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# ECO 500 this is a study guide

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1. You are given the following information about the amount your company can produce per day given the number of workers it hires.
Numbers of Workers | Quantity Produced
0 | 0
1 | 1
2 | 3
3 | 6
4 | 11
5 | 19
6 | 24
7 | 28
8 | 31
9 | 33
10 | 34
11 | 34
12 | 33

a. What is the range of workers where there are increasing returns to scale? Constant returns to scale? Decreasing returns to scale? Negative returns?
b. If the company wants to maximize total output, what number of workers should be hired?
c. What is the number of workers that should be hired if the company wants to maximize output per worker?

2. Your engineering department estimated the following production function.
Q = 15L2 - 0.5L3
a. What is the marginal product of labor function, MPL?
b. What is the average product of labor function, APL?
c. What is the value of L that maximizes Q?
d. What is the value of L at which average product is maximized?

Question 3 in attachment.

Question 4
In a production process, if an excessive amount of the variable input is used relative to the amount of fixed input available to support the production of the desired output, production is occurring in which of the following stages?
a) Stage II
b) Stages I and II
c) Stage I
d) Stage III

Question 5
The marginal product of a variable input is defined as:
a) the ratio of total output to the amount of the variable input used in producing the output.
b) the incremental change in total output that can be produced by the use of one more unit of the variable input in the production process.
c) the percentage change in output resulting from a given percentage change in the amount of the variable input X employed in the production process with Y.
d) a and b.

Question 6
A short-run production function assumes that:
a) the level of output is fixed.
b) at least one input is a fixed input.
c) all inputs are fixed inputs.
d) all inputs can be varied.

Question 7
If a firm is producing a given level of output in a technically efficient manner, it must be the case that
a) The firm is using the cost minimizing combination of inputs to produce the level of output.
b) Each input is producing its maximum marginal product.
c) The level of output is the most that can be produced with the given combination of inputs.
d) All of the above

Question 8
The main difference between the short-run and the long-run production functions is that
a) in the short run all inputs are fixed and in the long run all inputs are variable.
b) in the short run the firm varies all of its inputs to find the least-cost combination of inputs.
c) in the short run, at least one of the firm's input levels is fixed.
d) in the long run, the firm is making a constrained decision related to use existing plant and equipment efficiently, but there are no constraints determining short run production.

Question 9
The marginal rate of technical substitution is
a) the rate at which the firm can substitute labor for capital while holding output constant.
b) the rate at which the firm can substitute labor for capital while holding total cost constant.
c) the slope of the isocost curve.
d) all of the above.

Question 10
The rate at which one input X can be substituted for another input Y in a production process while keeping total output constant is
a) the slope of the isoquant curve.
b) the marginal rate of technical substitution (MRTS).
c) equal to MPx/MPy.
d) all of the above.

Question 11
The law of diminishing marginal returns
a) says that each and every increase in the amount of the variable input used in the production process will yield diminishing marginal returns.
b) is a mathematical theorem that can be logically proved or disproved.
c) says that after some point, the marginal product of an input will start to decline if the amount of other inputs is held constant.
d) none of the above.

Question 12
Marginal factor cost is defined as the amount that an additional unit of the variable input adds to
a) marginal cost.
b) variable cost.
c) marginal rate of technical substitution.
d) total cost.

Question 13
Every point along an isoquant is one associated with
a) economic efficiency.
b) technical efficiency.
d) cost minimization.

Question 14
A production function measures the relation between
a) input prices and output price.
b) the quantity of inputs and the quantity of output.
c) input prices and the quantity of output.
d) the quantity of inputs and input prices.

Question 15
If average product is increasing, marginal product
a) must be greater than average product.
b) must be less than average product.
c) must be decreasing.
d) must be increasing.

Question 16
At the point where total product is maximized
a) AP is maximized.
b) AP is equal to zero.
c) MP is maximized.
d) MP is equal to zero.

Question 17
Marginal revenue product is defined as the amount that an additional unit of the variable input adds to
a) marginal revenue.
b) total output.
c) total revenue.
d) marginal product.

Question 18
The marginal product of labor
a) measures how output changes as the wage rate changes.
b) is less than the average product of labor when the average product of labor is decreasing.
c) is negative when adding another unit of labor decreases output.
d) both b and c.

