Test Bank Docx The Cost of Production 182 Zupan Chapter 8 - Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key by Edgar K. Browning, Mark A. Zupan. DOCX document preview.
Package: Test Bank
Title: Microeconomics: Theory and Application, 13e
Chapter Number: 8
Question Type: Multiple Choice
1. Which of the following most completely describes the cost to a firm associated with the use of its resources in a particular way?
a. Its monetary outlay for inputs
b. Its explicit cost
c. The implicit cost of not renting its own resources
d. The opportunity cost of its resources
Learning Objective: Delineate the nature of a firm’s cost—explicit as well as implicit.
2. Which of the following can be classified as an implicit cost of production?
a. The cost of raw materials
b. Rent forgone on the office building
c. Interest paid on debt
d. Salary paid to workers
Learning Objective: Delineate the nature of a firm’s cost—explicit as well as implicit.
3. Sally Doe has her own law practice. She pays $1,500 in rent for her offices per month. She also pays $4,000 a month in salaries to secretaries and staff, utility bills worth $500 a month, and miscellaneous bills worth $1,000 a month. She recently received an offer to work for a legal firm for $8,000 a month, but she declined that in order to run her own practice. Which of the following most completely describes the cost Jane incurs per month to run her own practice?
a. $15,000
b. $7,000
c. $5,500
d. $6,000
Learning Objective: Delineate the nature of a firm’s cost—explicit as well as implicit.
4. A firm’s production cost equaling the opportunity cost of its resources reflects the fact that:
a. resources are best-suited to producing one particular good.
b. firms typically make one primary product.
c. resources can be used to make many different products.
d. firms often make more than one product.
Learning Objective: Delineate the nature of a firm’s cost—explicit as well as implicit.
5. Marico Corp. can manufacture 45,000 ball bearings per day at one of its production facilities. If the company uses the same facility for manufacturing rivets, a total of 30,000 rivets can be produced each day. Calculate Marico Corp.’s implicit cost per day of producing rivets at this facility.
a. The monetary value of 45,000 ball bearings
b. The monetary value of 30,000 rivets
c. The monetary value of 15,000 ball bearings
d. The monetary value of 15,000 rivets
Learning Objective: Delineate the nature of a firm’s cost—explicit as well as implicit.
6. Suppose you quit your job as an accountant earning an annual salary of $50,000 to buy foreclosed homes, fix them up, and then resell them. You have $200,000 of your own money to invest in this, half of which you use to purchase three homes for a combined $500,000 (borrowing the remaining $400,000), and spend the remaining $100,000 of your money on materials. Over the course of one year you fix up all three homes and resell them for a total of $700,000. Assume that your loan to purchase the homes is payable in one lump sum at the end of one year. If you can borrow and lend money at a 6% annual rate of interest, what was your total cost of renovating these three homes?
a. $572,000
b. $600,000
c. $624,000
d. $686,000
Learning Objective: Delineate the nature of a firm’s cost—explicit as well as implicit.
7. Suppose a builder constructs a house that he hopes to sell to a prospective future buyer before he finishes building it. After spending six months and $300,000 in acquiring the land and constructing the house, market conditions change and the builder fails to find a buyer willing to pay his asking price of $360,000. The builder further realizes that by investing $300,000 in a bank deposit he would have been able to earn $4,500 as interest. Which of the following is the economically efficient way for the builder to view his investment?
a. The $300,000 is a sunk cost and should be ignored when negotiating a price for the home.
b. The $300,000 is the builder’s opportunity cost and he should not accept any offer below that.
c. He should advertise more heavily in an attempt to sell the home for at least $300,000.
d. He should raise the price even further to better reflect the additional opportunity costs of his time and capital expenditures.
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
8. Ben decides to expand his ice cream store so he can begin selling sub sandwiches. He spends $20,000 in preparing his new sandwich shop. His marginal cost of selling sub sandwiches is $3 and he estimates that he can sell 10,000 subs for $6 each. He soon learns of a nearby store that is now selling identical subs for $3.50 each. Ben should:
a. quit selling subs since his average total cost of selling subs is greater than the $3.50 price he would now have to charge.
b. sell subs for $3.50 each, considering the $20,000 to be a sunk cost and ignoring it.
c. sell subs as long the price he receives exceeds his average fixed costs of selling subs.
d. lower his price to $5 to cover his average total cost of selling subs.
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
9. The monetary cost of the space a restaurant rents to produce meals can be categorized as a:
a. variable cost.
b. marginal cost.
c. fixed cost.
d. opportunity cost.
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
10. Total fixed cost is the same regardless of:
a. how many new machines a firm purchases.
b. how many facilities a firm shuts down.
c. how much new capital a firm rents.
d. how much output the firm produces.
