Question 1

Which of the following best describes the condition for cost minimization in the long run for a firm using labour (L) and capital (K)?

Accepted Answer

The ratio of marginal product to price is equalized across all factors: $$\frac{MP_L}{p_L} = \frac{MP_K}{p_K}$$

Question 2

A firm notices that $$\frac{MP_L}{p_L} \u003e \frac{MP_K}{p_K}. $$What should the firm do to minimize costs?

Accepted Answer

Increase the use of labour and decrease the use of capital.

Question 3

What is the principle of substitution in the context of production?

Accepted Answer

Firms will substitute towards the input whose price has fallen and away from the input whose price has risen.

Question 4

Which of the following statements about the long-run average cost (LRAC) curve is correct?

Accepted Answer

The LRAC curve is the boundary between attainable and unattainable cost levels for given technology and input prices.

Question 5

If a firm is operating at the minimum efficient scale, which of the following is true?

Accepted Answer

The firm is experiencing constant returns to scale.

Question 6

Suppose a firm’s output increases by 10% when all inputs are increased by 10%. This is an example of:

Accepted Answer

Constant returns to scale

Question 7

Which of the following best explains why the LRAC curve is often 'saucer-shaped'?

Accepted Answer

It reflects increasing, then constant, then decreasing returns to scale as output increases.

Question 8

Why can no short-run average total cost (SRATC) curve fall below the long-run average cost (LRAC) curve?

Accepted Answer

Because the LRAC curve represents the lowest attainable cost for each possible output.

Question 9

Which of the following is NOT an aspect of technological change?

Accepted Answer

Increased government regulation

Question 10

A firm faces a rise in the price of a key input. In the very long run, what are two possible responses?

Accepted Answer

Substitute away from the input or innovate away from the input

Question 11

Which of the following best describes productivity in economics?

Accepted Answer

The amount of output produced per unit of some input

Question 12

Why is technological change considered endogenous in the economic system?

Accepted Answer

Because it results from firms’ pursuit of profit through invention and innovation

Question 13

Which of the following is a real-world example of economies of scale?

Accepted Answer

A bakery reduces its average cost per loaf by doubling its output and using larger ovens.

Question 14

If a firm’s LRAC curve shifts downward, what is the most likely cause?

Accepted Answer

A technological improvement

Question 15

Suppose a firm is producing at a point where $$\frac{MP_L}{p_L} \u003c \frac{MP_K}{p_K}. $$What should the firm do to minimize costs?

Accepted Answer

Use more capital and less labour.

Question 16

Which of the following best describes the minimum efficient scale?

Accepted Answer

The smallest output at which LRAC is minimized

Question 17

Which of the following is a likely outcome if a firm experiences decreasing returns to scale?

Accepted Answer

Long-run average costs increase as output increases.

Question 18

Why must successful innovation produce large profits for firms?

Accepted Answer

Because large profits are needed to compensate for the high costs and risks of innovation

Question 19

Which of the following is a correct statement about the relationship between SRATC and LRAC curves?

Accepted Answer

Each SRATC curve is tangent to the LRAC curve at the output level where the fixed factor is optimal.

Question 20

Which of the following historical predictions was proven wrong due to technological change?

Accepted Answer

Thomas Malthus’s prediction that population growth would always outpace food production

Producers in the Long Run: Cost Minimization, Long-Run Costs, and Technological Change

Study Guide - Practice Questions