Besanko & Braeutigam Microeconomics, 4

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Chapter 4: Costs and Cost Minimization
Multiple Choice
1. Suppose ou are a star !asket!all plaer at a ma"or uni#ersit in our sophomore ear.
$ou are sought a%ter ! se#eral &B' teams. (hich o% the %ollo)ing choices !est
characterizes our opportunit cost i% ou choose to drop out o% college and enter the
&B'*
a+ The #alue o% our college scholarship that ou ha#e gi#en up.
!+ The skills that t)o more ears o% plaing at our college )ould ha#e gi#en ou
along )ith their additional #alue o#er the rest o% our li%e, in addition to the
educational #alue o% the college degree.
c+ The total o% e,plicit costs that ha#e !een incurred in the past.
d+ The total o% implicit costs that ha#e !een incurred in the past.
'ns: B
-. $ou ha#e in#ested a!out .1//,/// in a ne) 0hope%ull+ trend restaurant in an ur!an
location. These costs ha#e gone to purchase the restaurant, prepa insurance %or the
%ollo)ing ear and purchase supplies %or the restaurant. 1t )ill cost ou an additional
.1/,/// per ear to hire each )aiter and )aitress. 0The earn tips )hich the get to
keep.+ (hich o% the %ollo)ing statements is most accurate*
a+ The .1//,/// sum represents sunk costs, )hereas the costs %or )aiters and
)aitresses is not sunk, !ut all o% these costs )ould !e considered accounting
costs, !ut do not include all o% the possi!le economic costs o% operating the
!usiness.
!+ The .1//,/// sum represents sunk costs, )hereas the costs %or )aiters and
)aitresses is not sunk, !ut all o% these costs )ould !e considered accounting
costs, and also include all o% the possi!le economic costs o% operating the !usiness
c+ The .1//,/// sum represents sunk costs and the costs %or )aiters and )aitresses
are sunk as )ell.
d+ The .1//,/// sum represents sunk costs and all o% the possi!le accounting costs
as )ell.
'ns: '
2. Sunk costs do not
a+ matter.
!+ a%%ect !usiness shutdo)n decisions.
c+ a%%ect !usiness start3up decisions.
d+ cost as much as marginal costs.
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'ns: B
4. $ou decide to purchase a car %or .1-,///. 7pon dri#ing the car o%% o% the lot, the resale
#alue o% the car %alls to .8,///. '%ter purchasing the car, the .1-,/// purchase price
represents a0n+
a+ a#erage cost.
!+ implicit cost.
c+ sunk cost.
d+ non3sunk cost.
'ns: C
9. :pportunit cost %or a %irm is
a+ Costs that in#ol#e a direct monetar outla
!+ The sum o% the %irm;s implicit costs
c+ The total o% e,plicit costs that ha#e !een incurred in the past
d+ The #alue o% the ne,t !est alternati#e that is %orgone )hen another alternati#e is
chosen
<. ' small !usiness o)ner is planning to purchase a ne) o%%ice computer %or .1,///. The
opportunit cost o% purchasing this computer is
a+ .8//
!+ .1,///
c+ .1,1//
d+ 7nkno)n, since )e don;t kno) the o)ner;s ne,t !est alternati#e.
6. $ou decide to purchase a ne) car %or .1-,///. 7pon dri#ing the car o%% o% the lot, the
resale #alue o% the car %alls to .8,///. The opportunit cost o% purchasing the car is
========== and the opportunit cost o% using the car is ==========
a+ .1-,/// and .8,///.
!+ .1-,/// and .2,///.
c+ 7nkno)n and .8,///.
d+ 7nkno)n and .2,///.
'ns: '
>. ?conomic costs are snonmous )ith
a+ 'ccounting costs
!+ Sunk costs
c+ :pportunit costs
d+ 1mplicit costs
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8. The short3run is
a+ a time period in )hich all input le#els are %i,ed.
!+ a time period in )hich at least one input le#el is %i,ed.
c+ three months.
d+ a time period in )hich no input le#els are %i,ed.
1/. The cost3minimization pro!lem o% the %irm is to
a+ minimize total costs.
!+ minimize a#erage costs.
c+ minimize total cost o% producing a particular amount o% output.
d+ ma,imize output su!"ect to a cost constraint.
11. 1socost lines represent
a+ the same #alue %or e#er %irm in the industr.
!+ are the same as implicit costs.
c+ the same total e,penditure on the inputs to the production process.
d+ the sum o% all past e,plicit costs
1-. (hen isocost lines shi%t out)ard %rom the origin, it represents
a+ increasing le#els o% e,penditure on the inputs to the production process.
!+ increasing sunk costs
c+ increasing opportunit costs
d+ decreasing le#els o% e,penditure on the inputs to the production process.
12. 'n isocost line represents
a+ all com!inations o% inputs in )hich the %irm produces the same le#el o% output.
!+ all com!inations o% inputs in )hich the %irm has the same le#el o% total cost.
c+ %or a gi#en le#el o% output, the #arious points that )ill produce that same le#el o%
output at the same cost.
d+ all com!inations o% output that ield the same total cost le#el.
14. The cost3minimization pro!lem o% the %irm is to
a+ ma,imize output su!"ect to a gi#en cost constraint.
!+ minimize total cost.
c+ minimize a#erage cost.
d+ minimize total cost o% producing a particular le#el o% output.
19. The long3run is
a+ a time period in )hich all input le#els are %i,ed.
!+ a time period in )hich at least one input le#el is %i,ed.
c+ one ear.
d+ a time period in )hich no input le#els are %i,ed.
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1<. ' di%%erence !et)een the short run and the long run is that a %irm in the short run
a+ %aces an unconstrained cost minimization pro!lem, )hereas the %irm is
constrained in the long run.
!+ %aces a constrained cost minimization pro!lem, )hereas the %irm is unconstrained
in the long run.
c+ %aces a constrained cost minimization pro!lem in !oth the short run and the long
run.
d+ %aces an unconstrained cost minimization pro!lem in !oth the short run and the
long run.
16. (hen the le#el o% capital is plotted on the #ertical a,is and the le#el o% la!or is plotted on
the horizontal a,is, the slope o% the isocost line is 0assuming
w
is the price o% la!or and
r
is the price o% capital and production uses onl these t)o inputs+
a+
w
r