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
11. If fixed costs are $10,000 and variable costs are constant at $1.00 per unit over the relevant range of output, what will the average total cost be when 10,000 units are produced?
a. $0.20
b. $2.00
c. $5.00
d. $1.00
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
12. If fixed costs are $1,000 and variable costs are constant at $1.00 per unit over the relevant range of output, what will the average total cost be when 2,000 units are produced?
a. $0.50
b. $1.00
c. $1.50
d. $2.00
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
13. If there are no fixed costs and variable costs are constant at $1.00 per unit over the relevant range of output, what will the average total cost be after 50 units of output is produced?
a. $0
b. $1
c. $1.50
d. $2
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
14. If total fixed costs are $1,000, variable costs are constant at $5.00 per unit over the relevant range of output and the average total cost is $6, how many units are being produced?
a. 10
b. 100
c. 1,000
d. 1,100
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
15. Identify the example of sunk cost from the following.
a. A higher wage demanded by the labor union
b. Failure to meet the annual sales target
c. The lumber used to produce office furniture
d. Raw materials damaged by fire in the warehouse
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
16. If total fixed costs are $1,000, variable costs are constant at $5.00 per unit over the relevant range of output and average total cost is $6, what is total variable cost?
a. $100
b. $1,000
c. $5,000
d. $6,000
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
17. A firm’s costs are determined by:
a. its production function.
b. the market price of its product.
c. the market demand curve.
d. its production possibility frontier.
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
18. If total fixed costs are $1,000, variable costs are constant at $5.00 per unit over the relevant range of output and average total cost is $6, what is average fixed cost?
a. $1
b. $5
c. $10
d. $1,000
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
19. If there are no fixed costs and variable costs are constant at $1.00 per unit over the relevant range of output, what is marginal cost when 1 unit of output is produced?
a. $0
b. $0.50
c. $1
d. $2
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
20. Which of the following is correct?
a. Total Fixed Cost = Total Cost + Total Variable Cost
b. Total Cost = Total Variable Cost + Marginal Cost
c. Average Fixed Cost = Average Total Cost – Average Variable Cost
d. Average Total Cost = Marginal Cost + Average Fixed Cost
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
21. If there are no fixed costs and variable costs are constant at $1.00 per unit over the relevant range of output, what is the marginal cost of the second unit?
a. $0
b. $0.50
c. $1
d. $2
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
22. A total product curve whose slope is continually rising at an increasing rate:
a. indicates that an infinite amount of labor is needed to produce a given level of output.
b. does not reflect diminishing marginal returns.
c. does not reflect increasing marginal returns.
d. describes a production function where labor is the only input.
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
23. If the marginal cost curve intersects the average variable cost curve at 1,000 units per day, the rate of output at which average total cost is minimized is _____.
a. 1,000 units
b. more than 1,000 units
c. less than 500 units
d. 500 units
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
24. In the figure given below, curves F, C, and G denote the total cost, the total variable cost, and the total fixed cost of a firm.
Which of the following distances represent the total cost of producing BT units of output?
a. SR
b. ST
c. RT
d. AB
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
25. Refer to Figure 8-1. Which of the following is true at the output level BT?
a. The firm’s fixed cost is RT.
b. The firm’s average variable cost is RT/BT.
c. The firm’s marginal cost is RT/RB.
d. The firm’s variable cost is AB
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
26. Which of the following is true of the total variable cost curve in the short run?
a. It depicts the law of decreasing returns to scale.
b. It is a straight line parallel to the horizontal axis.
c. It is independent of the production function.
d. It lies below the short-run total cost curve.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
27. Which of the following does not decline as output increases?
a. Marginal cost
b. Average fixed cost
c. Average cost
d. Total fixed cost
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
28. Which of the following statements is not true?
a. Average variable cost falls, reaches a minimum and begins to rise.
b. Average total cost falls, reaches a minimum and begins to rise.
c. Average fixed cost falls, reaches a minimum, and begins to rise.
d. Marginal cost falls, reaches a minimum and begins to rise.
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
29. In the figure given below, curves F, C, and G denote the total cost, the total variable cost, and the total fixed cost of a firm.
Output
Costs
A
B
C
T
Figure 8-1
S
R
F
G
Refer to Figure 8-1. The total fixed costs of the firm are identified by the distance:
a. RS.
b. ST.
c. BR.
d. BT.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
30. Which of the following determines the shape of the marginal cost curve in the short run?
a. The marginal product of labor is first increasing and then decreasing
b. The wage rate first decreases and then increases throughout the range of output
c. The price of output produced by labor is first decreasing and then increasing
d. The presence of economies of scale in the product market
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
31. In the short run, a firm’s marginal cost rises because of:
a. a decline in output prices.
b. a decline in marginal productivity of inputs.
c. decreasing returns to scale.
d. the flexibility in input usage.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
32. If ΔTC represents the change in total cost, Δw the change in the wage rate, ΔTFC the change in total fixed cost, Δq the change in output, and ΔAC the change in average cost, the marginal cost of the firm can be defined as:
a. ΔTC/Δw.
