Topic 4 Practice Questions

1. In the short-run, the marginal product of labour curve is bell-shaped. Which of the following is NOT a reason for the marginal product of labour curve to slope upwards?

(A) Workers are specializing in certain tasks.

(B) The factory is not being fully used, therefore more workers can be hired.

(C) More capital is purchased.

(D) Managers are organizing the production process more efficiently.

 

Correct Answer: C

Explanation: We assume that capital is fixed in short-run production.

 

2. The production process shown in the figure exhibits ______.

(A) decreasing returns to scale.

(B) constant returns to scale.

(C) increasing returns to scale.

(D) none of the above.

 

Correct Answer: A

Explanation:

This production process exhibits decreasing returns to scale because doubling inputs results in less than double the output.

 

3. Candy owns a tea house. Assume the production function is: Q = 6KL, where Q is the number of drinks made per hour, K is the number of tea machines (capital), and L is the number of employees hired per hour (labour). What is the marginal product of labour?

(A) MP_L = 6

(B) MP_L = 6K

(C) MP_L = 6L

(D) MP_L = 6K/L

 

Correct Answer: B

Explanation:

The marginal product of labour is the additional output produced as the labour input is increased by one unit. MP_L = ΔQ/ΔL=6K

 

4. Which of the following is not possible regarding production in the short-run?

(A) Total product increases when average product decreases.

(B) When the marginal product is less than the average product, the total product is increasing.

(C) When the total product is decreasing, marginal product is greater than the average product.

(D) When the marginal product reaches the maximum, total product continues to increase.

 

Correct Answer: C

Explanation:

If the total product is decreasing, the marginal product must be negative and lower than the average product.

 

5. Assume Apple uses K units of machinery and L units of labour to produce AirPods. The production function is given as: A = L^0.5K^0.8. This production function exhibits _____.

(A) decreasing returns to scale.

(B) constant returns to scale.

(C) increasing returns to scale.

(D) none of the above.

 

Correct Answer: C

Steps:

A = L^0.5K^0.8

Multiply each input by 𝝺, (𝝺 >1)

f (𝝺L, 𝝺K) = (𝝺L)^0.5(𝝺K)^0.8 = 𝝺^0.5L^0.5 • 𝝺^0.8K^0.8 = 𝝺^1.3 L^0.5 K^0.8

𝝺q = 𝝺L^0.5 k^0.8

Since 𝝺 >1, f (𝝺L, 𝝺K)> 𝝺q

This production function exhibits increasing returns to scale.

 

6. Which of the following statements is FALSE regarding production in the short-run? (with labour being the only variable input)

(A) The AP_L is at its maximum point when it is equal to MP_L.

(B) The TP is at its maximum when MP_L = 0.

(C) When MP_L is greater than AP_L, the AP_L of labour is increasing.

(D) AP_L will always decrease when MP_L decreases.

 

Correct Answer:D

 

7. Firm X draws a curve where the absolute value of the slope at any point is equal to the ratio of marginal product of labour to the marginal product of capital. Firm X has drawn the ____ curve.

(A) isocost

(B) LS

(C) LM

(D) isoquant

 

Correct Answer: D

Explanation:

An isoquant curve shows all combinations of inputs that yield the same level of output. The absolute value of the slope of the isoquant at any given point measures the marginal rate of technical substitution (MRTS). MRTS_L,K = MP_L / MP_K.

 

8. A firm has a production function q(L,K) = 7L + 9K. Which of the following statements is correct?

(A) This production function exhibits increasing returns to scale.

(B) This production function exhibits constant returns to scale.

(C) This production function exhibits decreasing returns to scale.

(D) None of the above.

 

Correct Answer: B

Steps:

q(L,K) = 7L + 9K

Multiply each input by 𝝺, (𝝺 >1)

f (𝝺L, 𝝺K) = 7𝝺L+ 9𝝺K = 𝝺(7L+9K)=𝝺q

Since f (𝝺L, 𝝺K) = 𝝺q, this production function exhibits constant returns to scale.

 

9. What is the difference between short-run production and long-run production?

(A) Short-run is less than one year while long-run is more than one year.

(B) At least one input in production is fixed in the short-run, whereas no inputs are fixed in the long-run.

(C) Economies of scale are present in the short-run, and constant returns to scale are present in the long-run.

(D) No inputs are fixed in the short-run, whereas at least one input is fixed in the long-run.

(E) The firm must cover its fixed costs in the short-run and its variable costs in the long-run.

 

Correct Answer: B

Explanation:

The short-run is the period of time when quantities of one or more production factors cannot be changed, while the long-run is the period of time needed to make all production inputs variable.

 

10. Given the production function Q(L) = 20L³ + 60L, the MP_L is:

(A) 20L⁴ + 60L²

(B) 20L

(C) 60L² + 60

(D) 60L + 60

(E) 60L

 

Correct Answer:C

Explanation:

MP_L = ΔQ/ΔL = 60L² + 60

 

11. We know that for linear isoquants the MRTS is constant. What does that mean for their inputs and outputs?

(A) One unit of an input can be exchanged for less than one unit of the other input, and the output remains constant.

(B) One unit of an input can be exchanged for more than one unit of the other input, and the output remains constant.

(C) The same number of units from one input can be exchanged for a unit of the other input while holding output constant.

(D) The same number of units from one input cannot be exchanged for units of the other input, while holding output constant.

(E) The same number of units from the output can be exchanged for one unit of the input, while holding the output constant.

 

Correct Answer: C

 

12. In a situation where the marginal product of labour is greater than the average product of labour, which of the following is true about the average product of labour?

(A) It is decreasing.

(B) It is increasing.

(C) It is constant.

(D) None of the above.

 

Correct Answer: B

 

13. Consider an ice cream factory with the production function: Q = 100KL, where Q is the number of ice cream bars, K is the number of machines used, and L is the number of employees hired per hour. Assume this factory uses 3 employees and 5 ice cream machines and can produce 1000 ice cream bars per hour. We know that this factory operates ______.

(A) inefficiently.

(B) efficiently.

(C) optimally.

(D) proficiently.

 

Correct Answer: A

Explanation:

The production function shows the highest output produced by a firm for every specified input combination; in this case, when L = 3, K = 5, q = 100KL = 1,500. Nevertheless, this factory can only produce 1,000 ice cream bars, which shows that the production process is inefficient.

 

14. Which of the following statements regarding production in the short-run is FALSE?

(A) TP_L reaches its maximum when MP_L is zero.

(B) When MP_L = AP_L, AP_L reaches its maximum.

(C) When MP_L > AP_L, AP_L is decreasing.

(D) As the use of an input increases, with other inputs fixed, MP_L will eventually decrease.

 

Correct Answer: C

Explanation:

When MP_L > AP_L, AP_L is increasing.

 

15. Which of the following statements are FALSE?

(A) If the MRTS is constant, labour and capital are perfect complements in production.

(B) When isoquants are L-shaped, labour and capital must be used in fixed proportions during production.

(C) When isoquants are straight lines, the MRTS is constant. The rate at which capital and labor can be substituted for each other is always the same, independent of the level of inputs used.

(D) Diminishing marginal returns is only applicable in the short-run.

 

Correct Answer: A

Explanation:

If MRTS is constant, labour and capital are perfect substitutes in production.