!+
r
w

c+
K
L
MP
MP
d+
L
K
MP
MP
1>. To deri#e the e@uation %or an isocost line )hen the le#el o% capital is plotted on the
#ertical a,is and the le#el o% la!or is plotted on the horizontal a,is, ou should
a+ sol#e the production %unction %or K .
!+ sol#e the production %unction %or L .
c+ sol#e the total cost e@uation %or K .
d+ sol#e the total cost e@uation %or L .
18. Aet a %irm use la!or (L) and capital (K) as its onl inputs to produce an output, Q. The
cost o% la!or is w = $9 per la!or hour and the cost o% capital is r = $15 per machine hour.
(hen capital is measured on the #ertical a,is and la!or on the horizontal a,is, )hat is the
slope o% an isocost line %or this %irm*
a) -3.
!+ -5.
c+ -15.
d) -1/3.
-/. ' %irm uses la!or and capital,
0 , + L K
, to produce an output. The hourl cost o% la!or is
.1/, and the hourl cost o% capital is .9/. (hich o% the %ollo)ing com!inations o% la!or
and capital hours o% use represent points on the %irm;s .1//,/// isocost line*
a+ 01////, -///+
!+ 0-///, 1////+
c+ 01///, 1>//+
d+ 01///, 1///+
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-1. 1n order to sol#e graphicall %or an interior cost minimum o% the %irm, su!"ect to the
constraint o% producing a particular target le#el o% output, )e
a+ shi%t in the isocost line as much as possi!le.
!+ shi%t out the iso@uant as much as possi!le.
c+ shi%t the isocost line le%t as much as possi!le su!"ect to the constraint that it
touches the target iso@uant at least once.
d+ shi%t the iso@uant le%t as much as possi!le su!"ect to the constraint that it touches
the target isocost at least once.
--. (hich o% the %ollo)ing statements correctl characterizes the solution to a cost
minimization pro!lem )ith an interior solution*
a+ The iso@uant is tangent to the isocost line.
!+ The iso@uant lies to the interior o% the isocost line.
c+ The isocost line lies to the interior o% the iso@uant.
d+ The distance !et)een the iso@uant and the isocost line is ma,imized.
-2. (hen a %irm uses inputs in a %i,ed proportion, the cost minimizing com!ination o% capital
and la!or
a+ occurs )hen the %irm uses either all )orkers or all machines.
!+ occurs )hen the %irm uses e@ual amounts o% )orkers and machines.
c+ occurs )here the ratio o% the marginal producti#ities e@uals the ratio o% the input
prices.
d+ occurs at the corner point on the iso@uant.
-4. Suppose that a %irm uses onl t)o inputs in its production process. The ratio o% the
marginal products o% these inputs al)as e,ceeds the ratio o% the prices o% the inputs.
(hat can ou sa a!out the cost3minimizing point o% the %irm*
a+ 1t is an interior solution.
!+ ' cost3minimizing point must not e,ist.
c+ 1% a cost3minimizing point e,ists, it must !e at a corner.
d+ Costs must !e negati#e at the cost3minimizing point.
-9. Suppose %or a particular production %unction that
2< 2<
L K
K L
MP MP
L K