b. ΔTFC/Δq.
c. ΔAC/Δq.
d. ΔTC/Δq.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
33. In the short-run, diminishing marginal returns are associated with:
a. declining average variable costs.
b. rising marginal cost.
c. rising average fixed cost.
d. falling average total cost.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
34. Which of the following statements about marginal cost is correct?
a. When the marginal product of a variable input is rising, the marginal cost will fall.
b. When marginal cost equals average cost, average cost is at its maximum.
c. In the short-run, the marginal cost curve is parallel to the average variable cost curve.
d. When marginal cost is falling, total fixed cost is rising.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
35. The law of diminishing marginal returns:
a. is relevant in both the short and the long-run.
b. says that increasing fixed inputs eventually results in smaller and smaller increases in total output.
c. says that increasing variable inputs eventually results in smaller and smaller increases in total output.
d. says that increasing variable inputs eventually results in smaller and smaller increases in total cost.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
36. When output expands from the fourth to the fifth unit, the total variable cost of production rises from $400 to $500, while the total fixed cost remains constant at $100. Compute the marginal cost of producing the fifth unit.
a. $50
b. $200
c. $400
d. $100
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
37. When labor is the only variable input used in production, marginal cost [MC]:
a. is inversely related to the marginal product of labor [MPL].
b. is inversely related to the wage rate [w].
c. is positively related to MPL.
d. is negatively related to labor supply [SL].
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
38. If the marginal product of the variable input rises and then falls, the MC curve will:
a. rise and then fall.
b. fall and then rise.
c. downward sloping throughout.
d. not depend upon the path of the marginal product of the variable input.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
39. Once diminishing returns have set in, each additional unit of the variable input:
a. decreases total output.
b. adds less to total output.
c. adds more to total output.
d. does not affect total output.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
40. Once diminishing returns have set in, each additional unit of output:
a. requires less of the variable input than the previous unit.
b. requires less cost outlay than the previous unit.
c. requires more of the fixed input than the previous unit.
d. requires more cost outlay than the previous unit.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
41. If total cost rises as the level of output produced increases, then:
a. marginal cost must be rising.
b. marginal cost must be constant.
c. marginal cost must be falling.
d. marginal cost must be positive.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
42. A firm uses labor as an input in production. For the range of output where the average product of labor is increasing:
a. the marginal product of labor must be below the average product of labor.
b. the total product is at a maximum.
c. the marginal cost must also be increasing.
d. the average variable cost must be decreasing.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
43. Average fixed cost [AFC] is the:
a. horizontal distance between average total cost [ATC] and average variable cost [AVC].
b. vertical distance between ATC and AVC.
c. horizontal distance between ATC and the Y-axis.
d. vertical distance between ATC and the X-axis.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
44. A firm uses labor as an input in production. In the short-run, its average cost will reach a minimum where:
a. average product of labor reaches a maximum.
b. marginal product of labor reaches a maximum.
c. marginal cost begins to increase.
d. marginal cost equals average cost.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
45. Which of the following statements about the relationship between marginal cost and average cost is correct?
a. When MC is falling, AC is rising.
b. AC equals MC at MC's lowest point.
c. When MC exceeds AC, AC must be rising.
d. When AC exceeds MC, MC must be rising.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
46. Which of the following statements regarding the relationship between average cost and marginal cost is not true?
a. When marginal cost is below average total cost, average total cost falls.
b. When marginal cost is above average variable cost, average variable cost rises.
c. When marginal cost is equal to average total cost, average total cost is minimized.
d. When marginal cost is above average fixed cost, average fixed cost rises.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
47. Which of the following is true?
a. When average cost is decreasing, total cost must also be decreasing.
b. When average cost is decreasing, average product of labor must be decreasing.
c. When average cost is decreasing, marginal cost must be less than average cost.
d. When average cost is decreasing, output must be decreasing.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
48. The slope of the total variable cost curve equals the:
a. average variable cost.
b. marginal cost.
c. average cost.
d. marginal physical product.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
49. In the figure given below, curves F, C, and G denote the total cost, the total variable cost, and the total fixed cost of a firm.
In Figure 8-1, R identifies the point:
a. of inflection.
b. where AVC reaches a minimum.
c. where MC reaches a minimum.
d. where diminishing marginal returns set in.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
50. Consider a graph with a total variable cost curve. Cost is on the vertical axis and output on the horizontal axis. The marginal cost can be represented by:
a. a ray from the origin to a point tangent to the total variable cost curve.
b. a ray from the origin to a point on the total variable cost curve.
c. the slope at a particular point on the total variable cost curve.
d. the distance from the origin to a point on the total variable cost curve.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
51. Suppose labor is on the horizontal axis and capital is on the vertical axis. If the wage rate is $15 per worker per hour and the rental rate of capital is $10 per unit per hour, what is the slope of the isocost curve?
