.
Q=aK3L
3+bK 2L2
b.
Q=3AL2+2BL (where A=aK3, B= bK 2)
c.
Q=AL
3+BL2(where A = aK3,B=bK2)
d.
Q=AL2+BL (where A = aK3,B=bK2)
e. all of the above
10-4 What is a problem with using a production function of the form Q = aK + bL (a > 0, b > 0)?
a. MRTS is constant.
b. A positive output can be produced when one input is not used.
Chapter 10: PRODUCTION AND COST ESTIMATION
c. The marginal products of the inputs do not have diminishing marginal returns.
d. both a and b
e. all of the above
10-5 With a cubic production function of the form
Q=aK3L
3+bK 2L2
, in order for the average and
marginal product functions to have their usual theoretical properties, it must be the case that
a. a < 0, b > 0
b. a > 0, b < 0
c. a < 0, b < 0
d. a > 0, b > 0
10-6 When estimating a short-run production function of the form
Q=AL
3+BL2
, it is necessary to
specify in the computer routine that
a. A < 0.
b. B > 0.
c. the intercept term is forced to equal zero.
d. a and b
e. all of the above
10-7 When estimating a short-run average variable cost function,
a. the intercept must be forced to equal zero.
b. the cost data must be inflation-adjusted.
c. at least one input must have been constant during the period in which the data were
collected.
d. both b and c
e. all of the above
Chapter 10: PRODUCTION AND COST ESTIMATION
10-8 An average variable cost function is estimated as
AVC =96 –2Q+0.05Q2
Which of the following cost functions is associated with this estimate?
a. SMC = 96 – 4Q + 0.1Q2
b. TVC = 96Q – 2Q2 + 0.05Q3
c. TVC = 96Q + 4Q2 + 0.15Q3
d. SMC = 96 – 4Q + 0.15Q2
e. both b and d
10-9 A theoretical restriction on the short-run cubic cost equation, TVC = aQ + bQ + cQ2, is
a. a > 0, b > 0, c > 0
b. a > 0, b < 0, c > 0
c. a > 0, b > 0, c < 0
d. a > 0, b < 0, c < 0
10-10 A short-run production function was estimated as
Q= – 0.002L
3+0.16L2
At what level of labor usage does the maximum average product occur?
a. 20
b. 30
c. 40
d. 50
e. 60
10-11 A short-run production function was estimated as
Q= – 0.002L
3+0.16L2
What is average product when it is at its maximum level?
a. 3.20
b. 8.75
c. 6.92
d. 6.00
e. 9.40
Chapter 10: PRODUCTION AND COST ESTIMATION
10-12 A short-run production function was estimated as
Q= – 0.002L
3+0.16L2
What is total product when average product is at its maximum level?
a. 94
b. 86
c. 100
d. 128
e. 150
10-13 A short-run production function was estimated as
Q= – 0.002L
3+0.16L2
At 20 units of labor, what is average product?
a. 6.0
b. 1.9
c. 6.3
d. 4.0
e. 2.4
10-14 A short-run production function was estimated as
Q= – 0.002L
3+0.16L2
At 20 units of labor, what is marginal product?
a. 6.0
b. 1.9
c. 6.3
d. 4.0
e. 2.4
Chapter 10: PRODUCTION AND COST ESTIMATION
10-15 A short-run production function was estimated as
Q= – 0.002L
3+0.16L2
At 20 units of labor, what is total product?
a. 48
b. 96
c. 20
d. 62
e. 41
10-16 A short-run production function was estimated as
Q= – 0.002L
3+0.16L2
At 60 units of labor, what is average product?
a. 9.4
b. 8.6
c. 3.7
d. 2.4
e. 6.4
10-17 A short-run production function was estimated as
Q= – 0.002L
3+0.16L2
At 60 units of labor, what is marginal product?
a. 4.1
b. 1.2
c. 6.3
d. 2.4
e. −2.4
Chapter 10: PRODUCTION AND COST ESTIMATION
10-18 An estimated short-run cost function
a. can be used to make price and output decisions.