= =


1% the price o% capital is .9 per unit and the price o% la!or is .1-9 per unit, at the cost3
minimizing com!ination o% capital and la!or the %irm should emplo
a+ %i#e times as much la!or as capital.
!+ %i#e times as much capital as la!or.
c+ 1-9B2< units o% capital and 9B2< units o% la!or.
d+ 2<B1-9 units o% capital and 2<B9 units o% la!or.
'ns: B
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-<. Suppose in a particular production process that capital and la!or are per%ect su!stitutes so
that three units o% la!or are e@ui#alent to one unit o% capital. 1% the price o% capital is .4
per unit and the price o% la!or is .1 per unit, the %irm should
a+ emplo capital onl.
!+ emplo la!or onl.
c+ use three times as much capital as la!or.
d+ use three times as much la!or as capital.
'ns: B
-6. ' %irm;s production %unction is gi#en ! Q = KL. The )age rate o% la!or is w = $10 and
the rental rate o% capital is r = $20. The %irm )ants to produce 1,>// units o% output.
(hat is the most e%%icient com!ination o% la!or and capital
0 , + L K
*
a+ 01/, -/+
!+ 0-/, 8/+
c+ 0</, 2/+
d+ 08/, -/+
->. ' %irm;s production %unction is gi#en ! Q = KL. The )age rate o% la!or is w = $10 and
the rental rate o% capital is r = $20. The %irm )ants to produce 1,>// units o% output in the
most e%%icient )a possi!le. Co) much does the %irm spend*
a+ .-,///
!+ .1,2//
c+ .1,-//
d+ .1,1//
-8. ' %irm;s production %unction is gi#en ! Q = KL. The )age rate o% la!or is w = $10 and
the rental rate o% capital is r = $20. (hat is the most e%%icient com!ination o% la!or and
capital
0 , + L K
that also ields a cost o% e,actl .1///*
a+ 01/, 49+
!+ 0-9, 9/+
c+ 09/, -9+
d+ 0-/, 4/+
'ns: C
2/. ' %irm;s production %unction is gi#en ! Q = KL. The )age rate o% la!or is w = $10 and
the rental rate o% capital is r = $20. The %irm spends e,actl .1/// in the most e%%icient
)a possi!le. Co) much output can the %irm produce*
a+ 49/
!+ >//
c+ 1///
d+ 1-9/
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'ns: D
21. ' %irm;s production %unction is gi#en !
-
Q K L = . Eurther, the )age rate is .1/ w = and
the rental rate o% capital is .-/ r = . (hat is the most e%%icient com!ination o% la!or and
capital
0 , + L K
that also results in a total cost le#el o% e,actl .1,-//*
a+ 0-/, 9/+
!+ 0-9, 46.9+
c+ 02/, 49+
d+ 04/, 4/+
2-. ' %irm;s production %unction is gi#en !
-
Q K L = . Eurther, the )age rate is .1/ w = and
the rental rate o% capital is .-/ r = . Suppose that the %irm spends e,actl .1-// in the
most e%%icient )a possi!le. Co) much output can the %irm produce*
a+ 9/,///
!+ 9<,4/<.-9
c+ </,69/
d+ <4,///
22. ' %irm has a Co!!3Douglas production %unction %or its inputs o% capital and la!or. The
%irm is currentl paing .1/ per la!or hour and .9 per machine hour. The %irm is
currentl at an e%%icient production le#el, emploing an e@ual num!er o% machines and
)orkers. (hat can )e in%er a!out the marginal producti#ities o% capital and la!or at this
point*
a+ MPK = MPL
!+ MPK = 2MPL
c+ MPL = 2MPK
d+ MPL = .5MPK
24. Aet a %irm use la!or (L) and capital (K) as its onl inputs to produce an output, Q. The
cost o% la!or is w = $9 per la!or hour and the cost o% capital is r = $15 per machine hour.
(hat is the e@uation o% the .1.9million isocost line*
a) 1.5m = L + K.
!+ 1.5m = 5L + 15K.
c+ 1.5m = (5L)(15K).
d+ 1.5m = (5L + 15K)Q.
29. The Fe@ual !ang per !uckG condition re%ers to the %irm e@uating
a+ marginal re#enue )ith marginal cost.
!+ the marginal producti#it o% the last dollar spent on la!or )ith the marginal
producti#it o% the last dollar spent on capital.
c+ the marginal producti#it o% capital )ith the marginal producti#it o% la!or.
d+ the cost o% capital )ith the cost o% la!or.
2<. ' %irm uses capital and la!or to produce an output. The slope o% the isocost line e@uals:
a+ the ratio o% the marginal producti#ities o% the inputs.