a. –0.667
b. –1.5
c. –10
d. –15
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
52. Suppose labor is on the horizontal axis and capital on the vertical axis. If the total cost is defined by the equation TC = $400 + $15L + $10K, the slope of the isocost curve is:
a. –0.667
b. –1.5
c. –8
d. –40
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
53. Which of the following can be identified from an isocost line?
a. The least costly combination of inputs needed to produce a given level of output
b. The relative prices of inputs
c. The technological relationships among inputs
d. The rate at which one input can be substituted for another in the production process
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
54. Although isocost lines and budget lines are similar, they differ in that:
a. budget lines are linear while isocost lines can be curved.
b. the consumer is constrained to the budget line while the firm can have more than one isocost line.
c. the slope of a budget line equals the price ratio while the slope of an isocost line is not related to prices.
d. budget lines do not have a constant expenditure.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
55. Assume that labor is plotted on the horizontal axis and capital is plotted on the vertical axis. A firm plans to spend $1,000 per week on inputs and confronts a wage rate of $10 per hour and a capital rental rate of $20 per hour. Given this information, what will be the slope of the isocost curve?
a. –2
b. –1/2
c. –100
d. –50
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
56. A tangency between an isocost line and an isoquant shows all the following, except:
a. the maximum output attainable by a firm at a given cost.
b. the minimum cost necessary to produce a given output.
c. an input combination where the ratio of marginal products equals the ratio of the input prices.
d. an input combination where the returns to labor and capital inputs are equal.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
57. Which of the following is true of the expansion path?
a. It always slopes upward.
b. It slopes upward as long as input prices are constant.
c. It slopes upward as long as the firm uses more of both inputs as output increases.
d. It is always linear, but not necessarily upward-sloping.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
58. The long-run expansion path for a firm:
a. is not necessarily linear, but always slopes upward.
b. may be backward-bending, if a firm uses less of one input as output increases.
c. may be backward-bending, if the firm uses more of both inputs as output increases.
d. is always linear, but not necessarily upward-sloping.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
59. The expansion path identifies:
a. the least costly combination of inputs required to produce various levels of output.
b. the firm's demand curves for the inputs.
c. the various combinations of inputs that can be used to produce a given level of output.
d. the least-cost combination of outputs.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
60. The point of tangency between an isoquant and the isocost line indicates:
a. that in the long run fixed costs are equal to variable costs.
b. the maximum cost incurred for producing one unit of output.
c. that in the long run marginal costs tend to exceed fixed costs.
d. the minimum cost necessary to produce a particular level of output.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
61. The rule of cost minimization indicates that a firm should:
a. employ inputs so as to maximize output.
b. employ inputs such that the marginal product per dollar spent is equal for all inputs.
c. minimize total costs.
d. minimize marginal costs.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
62. Suppose the wage rate is $15 per hour and the rental rate of capital is $10 per hour. If the marginal product of labor is 60 and the marginal product of capital 10, the profit maximizing firm should:
a. hire more labor and less capital.
b. utilize more capital and less labor.
c. maintain its current input mix of capital and labor.
d. employ more of both capital and labor.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
63. Which of the following is true at every point on the expansion path?
a. It shows the combinations of inputs having the maximum productivity.
b. It shows the various levels of output that can be produced using a given level of inputs.
c. It shows the various combinations of inputs that can be used to produce a given level of output.
d. It shows the maximum output attainable at a given cost.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
64. Each point on an expansion path:
a. has a constant input price ratio.
b. has the same marginal rate of technical substitution [MRTS].
c. has the same total cost.
d. is cost-minimizing.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
65. Suppose a firm that uses labor and capital as the only inputs in production is currently on the long-run expansion path. The marginal product of labor and capital at this least cost combination are 60 units and 80 units respectively and the wage rate of labor is $6. Calculate the rental cost of capital borne by the firm.
a. $10
b. $8
c. $5
d. $12
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
66. Assume that Donnell Corp. is currently producing 500 units of output per period, using 25 units of labor and 20 units of capital. Values for the marginal product of each input and the prices of the inputs are as follows: MPK = 100, MPL = 200, w = 2, and r = 3. Given the information above, which of the following is true?
a. The firm is currently using the optimal levels of capital and labor.
b. The firm should increase capital and reduce labor usage.
c. The firm should increase labor and reduce capital usage.
d. The firm is not using the optimal levels of capital and labor, and it is impossible to determine the optimal levels from the given information.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
67. A firm is employing 100 units of labor and 50 units of capital to produce 200 widgets. Labor costs $10 per unit and capital $5 per unit. For the quantities of inputs employed, MPL = 2 and MPK = 5. In this situation, the firm:
a. is producing the maximum output possible given the prices and relative productivities of the inputs.
b. could lower its production costs by using more labor and less capital.
c. could increase its output at no extra cost by using more capital and less labor.
