Quiz on Production Theory and Estimation E303 Spring 02

1. Which of these must happen if there are diminishing marginal returns to an input?
A. the production function eventually declines
B. the marginal product eventually declines
C. the marginal product eventually becomes negative
D. all inputs are eventually decreased

2. Which of the following best defines the "marginal revenue product" in words?
A. the extra product when you increase one input by a unit holding others constant
B. the extra product, valued at its market price, when you increase one input by a unit
holding others constant
C. the extra product you can purchase with one extra dollar of money
D. the extra money you can earn by selling one unit of product

3. Find the expression for the marginal rate of technical substitution for a production
function Q = AK.7L.3 (you can assume that K is on the vertical axis).
A. AK.7L.3
B. -K/L
C. -.3K/.7L
D. - .7K/.3L
E. -AKL

4. Define "decreasing returns to scale".

A. when increasing an input holding others constant, the marginal product eventually
declines
B. when decreasing output by 10% the revenue decreases by less than 10%
C. when increasing each input by 10% the output increases by more than 10%.
D. when increasing each input by 10% the output increases but by less than 10%
E. when increasing each input by 10% the output decreases by 10%.

5. For the Cobb Douglas production function, Q = 100K.4L6 , assume that the input
prices for capital and labor are r=20 and w=10. If you are required to employ L=60
workers and are given the necessary production budget, what is the allocatively efficient
quantity of capital, K, to use?
A. K=100
B. K=20
C. K=40
D. K=16
E. K=60
For the next question, fill in the blanks in the following table and insert the correct
response on you Scantron. Notice that "marginals" are defined in this case using the
practical assumption that the change in labor is one whole unit.

Amount of labor Output of parts Average product Marginal product

0 0 - -
1 49 49 49
2 132 66 83
3 243 81 missing marg. prod.
4 376 missing ave product 133

6. The missing average product and the missing marginal product in the above table are
A. 94 and 111
B. 90 and 83
C. 34 and 49
D. 94 and 120
E. 98 and 132

7. Let the production function for your product be Q = 120 + 20L - .21L2. Assume that
laborers are paid a wage of $30 and that your product sells for $45. Approximately how
many laborers should you hire?
A. 120
B. 32
C. 12
D. 46
E. 104

8. Which of the following best defines an isoquant? (You can assume that we are
defining it in the context of the K by L quadrant).
A. a collection of all points where the marginal product of labor is the same
B. a collection of all points where the marginal rate of technical substitution is the same
C. a collection of all points where the output is the same
D. a collection of all points where the profit is the same
E. a collection of all points where the quantity of labor is the same

9. The equation such as (Q/K)/r = (Q/L)/w, is a condition of production required

to achieve which of the following?
A. allocative efficiency
B. profitable production
C. pricing below your competitor
D. just in time production
E. modern design
The following four questions pertain to the summary output table below, which can be
assumed to come from a regression of a the log/log version of a Cobb-Douglas
production function estimated over five input variables.

Summary Output
REGRESSION STATISTICS
Adj R Squared 0.895
Observations 36
ANOVA df F Signif
Regressors 5 60.81 8.61E-15
Residual 30
REGRESSION Coeffs. Stnd Error t statistics
Intercept 5.943 0.237 25.04
ln Skilled labor 0.143 0.019 7.44
ln Unskilled L 0.007 0.035 0.21
ln Equipment 0.028 0.017 1.62
ln Materials 0.328 0.023 14.21
ln Other inputs 0.003 0.025 0.12

10. Which statistic tests the hypothesis that the true mean values for all five input
regression coefficients are zeroes, and which does the reported data imply is true
regarding that hypothesis, that it should be rejected or accepted?
A. R square, and the hypothesis is accepted
B. F statistic, and the hypothesis is accepted
C. t statistic, and the hypothesis is accepted
D. R square, and the hypothesis is rejected
E. F statistic, and the hypothesis is rejected

11. Which of the regression coefficients contributes significantly to production of this

output using the usual two-tailed test of significance?
A. Skilled labor, Unskilled labor, and Materials
B. Skilled labor and Materials
C. Skilled labor, Equipment, and Materials
D. Equipment and Other inputs
E. none of the above

12. Which statistic measures "goodness of fit," and by our usual rules of thumb would
you say that this is equation is a good fit or a poor fit?
A. F statistic, and this is a poor fit
B. R squared statistics, and this is a poor fit
C. t statistic, and this is a poor fit
D. R squared statistic, and this is a good fit
E. t statistic and this is a good fit
13. Find the "output elasticity" in this estimated equation:
A. 0.51
B. 1.23
C. 1.00
D. 0.78
E. 3.89

14. Considering a pair of inputs, capital and labor, suppose that presently the ratios of
marginal product to input price were '34 widgits per dollar for capital' and '22 widgits
per dollar for labor'. Which of the following can you logically conclude?
A. capital is being overutilized compared to labor
B. labor is being overutilized compared to capital
C. the firm has achieved allocative efficiency
D. the firm should hire more of both inputs
E. none of the above

15. The statistic "Adjusted R squared", we have said, adjusts the initially calculated R
squared for some possibly misleading difference of the study at hand from the typical
study. What is it that Adjusted R squared adjusts for?
A. erroneous t statistics
B. differences in degrees of freedom
C. too many independent variables
D. values that are lost due to rounding