The Costs Of Production Verified Test Bank Ch13 - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 13 – The costs of production
TRUE/FALSE
1. Costs are a key determinate of a firm’s production and pricing decisions.
DIF: Easy TOP: Introduction
2. Economists normally assume that the goal of a firm is to maximise revenue.
DIF: Easy TOP: Introduction
3. When economists speak of a firm’s costs, they are usually excluding the opportunity costs.
DIF: Easy TOP: Costs as opportunity costs
4. Accounting profit and economic profit are two ways to say the same thing.
DIF: Easy TOP: Costs as opportunity costs
5. Implicit costs that do not require a money outlay are typically ignored by economists.
DIF: Easy TOP: Costs as opportunity costs
6. The cost of capital includes both any interest payments in loans as well as any forgone interest on savings used to finance the business.
DIF: Easy TOP: The cost of capital as an opportunity cost
7. The fact that many decisions are fixed in the short run, but variable in the long run has an impact on the firm’s cost curves.
DIF: Easy TOP: The various measures of cost
8. The short run is defined as the period of time in which all factors of production are fixed.
DIF: Easy TOP: How long is the long run?
9. When trying to understand the decision making process of different firms, economists assume that people think at the margin.
DIF: Easy TOP: The production function
10. The shape of the total cost curve is unrelated to the shape of the production function.
DIF: Easy TOP: From the production function to the total-cost curve
11. If the total cost curve becomes flatter as output increases, then this reveals diminishing marginal product.
DIF: Easy TOP: The production function
12. Diminishing marginal product exists when the production function becomes flatter as inputs increase.
DIF: Easy TOP: From the production function to the total-cost curve
13. Even if a firm was to produce nothing, it still incurs some variable costs in the short-run.
DIF: Easy TOP: Fixed and variable costs
14. Variable costs change as the firm alters the quantity of output produced.
DIF: Easy TOP: Fixed and variable costs
15. The cost of producing an additional unit of a good is not the same as the average cost of the good.
DIF: Easy TOP: Average and marginal cost
16. Average variable cost is equal to the quantity of output divided by the total variable cost.
DIF: Easy TOP: Average and marginal cost
17. The average total cost curve is unaffected by diminishing marginal product.
DIF: Moderate TOP: Cost curves and their shapes
18. The marginal cost curve can rise even if the average total cost is falling.
DIF: Moderate TOP: The relationship between short-run and long-run average total cost
19. The marginal cost curve bisects the average total cost curve at the minimum point of the average total cost curve.
DIF: Easy TOP: The relationship between marginal cost and average total cost
20. A second or third worker may have a higher marginal product than the first worker in certain circumstances.
DIF: Moderate TOP: Cost curves and their shapes
21. The marginal cost curve intersects the average variable cost curve at the minimum of the average variable cost curve.
DIF: Easy TOP: Cost curves and their shapes
22. Suppose that as a firm expands and notices that its long-run average total costs are declining. The most likely explanation for this is economies of scale.
DIF: Moderate TOP: Economies and diseconomies of scale
23. In some cases, specialisation allows larger factories to produce goods at a lower average cost than smaller factories.
DIF: Easy TOP: FYI: Lessons from a pin factory
24. The firm’s total cost can be used to determine both the firm’s average total cost and its marginal cost.
DIF: Moderate TOP: Economies and diseconomies of scale
25. Average total cost reveals how much total cost will change as the firm alters its level of production.
DIF: Easy TOP: Cost curves and their shapes
26. The marginal product of a firm’s workers is revealed by the shape of the marginal cost curve.
DIF: Easy TOP: The production function
27. When average total cost rises if a producer either increases or decreases production, then the firm is said to be operating at efficient scale.
DIF: Easy TOP: U-shaped average total cost
28. Because of the greater flexibility that firms have in the long run, all short-run cost curves lie on or above the long-run curve.
DIF: Moderate TOP: The relationship between short-run and long-run average total cost
29. The time it takes for a firm to reach the long run depends on the firm and the products it makes.
DIF: Easy TOP: The relationship between short-run and long-run average total cost
30. Implicit costs are costs that do not require an outlay of cash by the firm.
DIF: Easy TOP: Costs as opportunity costs
31. Cost of capital can also be seen as implicit costs.
DIF: Easy TOP: Costs as opportunity costs
32. The relationship between the quantity of inputs and quantity of output is called the production function.
DIF: Easy TOP: The production function
MULTIPLE CHOICE
1. The goal of most firms in the economy is to:
A. | maximise output |
B. | maximise profit |
C. | obtain the highest price for their product |
D. | minimise costs |
DIF: Easy TOP: What are Costs?