d. should use more of both inputs in equal proportions.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
68. A firm employs 100 units of labor and 50 units of capital to produce 200 widgets. Labor costs $10 per unit and capital costs $21 per unit. For the quantities of inputs employed, MPL = 3 and MPK = 3. In this situation, the firm:
a. is producing the maximum amount possible at the lowest possible cost.
b. could lower its production costs by using more capital and less labor.
c. could increase its output at no extra cost by using more labor and less capital.
d. should keep its input usage unchanged.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
69. If the marginal product of labor is four times the marginal product of capital and the price of labor is twice the price of capital, then:
a. labor will be substituted for capital by a profit maximizing firm.
b. capital will be substituted for labor by a profit maximizing firm.
c. output cannot be expanded any further by using the same input levels.
d. input usage should be left unchanged.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
70. Which of the following is true of cost minimization?
a. It is equivalent to profit maximization.
b. It is sufficient for profit maximization.
c. It is necessary for profit maximization.
d. It is unrelated to profit maximization.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
71. Which of the following assumptions is made by economists while constructing a firm’s marginal cost [MC] and average cost [AC] curves?
a. Input prices are constant.
b. Output is constant.
c. Output price is constant.
d. Technology will vary.
Learning Objective: Show how input price changes affect a firm’s cost curves.
72. Consider a firm that uses labor and capital as the only inputs. Suppose labor is on the horizontal axis and capital is on the vertical axis. Further, the expansion path has shifted down and average cost curves have shifted up. Which of following provides the most likely explanation for what has happened?
a. The wage rate decreased
b. The wage rate increased
c. The price of capital decreased
d. The price of capital increased
Learning Objective: Show how input price changes affect a firm’s cost curves.
73. Suppose a firm is using two inputs, labor, and capital. What will happen if the price of labor falls?
a. The firm's average cost curve will shift upward.
b. The firm's marginal cost curve will shift downward.
c. To produce the same level of output, the firm would need more capital.
d. The firm’s total cost of production will increase.
Learning Objective: Show how input price changes affect a firm’s cost curves.
74. Which of the following depicts the change in per-unit cost of production resulting from a decrease in the input prices, given the output produced by the firm is constant?
a. An upward shift of the marginal cost curve
b. A rightward shift of the total cost curve
c. A downward shift of the average cost curve
d. An upward shift of the isocost curve
Learning Objective: Show how input price changes affect a firm’s cost curves.
75. Which of the following explains the shape of the long-run average cost curve?
a. Returns to scale
b. Returns to labor
c. Returns to capital
d. Rental rate on capital
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
76. Which of the following is guaranteed by increasing returns to scale in production experienced in the long run?
a. Negative marginal costs
b. Zero average costs
c. Declining average costs
d. Rising marginal costs
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
77. If constant returns to scale apply to the entire range of production, then the long-run total cost curve would most likely:
a. be a straight line from the origin.
b. to increase at a decreasing rate initially, and then increase at an increasing rate.
c. to increase at an increasing rate initially, and then increase at a decreasing rate.
d. be U-shaped.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
78. Increasing returns to scale imply that:
a. average costs are constant.
b. average costs are falling.
c. average costs are increasing.
d. average costs are negative.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
79. The long-run average cost curve always:
a. reflects the law of diminishing returns.
b. reflects constant returns to scale.
c. shows the least-cost method of production for each level of output.
d. has an inverted U-shape.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
80. Suppose the government restricts the amount of capital equipment firms can purchase in an attempt to increase employment. If a firm expands output then its long-run average costs will be:
a. less than they would be without the restriction.
b. more than they would be without the restriction.
c. the same as they would be without the restriction.
d. uncertain. Need more information
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
81. Assume that with 20L and 30K a given firm can produce 100 units of output and with 40L and 60K it can produce 175 units (where L and K denote the labor and capital inputs). Based on this information, we can conclude that:
a. decreasing returns to scale exist.
b. average cost is decreasing.
c. average cost is constant.
d. increasing returns to scale exist.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
82. Decreasing returns to scale imply:
a. decreasing long run average cost and increasing short-run average cost.
b. increasing long run average cost.
c. constant long run average cost.
d. increasing long run average cost and decreasing short run average cost.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
83. Economies of scale:
a. is the same thing as increasing returns to scale.
b. exist if a firm increases its output more than in proportion to its total input cost.
c. exist if a firm increases its output precisely proportional to its total input cost.
d. refers to the ability to make large-scale investments in capital.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
84. Which of the following is true?
a. Diseconomies of scale imply increasing returns to scale.
b. Increasing returns to scale implies diseconomies of scale.
c. Increasing returns to scale implies economies of scale.
d. Economies of scale imply increasing returns to scale.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
85. Suppose a bakery is currently producing 1,500 loaves of bread per day using 20 workers and 80 units of capital. After hiring five more workers and twenty additional units of capital, the firm’s output increases by 600 loaves per day. This change exhibits:
a. increasing marginal product of labor.
b. constant returns scale.
c. increasing returns to scale.
d. diminishing marginal product of labor.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
86. Suppose a firm has two plants producing the same good. Each plant is producing 200 units of the good. In plant A, the short run average cost of production is $20 and in plant B it is $30. If the firm wants to produce a total of 400 units at the lowest cost in the long run, it should:
a. switch production from plant B to plant A until the average cost of production at each plant is the same.
b. produce only at plant A and shut down plant B.
c. switch production from plant B to plant A until the average cost is the same at the two plants.
d. continue to use the same input ratio.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
87. Long-run costs of production are generally lower than the short run costs because:
a. all inputs are fixed in the long run.
b. firms cannot change their scale of production in the long run.
c. there is greater flexibility in input usage in the long run.
d. there is no scope for learning by doing in the long run.
