Lamar University

EXERCISE QUESTIONS II 

Economics 5370

Part A. True-False Questions:

1)Other things being equal, an increase in money supply in the U.K. will results in depreciation of U.K. pound with respect to the currencies of other countries.

2. If the expected future spot exchange rate is higher than the forward exchange rate for a foreign

Exchange (e.g., $/£), then speculators will increase their investment to the foreign exchange (£).

3. If one country has a comparative advantage in one commodity as compared with the other country, it must also have an absolute advantage in that commodity.

4. As compared with other country, one country may have a comparative advantage in a commodity even if it has an absolute disadvantage in that commodity.

5. When a firm is taking a neutral stance in foreign exchange holding, it is speculating.

6. When a firm is deliberately taking a long or short position in foreign exchange holding, it is speculating.

7. According to the Purchasing Power Parity Theorem and the Quantity Theory of Money, other

things being equal, a rise in U.S. real GDP would cause depreciation of foreign currency

8. When two inputs are imperfect substitutes, the isoquant is a downward and straight line in the economic range of production.

9. The negative of the slope of an isoquant represents the price ratio of the two inputs.

10. The negative of the slope of an isocost line represents the ratio of the marginal products of the       two inputs (MRTS).

11. When labor and capital are imperfect substitutes, the marginal rate of substitution (of labor for

capital) increases along the isoquant as the amount of labor increases and the amount of capital decreases.

12. When the two inputs are perfect substitutes, the isoquant is convex to the origin.

13. When the two inputs are perfect substitutes, the cost minimization is attained by:

using one of the two inputs, or all input combinations for an output are the same in total cost.

14. When the two inputs are perfect substitutes, marginal rate substitution of labor for capital decreases as labor increases and capital decreases along the isoquant.

15. Assuming the case of imperfect substitute inputs, the region inside of the two ridge lines (in the isoquant diagram) is where the marginal products of both of the two inputs are positive.

and it is called “economic range of production.”

16. Assuming the case of imperfect substitute inputs, in the region outside the two ridge lines (in the isoquant diagram), MPs of both of the two inputs are negative.

17. If an isoquant is L-shaped, MRTS decreases along the isoquant.

18. Assuming the case of imperfect substitute inputs, a firm employs inputs a and b in a cost- minimizing or output-maximizing manner when MP_a/P_a = MP_b/P_b.

19. Assuming the case of imperfect substitute inputs, a firm employs inputs a and b in a profit- maximizing manner when MRP_i = MC_i (where MRP_i = Marginal Revenue Product of input i and MC_i = Marginal Cost of input i for i = a, b).

20. Assuming that the inputs a and b are imperfect substitutes, if a firm employs the two inputs to produce output with a given total cost such that MP_a/P_a > MP_b/P_b, then it can increase the output with the same total cost by using more a and less b.

21. The law of diminishing returns is a long-run phenomenon describing the relationship between input combinations and output.

22. Economic cost can be defined as compensation necessary to attract and retain inputs away from other uses, and it is same as the opportunity cost of using the inputs.

23. For an implicit cost, actual payment takes place for the use of the input.

24. Economic costs include only explicit costs.

25. Normal profit is an economic cost because it is a compensation necessary to attract and retain the owner's entrepreneurship and capital investment away from other uses.

26. TP decreases when MP decreases.

27. MP cuts AP's minimum point.

28. The law of diminishing returns results in an eventually falling short-run marginal cost curve.

29. When the firm uses more material inputs to increase production at the present plant, it is a long-run adjustment.

30. “Five new firms enter the plastic industry.” is a short-run statement.

31. The relationship between the marginal product (MP) and the average product (AP) is that if MP is greater than AP, AP must be falling.

32. If a firm decides to produce no output in the short-run, its costs will be its total variable costs.

33. The relationship between the marginal cost (MC) and the average total cost (ATC) is that the behavior of one does not affect the other.

34. In the short-run, in comparing the change in total variable cost (TVC) and total cost (TC) associated with an additional unit of output, the change in TC is greater than the change in TVC.

35. The short-run marginal product of a variable input has an inverse relationship with the marginal cost.

36. The short-run marginal cost falls for a time, then begins to rise when the point of diminishing returns is reached.

37. The short-run average product of a variable input has an inverse relationship with the average

fixed cost.

38. When diseconomies of scale are present, the long-run ATC curve falls.

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curve rises, (ii) when economies of scale (=IRS) are present, the long-run ATC curve falls.

39. Economies and diseconomies of scale explains why the short-run ATC curve is U-shaped.

40. The optimal plant size in the long-run depends on the output that the firm plans to produce.

41. The minimum efficient scale (MES) of a firm is the lowest output at which the long-run ATC is minimized.

42. When it is more expensive for a firm to produce two or more products jointly than separately, economies of scope are present.

43. When the cost elasticity (= %change in LTC/%change in Q) is greater than 1, increasing returns to scale (IRS) are present.

44. If the price of labor increases in the iso-cost diagram with labor (capital) measured on the horizontal (vertical) axis, then the vertical intercept does not change but isocost line will shift to the inside and becomes steeper.

45. If the price of capital increases in the isocost diagram with labor (capital) measured on the horizontal (vertical) axis, then the horizontal intercept does not change but isocost line will shift to the inside and becomes flatter.

46. Short-run cost is higher than long-run cost at each level of output, except at one output (where

the short-run and long-run costs are the same because here the size of the firm’s present plant coincides the plant size required by the condition for the optimal input combination (i.e., MP_L/P_L = MP_K/P_K)).

47. The Monopoly caused by economies of scale is called government monopoly.

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48. At the break-even point where economic profit is zero, the owner of the firm makes only normal profit (without making any economic profit).

49. In the presence of implicit cost, economic profit is greater than accounting profit.

50. When the two inputs are substitutes in production, the isoquant is downsloping in the economic range of production.

51. The marginal rate of technical substitution (MTRS) of an isoquant represents the marginal productivity ratio of the two inputs.

52. Assuming labor (L) and capital (K) are perfect substitutes, if MP_L/P_L < MP_K/P_K, optimal input combination requires use of only capital without any labor.

53. Average product (AP) curve cuts the maximum point of marginal product (MP) curve.

54. A sunk cost is the cost incurred as the result of an irreversible past decision, and hence it has no opportunity cost.

55. AP and AFC have an inverse relationship.

56. MP and MC have an inverse relationship,

57. Increasing or decreasing returns to scale is a long-run production phenomenon.

58. Average fixed cost goes down so long as output increases.

59. In the Stage One of production in the short-run, the input elasticity of production is less