2. The amount of money that a firm receives from the sale of its output is called:
A. | total revenue |
B. | total gross profit |
C. | total net profit |
D. | net revenue |
DIF: Easy TOP: Total revenue, total cost and profit
3. The amount of money that a firm pays to buy inputs is called:
A. | variable cost |
B. | marginal cost |
C. | fixed cost |
D. | total cost |
DIF: Easy TOP: Total revenue, total cost and profit
4. A firm’s profit is equivalent to:
A. | its total sales |
B. | average revenue minus average total cost |
C. | marginal revenue minus marginal cost |
D. | total revenue minus total cost |
DIF: Easy TOP: Total revenue, total cost and profit
5. Total revenue equals:
A. | total output multiplied by the unit cost of output |
B. | total output multiplied by profit |
C. | total output multiplied by the unit price of output |
D. | total output divided by profit |
DIF: Easy TOP: Total revenue, total cost and profit
6. Those things that must be forgone to acquire a good are called:
A. | competitors |
B. | substitutes |
C. | opportunity costs |
D. | explicit costs |
DIF: Easy TOP: Costs as opportunity costs
7. Suppose a firm produced 200 units of output, but sold only 150 of the units it produced. The average cost of production for each unit of output produced was $80. Each of the 150 units were sold for a price of $50. The total revenue of this firm would be:
A. | $12 000 |
B. | $10 000 |
C. | $7500 |
D. | -$8500 |
DIF: Moderate TOP: Total revenue, total cost and profit
8. Opportunity costs are comprised of:
A. | explicit costs |
B. | implicit costs |
C. | forgone income |
D. | all of the above |
DIF: Easy TOP: Costs as opportunity costs
9. An economist measures profit as:
A. | total revenue minus opportunity costs |
B. | total revenue minus explicit costs |
C. | total revenue minus fixed costs and explicit costs |
D. | total revenue minus fixed costs and wages |
DIF: Easy TOP: Costs as opportunity costs
10. Julia runs a home construction business and owns a variety of construction equipment. She normally uses her equipment to build and sell homes herself, however when times are tough she rents out the equipment to other builders. Which of the following should Julia not include when looking at the costs of building a new home:
A. | the rental income from leasing her construction equipment |
B. | any wages she has to pay to her employees |
C. | the purchase price of her construction equipment |
D. | the salary she could earn working for another construction company |
DIF: Moderate TOP: Costs as opportunity costs
11. To an economist, the field of industrial organisation answers which of the following questions?
A. | How does the difference in the number of firms affect prices and efficiency of market outcomes? |
B. | Why are consumers subject to the law of demand? |
C. | Why do firms experience falling marginal product of labour? |
D. | Why do firms consider production costs when determining product supply? |
DIF: Easy TOP: Introduction
12. If a business is profitable from an accountant’s point of view, then:
A. | it is always profitable from an economist’s point of view |
B. | it is never profitable from an economist’s point of view |
C. | economic profit will be higher than accounting profit |
D. | we cannot say without more information |
DIF: Moderate TOP: What are costs?
13. Mosti, a materials engineer, has discovered a groundbreaking new way to make recycled plastic stronger. He is looking to exploit this discovery by starting up his own business at a cost of $500 000. Unfortunately Mosti has only $200 000 in savings and must borrow the other $300 000. If the interest rate is 10%, then what, according to an economist, is the opportunity cost of starting up the business?