Learning Objective: Explain the impact of learning by doing on production cost.
88. Learning by doing:
a. results in higher costs in the long run than in the short run.
b. is a result of technological progress.
c. increases productivity of the inputs.
d. results from the increased use of inputs in production.
Learning Objective: Explain the impact of learning by doing on production cost.
89. Which of the following is true of learning by doing?
a. It results from economies of scale.
b. It results from an increase in the price of inputs.
c. It results from the substitution of one input by a costlier input.
d. It results from a firm’s cumulative output experience.
Learning Objective: Explain the impact of learning by doing on production cost.
90. When average costs fall as output increases, it is due to _____; when they fall at a given level of output it is due to _____.
a. economies of scale; learning by doing
b. economies of scale; diseconomies of scale
c. learning by doing; economies of scale
d. learning by doing; diseconomies of scale
Learning Objective: Explain the impact of learning by doing on production cost.
91. The possibility of learning by doing ensures:
a. equal profits for all firms in an industry.
b. uniform price for a product.
c. lower production costs to a pioneering firm.
d. lower production costs to a market entrant.
Learning Objective: Explain the impact of learning by doing on production cost.
92. Learning by doing is illustrated by:
a. a movement along the average cost curve to a lower cost.
b. a downward shift of the average cost curve.
c. a movement along the average cost curve to a higher cost.
d. an upward shift of the average cost curve.
Learning Objective: Explain the impact of learning by doing on production cost.
93. Which of the following factors can lead to learning by doing?
a. Substantial loss suffered in the long run
b. Decreasing returns to scale
c. Significant addition to inventory stock
d. Increased skill of the existing workforce
Learning Objective: Explain the impact of learning by doing on production cost.
94. Some firms can attain lower production costs through their cumulative production experience. The average cost curve of such firms shift downward with each successive bulk increase in total production. The situation described above refers to:
a. economies of scale.
b. economies of scope.
c. learning by doing.
d. the familiarity index.
Learning Objective: Explain the impact of learning by doing on production cost.
95. Learning by doing:
a. is synonymous with economies of scale.
b. causes the average cost curve to shift down.
c. causes the firm’s marginal cost curve to shift up and to the left.
d. occurs when output increases in greater proportion to the increase in inputs.
Learning Objective: Explain the impact of learning by doing on production cost.
96. Which of the following changes shift the long-run AC curve?
a. Learning by doing
b. Economies of scale
c. Diminishing marginal productivity
d. Constant returns to scale
Learning Objective: Explain the impact of learning by doing on production cost.
97. An important determinant of market structure is:
a. the difference between short-run average cost and long-run average cost for a given rate of output.
b. the elasticity of market demand where it intersects the industry supply curve.
c. the slope of the expansion path.
d. the level of output at which long-run average cost is at a minimum relative to market demand.
Learning Objective: Understand how the minimum efficient scale of production is related to market structure.
98. Assume that the long run average cost for a representative firm in an industry is minimized at $10 per unit of output. Further assume that total industry output is X at a price of $10, and that each firm in this industry produces 0.2X at an average cost of $10. Under these conditions we would expect the market to have:
a. a single firm.
b. two firms.
c. infinite number of firms.
d. five firms.
Learning Objective: Understand how the minimum efficient scale of production is related to market structure.
99. The minimum efficient scale is:
a. the level of output at which average cost per unit is smallest.
b. the scale of operations at which marginal cost is minimized.
c. the scale of operations at which average fixed cost per unit is minimized.
d. the level of output at which total cost is minimized.
Learning Objective: Understand how the minimum efficient scale of production is related to market structure.
100. The technological relationships reflected in the firms' long run cost curves are an important factor in determining the market structure of an industry because:
a. they determine the size of the market.
b. they influence the price elasticity of demand for the product.
c. they influence the demand for the product in the short run.
d. they determine the number of firms that can exist in an industry in the long run.
Learning Objective: Understand how the minimum efficient scale of production is related to market structure.
101. Economic analysis suggests that if the marginal cost of pollution abatement differs for two firms, the least cost pollution abatement strategy would require:
a. that both firms are limited to the same total pollution.
b. that the firms engage in different levels of pollution abatement but incur the same marginal cost of abatement.
c. that the firms engage in different levels of pollution abatement as long as they incur different marginal costs.
d. that the firms engage in different levels of pollution abatement but incur the same opportunity cost.