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## Economics Study Guide

Question 1
Among the reasons economists consider economic profit to be the best measure of a company's performance is

Accounting profit is difficult to measure.
Explicit costs are fully accounted for in economic but not accounting profit.
Estimating income for tax purposes only includes explicit costs.
The opportunity costs of all resources are subtracted from total revenue.

Question 2

Linda gave up her job paying \$60,000 a year to start Frozen Yogurt Express. The first year of operation, Frozen Yogurt Express generated \$70,000 in revenues and \$20,000 in explicit costs, not including any payment to Linda for her time. What is Linda's economic profit?

-\$10,000
\$10,000
\$50,000
\$70,000

Question 3

When comparing the risk between two investments

The standard deviation is appropriate even if the expected returns differ significantly.
The one with the greater expected value is always riskier.
Those with shorter life spans tend to be riskier.
The standard deviation is appropriate if the expected returns are close in value.

Question 4

Among common factors that give rise to principal-agent problems is

Information is shared equally by managers and agents.
Common goals are shared by managers and owners.
Asymmetric information is present.
A greater number of agents relative to the number of principals.

Question 5

If accounting profit is negative, economic profit must be

Zero.
Positive.
Negative.
Greater than accounting profit.

Question 6

The Soup Kitchen, a local charity, was given the gift of a building by a local philanthroper. The charity's board voted to remodel the building and use it to expand its services. The economic cost to the charity of using the building includes

Only the cost of remodeling.
The cost of remodeling and maintaining it.
The cost of remodeling, maintenance, and loss of revenue if the building had been rented/sold.
Only the value of lost revenue if the building had been rented or sold.

Question 7

Net benefits (profits) are maximized when

The additional benefit from the last unit of activity exceeds the additional cost of the last unit by the largest amount.
The difference between total benefit and total cost is maximized.
Total benefit is maximized.
Total benefit equals total cost.

Question 8

Assuming the supply curve remains constant, a decrease in demand can be expected to

Reduce equilibrium price and increase equilibrium quantity.
Increase equilibrium price and reduce equilibrium quantity.
Decrease equilibrium price and quantity.
Not result in a change in either equilibrium price or quantity.

Question 9

In which of the following examples will it NOT be possible to determine the effect (increase or decrease) on equilibrium price of hamburgers without knowing more about the magnitude of the shifts in supply and demand?

The demand for hamburgers decreases and the supply of hamburgers increases.
The demand for hamburgers increases and the supply of hamburgers decreases.
The demand for hamburgers increases while the cost of meat increases.
The demand for hamburgers increases and the supply of hamburgers increases.

Question 10

Suppose that the market for diamonds is in equilibrium. If political unrest shuts down several major diamond mines, which of the follow is most likely to happen?

The equilibrium quantity of diamonds decreases.
The supply of diamonds increases.
The equilibrium price of diamond decreases.
The demand for diamonds decreases.

Question 11

Assume that more people want Super Bowl tickets than are available through the ticket office at the current price. Select the statement that best represents the situation.

There is a shortage of Super Bowl tickets at the current price.
The current price is higher than the equilibrium price for Super Bowl tickets.
If the current price is lowered, the excess demand for Super Bowl tickets would decrease.
There is a surplus of Super Bowl tickets at the current price.

Question 12

Assume that a decrease in the price of product X results in fewer units of product Y being sold. You can conclude that X and Y are

Complementary goods.
Normal goods.
Inferior goods.
Substitute goods.

Question 13

The equilibrium price and quantity of tea both rise. Which of the following best fits the observed data?

a decrease in demand with supply constant
an increase in supply with demand constant
a decrease in demand coupled with an increase in supply
an increase in demand with supply constant

Question 14

When Napa Winery reduces the price of its chardonnay from \$20 a bottle to \$15 a bottle, the result is an increase in

The demand for its chardonnay.
The supply of its chardonnay.
The quantity demanded of its chardonnay.
The quantity of its chardonnay supplied.

Question 15

If the market price of milk decreases at the same time the market quantity of milk purchased rises, a possible factor influencing this change is

An increase in demand for milk with no change in supply.
An increase in supply of milk with no change in demand.
A decrease in supply of milk and an increase in demand.
An increase in supply of milk and an increase in demand for milk.

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