Chapter 6 : The Production Process : The behavior of Profit Maximizing Firms

Multiple Choice Questions

1. Four workers produce 160 units of output and 5 workers produce 180. The marginal
product of the fıfth worker is
(a) 32 units of output.
(b) 4 units of output.
(c) 20 units of output.
(d) 36 units of output.

2. The return on investment that is just suffıcient to satisfy the owners of a business is
called
(a) normal profit
(b) marginal profıt
(c) economic profıt.
(d) excess profıt

3. The law of diminishing returns

(a) applies in the short run but not in the long run.
(b) requires that all factors of production must diminish in equal proportions.
(c) requires that all factors of production must diminish in unequal proportions.
(d) states that marginal product must always be less than average product.

4. The demand curve faced by a perfectly competitive fırm is

(a) always downward sloping.
(b) horizontal.
(c) perfectly inelastic.
(d) downward sloping if the law of demand applies.

5. The short run is a period of time during which

(a) all resources are fıxed.
(b) all resources are variable.
(c) the scale of production is fıxed.
(d) the scale of production is variable.

6. Andy increases the amount of capital his workers use. The average product of labor
will _____and the marginal product of labor will _____.
(a) increase; increase
(b) decrease; decrease
(c) increase; decrease
(d) decrease; increase
Use the following table to answer the next two questions.

7. Total product, if 4 workers are employed, is

(a) 20 units of output.
(b) 69 units of output.
(c) 89 units of output.
(d) 107 units of output.

8. Average product, if 3 workers are employed, is

(a) 24 units of output.
(b) 23 units of output.
(c) 26 units of output.
(d) 8 units of output.

9. The cost-minimizing combination of labor and capital occurs when the MRTS of
capital for labor equals
(a) the MRTS of labor for capital.
(b) the ratio of MPL/MPK.
(c) the ratio of the price of labor to the price of capital.
(d) the ratio of the price of capital to the price of labor.

10. Ms. Prudence Juris decides to open a law office. She quits her job as an assistant
district attorney (annual salary: $25,000), borrows $50,000 at 10% annual interest,
hires a secretary at $20,000/year and rents office space at $55,000/year. During her
fırst year, she receives revenues of $100,000. Assuming costs and revenues as
represented, what is her economic profit for the year?
(a) $20,000
(b) zero, but she does earn a normal profit
(c) -$5,000'
(d) -$50,000
APPLICATION QUESTIONS

1. Billy-Bob is a highly paid economics professor making $15,000 per year. He thinks that
there must be a better way to make a living and decides to go into hog farming. Billy-Bob
resigns his teaching job, rents some land, and hires an agricultural college graduate to help
around the farm, drive the tractor, and slop the hogs.
At the end of the year, Billy-Bob has incurred the following explicit costs:

As for revenue, Billy-Bob sold 110 hogs during the year for an average revenue of $1000
each. How much economic profit did the farm eam? Assuming that teaching is his only
option, should he continue in the hog business?

2. Below is the production function for Wilma' s Wicker Baskets.

(a)Compute the marginal product and average product values in the following table.

Labor Total Product Marginal Product Average Product

1
2
3
4
5
6
7
8
9
10
(b) With which worker do diminishing returns occur?

3. Use of the following table for this question.

Number of Workers Marginal Product Total Product Average Product

1 12
2 16
3 14
4 13
5 10

(a) Complete the total product and average product columns.

(b) With which worker do diminishing returns occur?

(c) Graph the marginal and average product curves.

4. Assume that wooden chairs can be produced using two different techniques, A and B. The
following table provides data on the total input requirement of each at four different output
levels.

(a) If labor costs $2 per unit and capital costs $3 per unit, what is the minimum cost of
producing:
one chair?
two chairs?
three chairs?
four chairs?
 (b) Graph total cost of production as a function of output. (Put output on the X-axis and
cost on the Y-axis.)

(c) How much does it cost a profıt-maximizing firm to go from an output of:

one chair to an output of two chairs?

two chairs to an output of three chairs?

three chairs to four chairs?

PRACTICE TEST SOLUTIONS

Solutions to Multiple-Choice Questions

1. (c) Marginal product is the change in total product that occurs when an additional unit of
a resource is added.

2. (a) A normal rate of return is included in the cost of production.

3. (a) This law requires that variable resource is added to a given quantity of a fixed
resource. Fixed resources can occur only in the short run.

4. (b) Each firm is a price taker facing perfectly elastic (horizontal) demand curve.

5. (c) In the short run, at least one factor must be fixed, thus locking the firm into a given
scale of production.

6. (a) Each worker will become more productive, causing marginal product to increase. If
each worker produces more, average product will also increase.
7. (c) Total product is the sum of preceding marginal products----19+26+24+20.

8. (b) Average product is total product divided by the number of workers----

(19+26+24)/3=23.

9. (c) MRTS= -MPL/MPK

10. (c) Prudence makes an economic loss of $5000.

Her costs are $(25,000+5,000+20,000+55,000).