b. holds the capital stock constant.
c. can be estimated using time-series data.
d. both a and c
e. all of the above
10-19 A potential problem with cross-section cost data is that
a. nominal cost data include the effect of inflation.
b. different firms face different input prices.
c. at least one input is fixed over time.
d. both a and b
e. none of the above
10-20 The opportunity cost of capital owned by the firm should reflect
a. acquisition cost.
b. the return foregone by using the capital rather than renting it to another firm.
c. wage rate differences.
d. both a and b
10-21 Straker Industries estimated its short-run costs using a U-shaped average variable cost function of
the form
and obtained the following results. Total fixed cost (TFC) at Straker Industries is $1,000.
DEPENDENT VARIABLE:
AVC
R−SQUARE
F−RATIO
P−VALUE ON F
OBSERVATIONS:
35
0.8713
108.3
0.0001
VARIABLE
PARAMETER
ESTIMATE
STANDARD
ERROR
T−RATIO
P−VALUE
INTERCEPT
43.40
13.80
3.14
0.0036
Q
−2.80
0.90
−3.11
0.0039
Q2
0.20
0.05
4.00
0.0004
The estimated short-run marginal cost function (SMC) at Straker Industries is:
a.
SMC=43.4Q–1.4Q2+0.07Q3
b.
SMC=43.4 –1.4Q+0.07Q2
c.
SMC=43.4Q–5.6Q2+0.6Q3
d.
SMC=43.4 –5.6Q+0.6Q2
10-22 Straker Industries estimated its short-run costs using a U-shaped average variable cost function of
the form
and obtained the following results. Total fixed cost (TFC) at Straker Industries is $1,000.
DEPENDENT VARIABLE:
AVC
R−SQUARE
F−RATIO
P−VALUE ON F
OBSERVATIONS:
35
0.8713
108.3
0.0001
VARIABLE
PARAMETER
ESTIMATE
STANDARD
ERROR
T−RATIO
P−VALUE
INTERCEPT
43.40
13.80
3.14
0.0036
Q
−2.80
0.90
−3.11
0.0039
Q2
0.20
0.05
4.00
0.0004
At what level of output is average variable cost (AVC) at its minimum point for Straker
Industries?
a. 0.14
b. 4.7
c. 7
d. 14
e. 28
Chapter 10: PRODUCTION AND COST ESTIMATION
10-23 Straker Industries estimated its short-run costs using a U-shaped average variable cost function of
the form
and obtained the following results. Total fixed cost (TFC) at Straker Industries is $1,000.
DEPENDENT
VARIABLE:
AVC
R−SQUARE
F−RATIO
P−VALUE ON F
OBSERVATIONS:
35
0.8713
108.3
0.0001
VARIABLE
PARAMETER
ESTIMATE
STANDARD
ERROR
T−RATIO
P−VALUE
INTERCEPT
43.40
13.80
3.14
0.0036
Q
−2.80
0.90
−3.11
0.0039
Q2
0.20
0.05
4.00
0.0004
At Straker Industries, average variable cost (AVC) reaches its minimum value at $________.
a. $24.50
b. $33.60
c. $72.80
d. $121.80
10-24 Straker Industries estimated its short-run costs using a U-shaped average variable cost function of
the form
and obtained the following results. Total fixed cost (TFC) at Straker Industries is $1,000.
DEPENDENT VARIABLE:
AVC
R−SQUARE
F−RATIO
P−VALUE ON F
OBSERVATIONS:
35
0.8713
108.3
0.0001
VARIABLE
PARAMETER
ESTIMATE
STANDARD
ERROR
T−RATIO
P−VALUE
INTERCEPT
43.40
13.80
3.14
0.0036
Q
−2.80
0.90
−3.11
0.0039
Q2
0.20
0.05
4.00
0.0004
Chapter 10: PRODUCTION AND COST ESTIMATION
If Straker Industries produces 20 units of output, what is estimated average variable cost (AVC)?
a. $19.40
b. $67.40
c. $171.40
d. $179.40
10-25 Straker Industries estimated its short-run costs using a U-shaped average variable cost function of
the form
and obtained the following results. Total fixed cost (TFC) at Straker Industries is $1,000.