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!+ the ratio o% the output prices.
c+ the ratio o% the input prices.
d+ the ratio o% capital to la!or.
26. ' %irm;s production %unction is gi#en !
-
Q K L = . Eurther, the )age rate is .1/ w = and
the rental rate o% capital is .-/ r = . Suppose the %irm )ants to produce -6,/// units o%
output. (hat is the most e%%icient com!ination o% la!or and capital
0 , + L K
*
a+ 0-/, -/+
!+ 02/, 2/+
c+ 02/, 8/+
d+ 08/, 2/+
2>. ' %irm;s production %unction is gi#en !
-
Q K L = . Eurther, the )age rate is .1/ w = and
the rental rate o% capital is .-/ r = . Suppose that the %irm )ants to produce -6,/// units
o% output in the most e%%icient )a possi!le. Co) much does the %irm spend*
a+ .<//
!+ .8//
c+ .1,9//
d+ .-,1//
28. Suppose capital and la!or are per%ect complements %or a particular production process. 1%
the price o% la!or increases, holding the price o% capital and the le#el o% output constant,
the %irm should
a+ use more capital and less la!or.
!+ use more la!or and less capital.
c+ use the same amounts o% capital and la!or.
d+ eliminate all use o% la!or.
'ns: C
4/. Suppose capital and la!or are per%ect su!stitutes %or a particular production process. 1%
the price o% la!or increases, holding the price o% capital and the le#el o% output constant,
the %irm ma
a+ use more capital and less la!or.
!+ use more la!or and less capital.
c+ use the same amounts o% capital and la!or.
d+ ?ither use more capital and less la!or or use the same amounts o% !oth inputs.
'ns: D
41. Suppose that capital and la!or are per%ect complements in a one3to3one ratio in a %irm;s
production %unction. The %irm is currentl at an e%%icient production le#el, emploing an
e@ual num!er o% machines and )orkers. Suppose the cost o% la!or )ere to dou!le and the
cost o% capital )ere to %all ! hal%. 1% the %irm )anted to produce the pre#ious le#el o%
output, the %irm )ould hire
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a+ more la!or and less capital.
!+ less la!or and more capital.
c+ the same amounts o% la!or and capital.
d+ t)ice as much la!or as capital.
'ns: C
4-. Suppose that a %irm uses onl capital, K, and la!or, L, in its production process. 't the
%irm;s current long3run com!ination o% capital and la!or, it uses positi#e amounts o% !oth
inputs and measures the marginal products as 19
K
MP = and 1/
L
MP = . The rental rate
o% capital is r = 6 and the current )age rate %or la!or is w = 3. The %irm
a+ is currentl minimizing total cost in the long run.
!+ could lo)er cost ! increasing the usage o% capital and decreasing the usage o%
la!or.
c+ could lo)er cost ! increasing the usage o% la!or and decreasing the usage o%
capital.
d+ cannot lo)er cost )ithout also lo)ering the le#el o% output.
42. The e,pansion path graphs
a+ the com!inations o% capital and la!or that minimize total cost %or #arious le#els o%
output.
!+ the com!inations o% capital and la!or that ha#e the same total cost %or #arious
le#els o% output.
c+ the com!inations o% capital and la!or that ha#e the same le#el o% output.
d+ ho) the %irm can e,pand output )hile holding total cost constant.
44. 'n increase in the @uantit o% output )ill cause the cost minimizing @uantit o% an input
to go ======== i% the input is a normal input and )ill cause the cost minimizing @uantit
o% the input to go ========= i% the input is an in%erior input.
a+ upH up
!+ upH do)n
c+ do)nH up
d+ do)nH do)n
'ns: B
49. Eor a production process )ith ten inputs, ho) man inputs could !e in%erior inputs*
a+ 9
!+ /
c+ 8
d+ 1/
'ns: C
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4<. 'n input demand cur#e represents
a+ ho) the cost3minimizing amount o% input #aries )ith the le#el o% output.
!+ ho) the cost3minimizing output #aries )ith an input;s price.
