Chapter 7 True or False Quiz

. The production function is an equation, table, or graph that shows the maximum output that can be produced from different combinations of inputs.

. Production refers to all activities involved in the production of goods and services.

. Fixed inputs are those that can never be changed.

. All inputs are variable in the long run.

. All inputs are fixed in the short run.

. Scale is a short-run concept.

. The firm plans in the short run and operates in the long run.

. The slope of the short-run production function is equal to the average product of the variable input.

. Output elasticity is equal to the marginal product of an input divided by the average product of the input.

. The law of diminishing returns is a long-run concept.

. The marginal product of the variable input is at a maximum at the level of output that corresponds to the inflection point on the short-run production function.

. The average product and the marginal product of the variable input are equal at the level of output that corresponds to the inflection point on the short-run production function.

. When an input's average product exceeds its marginal product, average product is increasing.

. The law of diminishing returns holds that the marginal product of a variable input will eventually decline if output is increased while at least one input is fixed.

. Stage II of production begins at a level of output where the average product of the variable input is at a maximum and ends where the marginal product of the variable input is equal to zero.

. Stage I of production begins where the average product of the variable input is equal to the marginal product of the variable input.

. In general, a firm should continue to hire additional units of an input so long as the marginal revenue product of the input is greater than the marginal resource cost of the input.

. The marginal revenue product of an input is equal to the change in the firm's total revenue that results from employing an additional unit of a variable input.

. The marginal resource cost of an input is equal to the change in total cost that results from hiring an additional unit of a variable input.

. The marginal resource cost of an input is identical to the firm's demand curve for that input.

. An isoquant shows all combinations of two inputs that will result in the same level of output.

. Ridge lines drawn on an isoquant map separate Stage II from Stages I and III of production.

. Firms will only operate at points on an isoquant map that are between the ridge lines.

. The absolute value of the slope of an isoquant is equal to the ratio of the marginal products of the inputs.

. The marginal rate of technical substitution measures the number of units of one input that can be dispensed with while holding output constant when one additional unit of the other input is added.

. The closer an isoquant is to a straight line, the closer the inputs are to being perfect complements.

. If the marginal rate of technical substitution is the same at all points on an isoquant, then the two inputs are perfect substitutes.

. The isocost line represents all combinations of inputs that have the same total cost.

. The absolute value of the slope of the isocost line is equal to the ratio of input prices.

. If two isocost lines are parallel, then both have the same input price ratio but the one further from the origin represents a higher level of total cost.

. If a firm is minimizing the total cost of producing a given level of output, then it must also be maximizing the level of output produced at a given level of total cost.

. The point of tangency between a convex isoquant and an isocost line represents an optimal combination of inputs.

. Every point on an expansion path represents a combination of inputs that minimizes the cost of producing a given level of output.

. All expansion paths are straight lines through the origin.

. If a firm is maximizing profit, then it must be employing a combination of inputs that is on its expansion path.

. If a firm is employing a combination of inputs that is on its expansion path, then it must be maximizing profits.

. If the price of an input increases, then the firm will use more of it.

. If a firm is experiencing increasing returns to scale, then a doubling of output will require more than a doubling of all inputs.

. Decreasing returns to scale arise because of increased specialization and division of labor at higher levels of output.

. Most firms operate at a level of output that results in nearly constant returns to scale.

. One advantage of the use of the Cobb-Douglas production function for empirical estimation is that it can be expressed as a linear function.

. If the sum of the output elasticities for a production function is greater than one, then the production function exhibits decreasing returns to scale.

. The law of comparative advantage postulates that even if a nation is less efficient or has an absolute disadvantage with respect to another in the production of all commodities, there is still a basis for mutually beneficial trade.

. A country that has an absolute advantage in the production of a particular good must also have a comparative advantage in the production of that good.

. A country that has a comparative advantage in the production of a particular good must also have an absolute advantage in the production of that good.

. Product differentiation exists when an industry produces goods that are not identical.

. Intra-industry trade allows each country to specialize in some variation of a product.

. A country will import goods in which it has a comparative advantage and export goods in which it has a comparative disadvantage.

. A country that has a relative abundance of cheap labor will tend to have a comparative advantage in the production of goods that are produced using a lot of labor.

. Most innovations involve revolutionary departures from previous practices and products.

. Product innovation is shown on an isoquant map by a shift in all isoquants toward the origin.

. The product cycle model asserts that innovating firms tend to achieve long-term domination of markets.

. Innovation tends to be stimulated by an environment where firms are protected from competitive forces.

. American firms generally stress product innovation while Japanese firms stress process innovation.

. One disadvantage of modern computerized production methods is that they tend to reduce the optimal lot size, thus reducing total profits.

. Most innovations are based on new technologies and ideas.

. The use of robots on automobile assembly lines is an example of product innovation.

. CAD is an acronym that stands for capital-assisted development.

. CAM is an acronym that stands for computer-aided manufacturing.

. CAD-CAM allows firms to develop products more rapidly and at a lower cost.

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