Question

21. Suppose the company E-bikes R US has isoquants that are straight lines or L-shaped. To
cost minimize, E-bikes R US will
A) not be able to minimize costs.
B) find the lowest isocost line touching the relevant isoquant.
C) find the highest isocost line touching the relevant isoquant.
D) choose not to produce any output.

22. Suppose each mechanic must use only one wrench to fix the car, and wrenches are useless
by themselves. In the long run, the firm will experience
A) increasing returns to scale.
B) constant returns to scale.
C) decreasing returns to scale.
D) The returns to scale cannot be determined from the information provided.

23. Suppose that for the company E-bikes R US, a unit of capital costs three times as much as
a unit of labor. If MPK = 100, MPL = 50, then this firm
A) is minimizing its cost at current output level.
B) should use more capital and less labor to raise output at current cost.
C) should use less capital and more labor to raise output at current cost.
D) None of above.

24. In the long-run, the average cost is never higher than the short-run average cost because
in the long run
A) capital costs equal zero.
B) the firm can move to the lowest possible isocost curve.
C) wages always increase over time.
D) wages always decrease over time.

25. After 3 years of being in business, the bike builders at E-bikes R US have become more
adept because of the overall number of bikes built over that time. As a result, the average cost
of production is lowered due to
A) economies of scale.
B) increasing returns to scale.
C) increasing marginal returns.
D) learning by doing.

26. Suppose that the number of e-bike producers increase. The residual demand curve for
each e-bike firm becomes
A) more elastic.
B) less elastic.
C) larger.
D) vertical.

Answer 1

21) The correct option is B. The cost minimising output level is found at the point where isoquant touches the lowest possible isocost line. An isoquant shows different combination of inputs which can produce same level of output. An isocost line shows different bundle of factors which costs the same amount. In case, isoquants are L shaped, we will get the optimal output (maximum output at lowest cost) at the point where isoquant touches the lowest possible isocost line.