c+ ho) the cost minimizing amount o% input changes )ith the input;s price.
d+ ho) the cost minimizing output #aries )ith the output price.
46. ' cur#e that sho)s ho) the %irm;s cost3minimizing @uantit o% capital #aries )ith the
price o% capital is the %irm;s
a+ Irice3e,pansion cur#e
!+ Aa!or demand cur#e
c+ Capital demand cur#e
d+ ?lasticit o% demand cur#e
4>. Suppose that a %irm;s production %unction o% output Q is a %unction o% onl t)o inputs,
la!or (L) and capital (K) and can !e )ritten Q = 25LK. Aetting the )age rate %or la!or !e
w and the rental rate o% capital !e r, the e@uation %or the %irm;s demand %or la!or )ould
!e:
a+
r
wQ
L
-9
=
!+
wQ
r
L
-9
=
c+
w
rQ
L
-9
=
d+
rQ
w
L
-9
=
48. Suppose that a %irm;s production %unction o% output Q is a %unction o% onl t)o inputs,
la!or (L) and capital (K) and can !e )ritten Q = 25LK. Aet the )age rate %or la!or !e w
= 1 and the rental rate o% capital !e r= 1. 1% the %irm produces 1// units o% output, ho)
man units o% la!or )ill it use*
a+ 1
!+ -
c+ 2
d+ 4
9/. (hen the elasticit o% su!stitution !et)een capital and la!or is lo),
a+ la!or demand )ill !e price elastic.
!+ la!or demand )ill !e price inelastic.
c+ the capital3la!or ratio )ill !e lo).
d+ the la!or demand cur#e )ill !e a %lat line.
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'ns: B
91. ' high elasticit o% su!stitution !et)een capital and la!or implies that la!or demand )ill
!e
a+ price elastic.
!+ unitar price elastic.
c+ price inelastic.
d+ more inelastic than capital demand.
9-. Suppose that a %irm has a Co!!3Douglas production %unction %or its inputs o% capital and
la!or. The %irm is currentl paing .1/ per la!or hour and .9 per machine hour. The
%irm is currentl at an e%%icient production le#el, emploing an e@ual num!er o% machines
and )orkers. Suppose the cost o% la!or )ere to dou!le and the cost o% capital )ere to %all
! hal%. 1% the %irm )anted to produce the pre#ious le#el o% output %or the pre#ious cost,
the %irm )ould hire
a+ more la!or and less capital.
!+ less la!or and more capital.
c+ e@ual amounts o% la!or and capital.
d+ t)ice as much la!or as capital.
92. 1denti% the truth%ulness o% the %ollo)ing statements.
1. 'll %i,ed costs are sunk costs.
11. 'll sunk costs are %i,ed costs.
a+ Both 1 and 11 are true.
!+ Both 1 and 11 are %alse.
c+ 1 is trueH 11 is %alse.
d+ 1 is %alseH 11 is true.
'ns: D
94. 1denti% the truth%ulness o% the %ollo)ing statements.
1. ' %irm decides to purchase a computer %or .1,9// at the end o% the month. The
computer )ill !e used %or administrati#e purposes that do not #ar )ith the #olume o%
product that the %irm makes. The computer has no re3sale #alue. This is a %i,ed cost. 't
the !eginning o% the month, this cost is non3sunk.
11. ' %irm decides to purchase a computer %or .1,9// at the !eginning o% the month.
The computer )ill !e used %or administrati#e purposes that do not #ar )ith the #olume
o% product that the %irm makes. The computer has no re3sale #alue. This is a %i,ed cost.
't the end o% the month, this cost is sunk.
a+ Both 1 and 11 are true.
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!+ Both 1 and 11 are %alse.
c+ 1 is trueH 11 is %alse.
d+ 1 is %alseH 11 is true.
'ns: '
99. Consider a production process )ith t)o inputs and assume the le#el o% one o% the inputs
is %i,ed in the short run. To determine the optimal le#el o% the #aria!le input ou should
a+ sol#e the total cost e@uation %or the le#el o% the #aria!le input.
!+ sol#e the total cost e@uation %or the le#el o% the %i,ed input and su!stitute that into
the production %unction.
c+ sol#e the production %unction %or the le#el o% the %i,ed input.
d+ sol#e the production %unction %or the le#el o% the #aria!le input.
'ns: D
9<. ' %irm;s production process uses la!or, L, and capital, K, to produce an output, Q
according to the %unction Q = 25KL. Aet la!or !e %i,ed at le#el

