Explain how a firm should produce its output not how much

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Practice Problems

Fall, 2004

State whether each of the following remarks is true, false or uncertain, and then give a brief (but good!) explanation as to why. Each remark is "worth" 12 points; 4 for "T, F or U", 8 for your explanation.

1. True, False or Uncertain: Sales and excise taxes are usually more harmful to consumers than they are to producers because these types of taxes almost always involve a transfer of consumer surplus to producers.

2. True, False or Uncertain: The government can be guaranteed to reduce the cost and increase the availability of health care services provided to the elderly by taxing the buyers of the service (the elderly) and subsidizing the health care providers.

3. True, False or Uncertain: An excise tax is most effective for revenue generating purposes when the good being taxed has a fairly flat demand curve. A sales tax is most effective at raising revenues when the good being taxed has a fairly flat supply curve.

4. A manufacturer operating in the short run observes that the price of its product is rising. True, False or Uncertain: This firm will probably be forced into reducing its output and laying off some of its workers.

5. The manager of an plastic pipe fittings plant finds that she can get the same level of output using two different capital-to-labor ratios (K/L), one where capital used exceeds labor used, one where labor used exceeds capital used. Labor hired by this operation is fairly cheap so the costs per unit of capital exceed costs per unit of labor. True, False or Uncertain: Assuming she is capable of doing so, this manager should orient production toward using more labor than capital.

6. True, False or Uncertain: The capital-labor ratio of a cost minimizing firm in the long run indicates how a firm should produce its output, not how much output it should produce.

Reference no: EM1338394

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