Learning Objective: Describe how cost curves can be applied to the problem of controlling pollution.
102. If the marginal cost of pollution abatement differs between two firms, the total cost of pollution abatement can be lowered by:
a. increasing abatement where its marginal cost is high and reducing it where marginal cost is lower.
b. decreasing abatement where its average cost is high and reducing it where average cost is lower.
c. increasing abatement where its marginal cost is less and reducing it where marginal cost is greater.
d. decreasing abatement where its marginal cost is less and increasing it where marginal cost is greater.
Learning Objective: Describe how cost curves can be applied to the problem of controlling pollution.
103. Economies of scope exist if:
a. it is cheaper to have only one firm in an industry.
b. it is cheaper for one firm to produce two products jointly than for separate firms to produce them separately.
c. it is more expensive to have one firm in an industry.
d. it is cheaper for two firms to work together to make two products than for one firm to make both by itself.
Learning Objective: Cover economies of scope—is it cheaper for one firm to produce products jointly than it is for separate firms to produce the same products independently?
104. Identify the correct statement.
a. Economies of scope are unrelated to economies of scale.
b. Economies of scope imply economies of scale, but not vice versa.
c. Economies of scope imply economies of scale, and vice versa.
d. Economies of scope usually imply diseconomies of scale.
Learning Objective: Cover economies of scope—is it cheaper for one firm to produce products jointly than it is for separate firms to produce the same products independently?
105. Dine-in restaurants provide two distinct products, food and a place to sit and eat. This is an example of:
a. economics of scale.
b. economies of scope.
c. a poor pricing strategy.
d. a loss leader.
Learning Objective: Cover economies of scope—is it cheaper for one firm to produce products jointly than it is for separate firms to produce the same products independently?
106. Consider the cubic total cost function TC = a + bQ + cQ2 + dQ3, where a = 0, b = 25, c = -10, and d = 1. The firm's minimum efficient scale would be an output of _____ units.
a. ten
b. five
c. one
d. two
Learning Objective: Overview how cost functions can be empirically estimated through surveys and regression analysis.
107. For the cubic total cost function TC = a + bQ + cQ2 + dQ3, where a = 0, b = 25, c = -10, and d = 1, the firm’s average variable cost is minimized at an output of:
a. ten.
b. five.
c. two.
d. one.
Learning Objective: Overview how cost functions can be empirically estimated through surveys and regression analysis.
108. For the cubic total cost function TC = a + bQ + cQ2 + dQ3, where a = 0, b = 25, c = -10, and d = 1, the marginal cost at an output of one unit equals:
a. $0.
b. $5.
c. $8.
d. $10.
Learning Objective: Overview how cost functions can be empirically estimated through surveys and regression analysis.
109. Which of the following is true for the cubic total cost function TC = a + bQ + cQ2 + dQ3, where a = 0, b = 25, c = -10, and d = 1?
a. Marginal cost equals average total cost
b. Marginal cost equals average variable cost
c. Total cost equals total variable cost
d. Total cost equals total fixed cost
Learning Objective: Overview how cost functions can be empirically estimated through surveys and regression analysis.
Question Type: True/False
110. Total Fixed Cost = Total Cost + Total Variable Cost
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
111. Total Cost = Total Variable Cost + Marginal Cost
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
112. Average Fixed Cost = Average Total Cost – Average Variable Cost
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
113. Average Total Cost = Marginal Cost + Average Fixed Cost
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
114. In the short run, the total variable cost curve depicts the law of decreasing returns to scale.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
115. In the short run, the total variable cost curve is a straight line parallel to the horizontal axis.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
116. In the short run, the total variable cost curve is independent of the production function.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
117. In the short run, the total variable cost curve lies below the short-run total cost curve.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
118. Average variable cost falls, reaches a minimum and begins to rise.
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
119. Average total cost falls, reaches a minimum and begins to rise.
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
120. Average fixed cost falls, reaches a minimum, and begins to rise.
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
121. Marginal cost falls, reaches a minimum and begins to rise.
Learning Objective: Outline how cost is likely to vary with output in the short run and various measures of short-run cost.