DEPENDENT VARIABLE:
AVC
R−SQUARE
F−RATIO
P−VALUE ON F
OBSERVATIONS:
35
0.8713
108.3
0.0001
VARIABLE
PARAMETER
ESTIMATE
STANDARD
ERROR
T−RATIO
P−VALUE
INTERCEPT
43.40
13.80
3.14
0.0036
Q
−2.80
0.90
−3.11
0.0039
Q2
0.20
0.05
4.00
0.0004
If Straker Industries produces 20 units of output, what is estimated total variable cost (TVC)?
a. $1,348
b. $1,498
c. $2,348
d. $4,428
10-26 Straker Industries estimated its short-run costs using a U-shaped average variable cost function of
the form
and obtained the following results. Total fixed cost (TFC) at Straker Industries is $1,000.
DEPENDENT VARIABLE:
AVC
R−SQUARE
F−RATIO
P−VALUE ON F
OBSERVATIONS:
35
0.8713
108.3
0.0001
VARIABLE
PARAMETER
ESTIMATE
STANDARD
ERROR
T−RATIO
P−VALUE
INTERCEPT
43.40
13.80
3.14
0.0036
Q
−2.80
0.90
−3.11
0.0039
Q2
0.20
0.05
4.00
0.0004
If Straker Industries produces 20 units of output, what is estimated total cost (TC)?
a. $1,348
b. $1,498
c. $2,348
d. $4,428
10-27 Straker Industries estimated its short-run costs using a U-shaped average variable cost function of
the form
and obtained the following results. Total fixed cost (TFC) at Straker Industries is $1,000.
DEPENDENT VARIABLE:
AVC
R−SQUARE
F−RATIO
P−VALUE ON F
OBSERVATIONS:
35
0.8713
108.3
0.0001
VARIABLE
PARAMETER
ESTIMATE
STANDARD
ERROR
T−RATIO
P−VALUE
INTERCEPT
43.40
13.80
3.14
0.0036
Q
−2.80
0.90
−3.11
0.0039
Q2
0.20
0.05
4.00
0.0004
If Straker Industries produces 20 units of output, what is estimated average total cost (ATC)?
a. $19.40
b. $67.40
c. $117.40
d. $1,348
Chapter 10: PRODUCTION AND COST ESTIMATION
10-28 Straker Industries estimated its short-run costs using a U-shaped average variable cost function of
the form
and obtained the following results. Total fixed cost (TFC) at Straker Industries is $1,000.
DEPENDENT
VARIABLE:
AVC
R−SQUARE
F−RATIO
P−VALUE ON F
OBSERVATIONS:
35
0.8713
108.3
0.0001
VARIABLE
PARAMETER
ESTIMATE
STANDARD
ERROR
T−RATIO
P−VALUE
INTERCEPT
43.40
13.80
3.14
0.0036
Q
−2.80
0.90
−3.11
0.0039
Q2
0.20
0.05
4.00
0.0004
If Straker Industries produces 20 units of output, what is estimated short-run marginal cost
(SMC)?
a. $171.40
b. $463.20
c. $1,348
d. $2,348
10-29 Straker Industries estimated its short-run costs using a U-shaped average variable cost function of
the form
and obtained the following results. Total fixed cost (TFC) at Straker Industries is $1,000.
DEPENDENT VARIABLE:
AVC
R−SQUARE
F−RATIO
P−VALUE ON F
OBSERVATIONS:
35
0.8713
108.3
0.0001
VARIABLE
PARAMETER
ESTIMATE
STANDARD
ERROR
T−RATIO
P−VALUE
INTERCEPT
43.40
13.80
3.14
0.0036
Q
−2.80
0.90
−3.11
0.0039
Q2
0.20
0.05
4.00
0.0004
If Straker Industries produces 12 units of output, what is estimated average variable cost (AVC)?
a. $28.04
b. $32.40
c. $33.33