Question

1. Domino brand sugar and C&H brand sugar are perfect substitutes in production for Paradise Bakery and the slope of its isoquants is 1 (in absolute value). In January of 2014 Paradise Bakery used 200 bags of Domino sugar and 20 bags of C&H sugar. (The bags of sugar from both companies are the same size and Paradise Bakery behaves optimally.)

Domino sugar costs less to use than C&H sugar

Domino sugar costs more to use than C&H sugar

Domino sugar and C&H sugar cost the same

Paradise enjoys a lower marginal product from C&H sugar than Domino sugar

None of these.

2.Which of the following statements about the short-run production function is true?

MP always equals AP at the maximum point of MP.

MP always equals zero when TP is at its maximum point.

TP starts to decline at the point of diminishing returns.

When MP diminishes, AP is at its minimum point.

None of these options are true.

3.If a firm moves from one point on a production isoquant to another point on the same isoquant, which of the following will certainly not happen?

A change in the level of output

A change in the marginal products of the inputs

A change in the rate of technical substitution

A change in profitability

All of these.

4.Which of the following holds true?

When the Marginal Product (MP) is rising, Marginal cost (MC) is rising; and when MP is falling, MC is falling.

When MP is rising, MC is constant, and when MP is falling, MC is negative.

There is no relationship between MP and MC.

When MP is rising, MC is falling, and when MP is falling, MC is rising.

Answer 1

Answer-1. Domino sugar costs less to use than C&H sugar.

Domino brand sugar and C&H brand sugar are perfect substitutes in production for Paradise Bakery. So, Paradise Bakery used that brand of sugar more which cost is less because both are perfect substitutes. Perfect substitutes goods , if the utility consumers get from one good is the same as another.

Answer-2. MP always equals zero when TP is at its maximum point.

The Law of variable proportion states that the production function with one factor variable, keeping the quantities of other factors fixed. It refers to the input-output relation when output is increased by varying the quantity of one input. In the second stage of Law of variable proportion when TP reaches its maximum, MP becomes Zero.

Answer-3. A change in the level of output.

An isoquant is a curve that shows all the combinations of inputs that yield the same level of output. 'Iso' means equal and 'quant' means quantity. Therefore, an isoquant represents a constant quantity of output. So, if a firm moves from one point on a production isoquant to another point on the same isoquant a change in the level of output will certainly not happen.

Answer-4. When MP is rising, MC is falling, and when MP is falling, MC is rising.

After this, if we increase the amount of variable factors knowing that fixed factors have already been used upto their maximum limit, then stage of diminishing returns or increasing cost arises (MP falls and MC starts rising). This is the reason, that MC is reciprocal of MP.