122. When the marginal product of a variable input is rising, the marginal cost will fall.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
123. When marginal cost equals average cost, average cost is at its maximum.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
124. When marginal cost is falling, total fixed cost is rising.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
125. In the short-run, the marginal cost curve is parallel to the average variable cost curve.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
126. When marginal cost is falling, average cost is rising.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
127. Average cost equals marginal cost at marginal cost's lowest point.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
128. When marginal cost exceeds average cost, average cost must be rising.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
129. When average cost exceeds marginal cost, marginal cost must be rising.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
130. When average cost is decreasing, total cost must also be decreasing.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
131. When average cost is decreasing, average product of labor must be decreasing.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
132. When average cost is decreasing, marginal cost must be less than average cost.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
133. When average cost is decreasing, output must be decreasing.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
134. The expansion path always slopes upward.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
135. The expansion path slopes upward as long as input prices are constant.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
136. The expansion path slopes upward as long as the firm uses more of both inputs as output increases.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
137. The expansion path is always linear, but not necessarily upward-sloping.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
138. At every point, the expansion path shows the combinations of inputs having the maximum productivity.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
139. At every point, the expansion path shows the various levels of output that can be produced using a given level of inputs.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
140. At every point, the expansion path shows the various combinations of inputs that can be used to produce a given level of output.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
141. At every point, the expansion path shows the maximum output attainable at a given cost.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
142. Cost minimization is equivalent to profit maximization.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
143. Cost minimization is sufficient for profit maximization.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
144. Cost minimization is necessary for profit maximization.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
Cost minimization is unrelated to profit maximization.
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
145. Diseconomies of scale imply increasing returns to scale.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
146. Increasing returns to scale implies diseconomies of scale.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
147. Increasing returns to scale implies economies of scale.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
148. Economies of scale imply increasing returns to scale.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
149. Learning by doing results from economies of scale.
Learning Objective: Explain the impact of learning by doing on production cost.
150. Learning by doing results from an increase in the price of inputs.
Learning Objective: Explain the impact of learning by doing on production cost.
151. Learning by doing results from the substitution of one input by a costlier input.
Learning Objective: Explain the impact of learning by doing on production cost.
152. Learning by doing results from a firm’s cumulative output experience.
Learning Objective: Explain the impact of learning by doing on production cost.
153. Economies of scope are unrelated to economies of scale.
Learning Objective: Cover economies of scope—is it cheaper for one firm to produce products jointly than it is for separate firms to produce the same products independently?
154. Economies of scope imply economies of scale, but not vice versa.
Learning Objective: Cover economies of scope—is it cheaper for one firm to produce products jointly than it is for separate firms to produce the same products independently?
155. Economies of scope imply economies of scale, and vice versa.
Learning Objective: Cover economies of scope—is it cheaper for one firm to produce products jointly than it is for separate firms to produce the same products independently?
156. Economies of scope usually imply diseconomies of scale.
Learning Objective: Cover economies of scope—is it cheaper for one firm to produce products jointly than it is for separate firms to produce the same products independently?
Question Type: Essay
157. For the total variable cost (TVc. curve below, draw a total cost curve and a positive total fixed cost (TFc. curve. Then derive the associated marginal cost (Mc., average total cost (ATc., average variable (AVc., and average fixed cost (AFc. curves. Explain the appropriate relationships among the curves.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
158. Do you think the marginal cost curve of a petroleum refinery will be U-shaped? Explain your answer.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
159. On the following per-unit cost graph, show two ways to identify total fixed cost. Explain your answer.
Learning Objective: Detail the typical shapes of a firm’s short-run cost curves.
160. Answer the following:
a) Consider a firm which produces baseball bats using wood and workers. On a graph with capital (wood) on the vertical axis and labor (workers) on the horizontal axis, draw an isoquant and isocost line such that the firm is minimizing the total cost of producing Q1 baseball bats. Let this initial point be profit-maximizing.
b) Suppose forest fires cause the price of wood to rise. Trace the effects of this change on the firm’s optimal combination of inputs. Will they now produce more or less than Q1 bats? Why?
Learning Objective: See how a firm will choose to combine inputs in its production process in the long run when all inputs are variable.
162. Using an isoquant and isocost curves, with labor on the horizontal axis and capital on the vertical axis,
a) Show a firm’s efficient combination of capital and labor needed to produce 100 television sets per day. (You may use abstract quantities such as K1 and L1 or actual numbers.)
b) Is this the least cost means of producing this level of output? Explain.
c) Next, using a dashed line, on the same graph draw the change that would occur in the long run if the cost of labor were to rise relative to the cost of capital and the firm’s output were to remain fixed at 100 television sets per day.
d) Now, suppose that before the price change took effect, labor in this industry had succeeded in protecting against job loss by forbidding firms from getting rid of labor and substituting it with capital. Draw the new isocost curve assuming the company still wishes to produce 100 television sets each day.
e) Is labor made better off in the long run as a result of this labor saving campaign? Explain.
Learning Objective: Differentiate between a firm’s long-run and short-run cost curves.
164. Consider two firms A and B. Firm A notices that its total costs have declined by 10 percent each time its cumulative output has doubled. Firm B notices that its average cost of production declined by 10 percent after it increased production by 5 percent and hired 50 more workers to work with its existing unused equipments. Explain graphically whether the experiences of these two firms will have similar implications on the long run average cost of production.
Learning Objective: Explain the impact of learning by doing on production cost.
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Connected Book
Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key
By Edgar K. Browning, Mark A. Zupan