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Exam 13: Firms Production Decisions

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Question 21

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In theory, a cost-minimising firm will choose

A) not to produce any output.
B) the lowest isocost line tangential to the relevant isoquant.
C) the highest isocost line tangential to the relevant isoquant.
D) any combination of the factors between where the isocost line cuts through the isoquant line.

E) A) and B)
F) A) and C)

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Question 22

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Assuming there are only two factors of production required, the slope of the isocost line shows

A) the marginal rate of substitution.
B) the ratio of capital to labour.
C) the best combination of those factors to use.
D) the potential combination of those factors for a given level of output.

E) C) and D)
F) B) and C)

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Question 23

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Suppose the production function for good q is given by q = 3K + 2L where K and L are capital and labour inputs. Consider three statements about this function: I. The function exhibits constant returns to scale. II) The function exhibits diminishing marginal productivities to all inputs. III) The function has a constant rate of technical substitution. Which of these statements is true?

When are the factor inputs, labour and capital, perfect substitutes and how does this affect the shape of the isoquant line?

There are an infinite number of isocost lines, corresponding to every possible level of total cost.

How does a change in the price of one input change the least cost combination?

An increase in the wage rate will have a greater effect on average costs

The low-cost input combination is the point where the isocost line cuts through the isoquant curve.

The marginal rate of technical substitution of labour for capital measures

-Refer to the figure above. A firm's isocost line would shift from C to B if

-Refer to the figure above. A firm's isocost line would shift from A to C if

After analysing factor input data, a firm as established that: $\begin{array}{|l|l|}\hline \text { A change in one hour of labour } & \text { Would change output by } 100 \text { units a day } \\\hline \text { A change in one hour of capital } & \text { Would change output by } 20 \text { units a day } \\\hline \text { Labour costs per hour } & \text { R50 } \\\hline \text { Capital costs per hour } & \text { R5 } \\\hline\end{array}$ Can the firm increase its production without increasing its budget?

Construct isoquant lines for the following data $\begin{array}{|l|l|l|l|l|}\hline \text { Daily output } & \text { Option } 1 & \text { Option } 2 & \text { Option } 3 & \text { Option } 4 \\\hline \text { Output }=250 \text { units } & 6 \mathrm{~K}+1 \mathrm{~L} & 4 \mathrm{~K}=3 \mathrm{~L} & 2 \mathrm{~K}+8 \mathrm{~L} & \text { none } \\\hline \text { Output }=500 \text { units } & 9 \mathrm{~K}+1 \mathrm{~L} & 7 \mathrm{~K}+2 \mathrm{~L} & 4 \mathrm{~K}+5 \mathrm{~L} & 3 \mathrm{~K}+9 \mathrm{~L} \\\hline\end{array}$

Explain, using examples, the difference between specific factor intensive firms.

Any point where the isocost line cuts the isoquant line is a possible combination of factors that could be used.

A firm's isoquant shows

$\begin{array} { | c c | } \hline K & L \\\hline 8.4 & 0 \\7.8 & 1 \\7.2 & 2 \\6.6 & 5 \\6.0 & 4 \\5.4 & 5 \\4.8 & 6 \\4.2 & 7 \\3.6 & 8 \\3.0 & 9 \\2.4 & 10 \\1.8 & 11 \\1.2 & 12 \\0.6 & 13 \\0 & 14 \\\hline\end{array}$ -Refer to the table above. The price of labour is R60 per hour and the price of capital is R100 per hour. Then it follows that in relation to 3 hours of capital, the total labour costs that could be afforded would be:

-Refer to the figure above showing the possible production functions of a fictitious pizza firm. For an output of 600 pizzas which combinations of capital and labour can be used?

$\begin{array} { | c c | } \hline K & L \\\hline 8.4 & 0 \\7.8 & 1 \\7.2 & 2 \\6.6 & 5 \\6.0 & 4 \\5.4 & 5 \\4.8 & 6 \\4.2 & 7 \\3.6 & 8 \\3.0 & 9 \\2.4 & 10 \\1.8 & 11 \\1.2 & 12 \\0.6 & 13 \\0 & 14 \\\hline\end{array}$ -Refer to the table above. If the price of labour is R60 an hour and the price of capital R100 an hour, the total budget available is:

$\begin{array} { | c c | } \hline K & L \\\hline 8.4 & 0 \\7.8 & 1 \\7.2 & 2 \\6.6 & 5 \\6.0 & 4 \\5.4 & 5 \\4.8 & 6 \\4.2 & 7 \\3.6 & 8 \\3.0 & 9 \\2.4 & 10 \\1.8 & 11 \\1.2 & 12 \\0.6 & 13 \\0 & 14 \\\hline\end{array}$ -Refer to table above. If capital hours are drawn on the vertical axis and labour hours are drawn on the horizontal axis, then the budget line would intersect the vertical axis at ___ and the horizontal axis at ___.