= L L
. (hat is the cost
minimizing le#el o% capital that the %irm must use to produce a target le#el o% output,

= Q Q
*
a+
Q
L
K
-9

=
!+
Q L K

= -9
c+
L
Q
K
-9

=

d+

=
L
Q
K
-9//
-
96. ' %irm;s production process uses la!or, L, and capital, K, and materials, M, to produce an
output, Q according to the %unction Q = KLM. The )age rate %or la!or is w = -, the
rental rate o% capital is r = 1, and the cost o% materials is m = 4 per unit. (hat is the long
run cost minimizing le#el o% capital that the %irm must use to produce a target le#el o%
output, Q = 1000*
a) K = 5
b) K = 10
c) K = 20
d+ K = 40
9>. ' %irm;s production process uses la!or, L, and capital, K, and materials, M, to produce an
output, Q according to the %unction Q = KLM. The )age rate %or la!or is w = -, the
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Besanko & Braeutigam Microeconomics, 4
th
editionTest Bank
rental rate o% capital is r = 1, and the cost o% materials is m = 4 per unit. Aet materials
input !e %i,ed no) at M = 2. (hat is the cost minimizing le#el o% capital that the %irm
must use to produce a target le#el o% output, Q = 1600*
a) K = 5
b) K = 10
c) K = 20
d+ K = 40
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