Marginal physical and revenue products

Choose the best answer.

1. Marginal physical product can tell a producer
a. at what point to stop adding inputs to the production process.
b. how much profit will be made at each level of production.
c. how much the last input added to the total amount of revenue.
d. how much the last input added to the total amount of production.
e. total cost at a given level of output.

2. The "law" of diminishing returns
a. is deduced from the basic biochemical relationship of agricultural theory.
b. was constructed as the basis of observation during experiments on the impact of fertilizer on output in the 1930s.
c. is based on regular observations of input-output relationships over the last two centuries.
d. is borrowed from physical laws related to conversion of matter and energy.
e. states that total output diminishes with the addition of each unit of output.

3. When the marginal revenue product of an input is less than its price, the
a. producer should expand the use of that input.
b. price of the input will automatically rise in a free market.
c. producer should reduce the use of that input.
d. marginal physical product of that input must be below its average physical product.
e. price should be lowered to equal the marginal physical product.

4. If the firm's marginal physical product is 8, and its products sell for $70, at a labor cost of $150, the firm is operating
a. short of an optimal input point.
b. at the optimum input point.
c. beyond the optimum input point.
d. at a point where marginal revenue product equals price.
e. There isn't enough information to determine if the input point is optimal.

5. Which of the following indicates an input is being overused relative to the optimal level?
a. MRP = P of input.
b. MRP > P of input.
c. MRP < P of input.
d. MPP < P of output.
e. MPP = total cost.

6. If the MPP of labor is 60 and the price of labor per period is $20, the MPP of machinery is 75 and the price of the machinery per period is $25, in order to achieve optimal input proportions the firm should use
a. more labor and less machinery.
b. more machinery and less labor.
c. more labor with the same amount of machinery.
d. the current combination.
e. more machinery with the same amount of labor.

7. A factory produces 1,000 radios a year, AVC = $10 and TFC = $5,000. The factory's TC
a. equals $15.
b. equals $5,005.
c. equals $15,000.
d. equals $10,000.
e. cannot be determined from the information given.

8. AC is lower in the long run than in the short run because
a. prices often fall, allowing savings on purchases.
b. inputs can be combined more efficiently in the long run.
c. over time the prices of all inputs tend to decrease.
d. AFC falls with output over all ranges of output.
e. of the law of diminishing returns.

9. If a firm increases inputs by 15 percent and output increases by 12.5 percent, the firm is experiencing
a. increasing returns to scale.
b. decreasing returns to scale.
c. constant returns to scale.
d. increasing costs per unit of output.
e. diseconomies of scale.

10. An airline industry study recently reported, "Evidence is abundant that larger firms are not more efficient or less costly simply because they are larger. In fact, other things equal, the largest carriers tend to have a higher level of unit costs, possibly caused by the difficulties of managing an airline of large size." This means that
a. there are increasing returns to scale in the airline industry.
b. the airline industry suffers from diminishing returns to additions of its variable inputs.
c. the larger airlines are not profitable.
d. airlines are experiencing decreasing returns to scale.
e. airlines should merge to become larger.

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Choose the best answer.

11. The goal of the business firm is maximization of ______, and the goal of the consumer is maximization of ______.
a. total sales; marginal income
b. total profit; total utility
c. total output; total utility
d. total sales; marginal utility
e. marginal revenue, marginal utility

12. Marginal revenue is the addition to a firm's revenue from
a. a $1 change in price.
b. a one-unit change in output.
c. the sale of inferior output.
d. a $1 reduction in marginal cost.
e. multiplying market price by total quantity sold.

13. To find a firm's total revenue at every quantity, all you need to know is
a. the demand curve for its product.
b. the demand curve for its product and its total cost.
c. its profit-maximizing price and quantity.
d. its total profit curve.
e. the supply curve for its product.

14. Average cost equals
a. change in total cost/change in quantity.
b. total cost/quantity.
c. total cost - total variable cost.
d. total cost - total fixed cost.
e. quantity/total cost.

15. Average cost
a. is always larger than marginal cost.
b. generally declines for some range of output, hits a minimum, and then increases.
c. is always smaller than marginal cost.
d. is total cost/price of the product.
e. generally rises for some range of output, hits a maximum, and then decreases.

16. Marginal cost
a. equals the slope of the total cost curve.
b. is calculated as dTC/dQ.
c. is the change in total cost resulting from a one-unit increase in output.
d. is constant if a firm can always increase its output by one unit at a marginal cost of $10.
e. All of the above are correct.

17. To find its profit-maximizing output level, a firm should operate where
a. AVC = MC.
b. MC = MR.
c. TFC = TVC.
d. AFC = AVC.
e. TR = TC.

18. A microcomputer manufacturer sells 1,000 units per month at $2,500 each. A price cut to $2,000 is being considered. His marginal cost is constant at $1,500 per unit. To maintain profits, quantity sold must increase to at least
a. 1,500.
b. 2,000.
c. 2,500.
d. 3,000.
e. 3,500.

19. If at optimum output of 1,000 units, the firm is incurring average variable cost per unit of $3, average fixed cost per unit of $1.50, and selling its output at $7 per unit, total profit is
a. $7,000.
b. $2,500.
c. $1,500.
d. $250.
e. zero.

20. A firm has positive fixed cost and positive variable cost. At its current level of output, marginal cost equals average cost. The firm must
a. not be producing at its profit-maximizing level of output.
b. be producing the quantity that minimizes average cost.
c. be operating at a point at which total variable cost equals total fixed cost.
d. be earning negative profit.
e. be operating at a point at which total variable cost equals total cost.