Economics 【Reading 15】Sample following, include, example, 2012

Mechanic

Which of the following is an example of an implicit cost?

A) Labor salaries.

B) Rent.

C) The opportunity cost of a firm's equity capital.

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Implicit costs include the opportunity cost of a firm's equity. Explicit costs are measurable cash flows for operating expenses.

terpsichorefan

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dkishore1

Which of the following most accurately describes the relationship between marginal cost (MC), average variable cost (AVC), marginal product (MP), and average product (AP)?

A) When MP > AP, MC > AVC.

B) When MP = AP, MC = AVC.

C) When MP = AP, MC > AVC.

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At some output level Q and corresponding labor input L, MC = AVC and MP = AP. At Q and L, AVC is at its minimum and AP is at its maximum. Hint: draw the curves.

dkishore1

Which of the following conditions is most likely to exist for a typical production process when average product is at its maximum?

A) Average variable cost is at a minimum.

B) Marginal product is increasing.

C) Marginal cost is at a minimum.

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When average product is at a maximum, average variable cost is at a minimum. At the corresponding labor and output level, marginal product is decreasing and marginal cost is increasing.

dkishore1

A firm should continue adding to its capital until the marginal revenue product of capital is:

A) equal to the marginal revenue product of labor.

B) equal to the cost of capital.

C) greater than the cost of capital.

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A firm should continue to accept capital projects until the marginal revenue product of capital (the value added) is equal to the cost of capital. Prior to this point, the firm gains from each unit of capital added.

dkishore1

The quantity of labor that a profit maximizing firm will employ, holding other input factors constant, is the level at which:

A) one more unit of labor would cost less than the value of its additional output.

B) the marginal revenue product of labor is equal to the wage rate.

C) the marginal product of labor is equal to the marginal cost of labor.

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For any productive input, including labor, a profit maximizing firm will employ additional units of the input until its marginal revenue product is equal to its price (the wage rate is the price of labor). If one more unit of labor would cost less than the value of its additional output, the firm will increase profits by adding that unit. Marginal product is measured in units of output and cannot be compared directly to marginal cost, which is measured in units of money.

dkishore1

Marginal revenue product is best defined as the:

A) gain in total revenue from selling one more unit of output.

B) additional output that results from employing one more unit of a productive input.

C) addition to total revenue from selling the additional output from using one more unit of an input.

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The marginal revenue product is the addition to total revenue from selling the additional output that one more unit of an input can produce. The additional output that results from employing one more unit of a productive input is the marginal product. The gain in total revenue from selling one more unit of output is the marginal revenue. A marginal revenue product exists for any level of output; it is not limited to the level at which marginal revenue equals marginal cost.

dkishore1

The increase in total revenue from selling the additional output of one more unit of an input is called the input’s:

A) marginal revenue product.

B) factor of production.

C) marginal revenue.

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The marginal revenue product of an input is the addition to total revenue gained by selling the additional output from employing one more unit of that input.

dkishore1

A shop foreman determines that an employee would produce two more units of output if he worked one additional hour. The product currently sells for $15.00 per unit and the firm is a price taker. Which of the following choices most accurately describes the relationship between the marginal revenue (MR) and marginal revenue product (MRP) from the additional hour of labor input?

A) MR = $15 and MRP < MR.

B) MRP > MR.

C) MRP = MR.

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By definition, the MR is the addition to total revenue from selling one more unit of output. The MRP is the revenue from selling the marginal product, which in this example is two units. Therefore the MRP must be greater than the MR.

dkishore1

Are the following two statements about the marginal revenue product (MRP) of a factor of production accurate?
Statement 1: In a price taker market, the MRP of an input is the marginal product of the input multiplied by the price of the output it generates.
Statement 2: If we compare any two productive inputs, the one with the higher MRP will earn greater economic rent.

Statement 1

Statement 2

A) Incorrect Correct

B) Correct Incorrect

C) Correct Correct

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Statement 1 is correct. MRP is the addition to total revenue from selling the output generated by one more unit of input. In a price taker market (i.e., perfect competition), marginal revenue is equal to price. Therefore, the MRP is the marginal product of the input times the output price. Statement 2 is incorrect. The extent to which a factor of production earns economic rent depends on the shape of its supply curve. An input with a high MRP might earn very little economic rent if the supply of the input is highly elastic. An input with a relatively lower MRP can earn significant economic rent if its supply is highly inelastic.