Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 7] COSTS OF PRODUCTION 155
7. If the LAC curve falls as output expands, this is due to (a) economies of scale, (b) the law of diminishing returns,
(c) diseconomies of scale, or (d) any of the above.
Ans. (a) See Section 7.5.
8. When a ¼ 3/4 and b ¼ 1/4 for the Cobb-Douglas production function, returns to scale are (a) constant, (b) increasing,
(c) decreasing, or (d) first increasing and then decreasing.
Ans. (a) Because a þ b ¼ 1. See Section 8.1.
9. The output elasticity of labor measures (a) (DQ)/(DL), (b) (%DQ)/(%DL), (c) (DL)/(DQ), or (d) (%DL)/(%DQ).
Ans. (b) See Section 7.8.
10. Which of the following statements is false with regard to X-inefficiency? (a) It measures the degree by which the
output of a commodity falls short of the maximum indicated by the production function; (b) it results from lack of
adequate motivation; (c) it has been found to exist, according to several empirical studies; or (d) all of the above.
Ans. (d) See Section 7.9.
11. Technological progress refers to (a) an increase in MP L and MP K ,(b) the reduction in L and K to produce any level
of output, (c) a shift of the isoquants toward the origin, or (d) all of the above.
Ans. (d) See Section 7.10.
12. Labor-using technological progress (a)meansL-deepening, (b)meansK-saving, (c)reducesK/L,or(d) all of the above.
Ans. (d) See Example 8.
Solved Problems
SHORT-RUN COST CURVES
7.1 (a) What are some of the implicit costs incurred by an entrepreneur in running a firm? How are these
implicit costs estimated? Why must they be included as part of costs of production? (b) What price does
the firm pay to purchase or hire the factors it does not own?
(a)
(b)
An entrepreneur must include as part of the costs of production not only what this person actually pays out
to hire labor, purchase raw and semifinished materials, borrow money, and rent land and buildings (the
explicit costs) but also the maximum salary that the entrepreneur could have earned working in a similar
capacity for someone else (say, as the manager of another firm). Similarly, the entrepreneur must
include as part of the costs of production the return in the best alternative use from the capital, land,
and on any other factor of production that this person owns and uses in the enterprise. These resources
owned and used by the firm itself are not “free” resources. The (implicit) cost to the firm involved in
using them is equal to the (best) alternatives foregone (i.e., what these same resources would have
earned in their best alternative use). Whenever we speak of costs in economics or draw cost curves, we
always include both explicit and implicit costs.
For the inputs which the firm purchases or hires, the firm must pay a price at least equal to what these same
inputs could earn in their best alternative use. Otherwise, the firm could not purchase them or retain them for
its use. Thus the cost to the firm involved in the use of any input, whether owned by the firm (implicit cost) or
purchased (explicit cost), is equal to what the same input could earn in its best alternative use. This is the
alternative or opportunity cost doctrine.
Throughout this chapter, we assume that factor prices remain constant, regardless of the quantity of each
factor demanded by the firm per unit of time. That is, we assume that the firm is a perfect competitor in the
factor market. (Changes in factor prices and their effect on cost curves are considered in Chapter 9. The
discussion of how factor prices are actually determined is deferred to Chapter 13.)