1.
Can a firm have a production function that exhibits increasing returns to
scale, constant returns to scale, and decreasing returns to scale as output
increases? Discuss.: Many firms have production functions that first exhibit increasing, then constant, and ultimately decreasing returns to scale. At low levels of output, a proportional increase in all inputs may lead to a larger-than-proportional increase in output, because there are many ways to take advantage of greater specialization as the scale of operation increases.
2.
Can an isoquant ever slope upward? Explain.: No. An upward sloping isoquant would mean that if you increased both
inputs output would stay the same.
3.
Explain which of the following items in each pair is more price elastic: The demand for a specific brand of toothpaste and the demand for
toothpaste in general: The demand for a specific brand is more elastic because the consumer can easily switch to another brand if the price goes up.
4.
Explain which of the following items in each pair is more price elastic. The demand for gasoline in the short run and the demand for gasoline in
the long run: Is more elastic since consumers have more time to adjust to a change in price.
5.
Explain why the marginal rate of technical substitution is likely to diminish as
more and more labor is substituted for capital.: As more and more labor is substituted for capital, it becomes increasingly difficult for labor to perform the jobs previously done by capital. Therefore, more units of labor will be required to replace each unit of capital, and the MRTS will diminish
6.
For food, is a price increase likely to lead to a
substantial income (as well as substitution) effect?: Large income effect, virtually no substitution effect: As with housing, the amount of income spent on food is relatively large for most consumers, so the income effect is large.
7.
For housing, is a price increase likely to lead to a
substantial income (as well as substitution) effect?: Large income effect, small substitution effect: The amount of income spent on housing is relatively large for most consumers.
8.
For salt, is a price increase likely to lead to a
substantial income (as well as substitution) effect?: Small income effect, small substitution effect: The amount of income that is spent on salt is very small, so the income effect is small.
9.
For theater tickets, is a price increase likely to lead to a substantial income (as well as substitution) effect?: Small income effect, large substitution effect: The amount of income spent on theater tickets is relatively small, so the income effect is small.
10.
It is possible to have diminishing returns to a single factor of production and
constant returns to scale at the same time. Discuss.: Diminishing returns and returns to scale are completely different concepts, so it is quite possible to have both diminishing returns to, say, labor and constant returns to scale. Diminishing returns to a single factor occurs because all other inputs are fixed. Thus, as more and more of the variable factor is used, the additions to output eventually become smaller and smaller because there are no increases in the other factors.
11.
Suppose that an individual allocates his or her entire budget between two
goods, food and clothing. Can both goods be inferior?: No, the goods cannot both be inferior; at least one must be a normal good.
12.
True or False? The level of utility increases as an individual moves downward along
the demand curve.: True. As the price of a good falls, the budget line pivots outward, and the consumer is able to move to a higher indifference curve.
13.
True or False? The marginal rate of substitution diminishes as an individual moves
downward along the demand curve.: True. The consumer maximizes his utility by choosing the bundle on his budget line where the price ratio is equal to the MRS.
14.
Why does production eventually experience diminishing marginal returns to
labor in the short run?: because there will be
at least one fixed factor of production, such as capital.