A. | $500 000 per annum |
B. | $50 000 per annum |
C. | $30 000 per annum |
D. | $20 000 per annum |
DIF: Moderate TOP: Economic profit versus accounting profit
14. An important implicit cost of almost every business is the:
A. | cost of accounting services |
B. | cost of compliance with government regulation |
C. | opportunity cost of financial capital that has been invested in the business |
D. | cost of debt |
DIF: Moderate TOP: Costs as opportunity costs
15. The amount of money that an orchardist could have earned if he had planted orange trees, rather than apple trees, is termed:
A. | explicit cost |
B. | accounting cost |
C. | implicit cost |
D. | total sales |
DIF: Moderate TOP: Costs as opportunity costs
16. Economic profit is equal to:
A. | total revenue minus the opportunity cost of producing goods and services |
B. | total revenue minus the accounting cost of producing goods and services |
C. | total revenue minus the explicit cost of producing goods and services |
D. | average revenue minus the average cost of producing the last unit of a good or service |
DIF: Easy TOP: Economic profit versus accounting profit
17. Accounting profit is equal to:
A. | total revenue minus the explicit cost of producing goods and services |
B. | total revenue minus the opportunity cost of producing goods and services |
C. | average revenue minus the average cost of producing the last unit of a good or service |
D. | marginal revenue minus marginal cost |
DIF: Easy TOP: Economic profit versus accounting profit
18. From a firm’s costs perspective, the long run is:
A. | the period of time for all factors to become variable |
B. | the period of time needed to adjust the amount of labour input |
C. | the period of time needed to adjust the amount of capital used |
D. | greater than one year |
DIF: Easy TOP: How long is the long run?
19. During the summer Jeremy, a small business owner, can hire extra staff to help him repair boats. On his own Jeremy can repair 10 boats a day, adding a second staff member sees 15 boats a day repaired, and adding a third sees 18 boats a day repaired. The marginal product of the third worker is:
A. | 18 boats/day |
B. | 15 boats/day |
C. | 5 boats/day |
D. | 3 boats/day |
DIF: Easy TOP: The production function
20. Which of the following describes the marginal product of labour?
A. | the increase in labour necessary to generate a one-unit increase in output |
B. | the increase in output obtained from a one-unit increase in labour |
C. | the additional profit created with a one-unit increase in labour |
D. | the additional cost created with a one-unit increase in labour |
DIF: Easy TOP: The production function
21. The marginal product of labour can be defined as (where denotes ‘change’):
A. | output/labour |
B. | labour/output |
C. | profit/labour |
D. | labour/total cost |
DIF: Easy TOP: The production function
22. Diminishing marginal product of labour is NOT likely to be observed when:
A. | experienced workers in labour teams help train new staff |
B. | there is high demand for workers in the industry |
C. | more workers allows people to specialise in one task |
D. | new workers have to use the oldest technology in a plant |
DIF: Moderate TOP: From the production function to the total-cost curve
23. Diminishing marginal product of labour me
A. | the addition of an extra worker will reduce total output |
B. | each new worker will output more than previous workers |
C. | removing a worker will increase total output |
D. | removing a worker will increase the marginal product of the remaining workers |
DIF: Moderate TOP: The production function
Graph 13-1
This graph depicts a production function for a firm that produces cookies. Use the
graph to answer the following question(s).
24. Refer to Graph 13-1. As the number of workers increases:
A. | total output increases, but at a decreasing rate |
B. | marginal product increases but at a decreasing rate |
C. | marginal product increases |
D. | total output decreases |
DIF: Moderate TOP: From the production function to the total-cost curve
25. Refer to Graph 13-1. With regard to cookie production, the figure implies:
A. | decreasing cost of cookie production |
B. | diminishing marginal product of workers |
C. | increasing marginal product of workers |
D. | diminishing marginal cost of cookie production |
DIF: Moderate TOP: From the production function to the total-cost curve
26. Refer to Graph 13-1. The slope of the total product curve reveals information about the:
A. | average product of workers |
B. | fixed product of workers |
C. | total product of workers |
D. | marginal product of workers |
DIF: Moderate TOP: From the production function to the total-cost curve
27. Lettuce Eat, a vegetarian cafe, exhibits diminishing returns to labour. If the cost of each meal is constant and labour is the only other input, then the total cost-curve will:
A. | become flatter as meal production increases |
B. | become steeper as meal production increases |
C. | will stay constant as meal production increases |
D. | we cannot tell without more information |
DIF: Moderate TOP: From the production function to the total-cost curve
28. Jeremy, a small business owner, earns $50 an hour repairing boats. One afternoon he takes five hours off work to build a gazebo in his garden, spending $200 on materials. If the addition of a gazebo increases his home’s value by $400, then his accounting profit will be:
A. | -$200 |
B. | -$400 |
C. | $200 |
D. | $400 |
DIF: Easy TOP: What are costs?
29. Dave is majoring in computer information development at University of Environmental Sustainability. While he has been attending university, Dave has started a computer consulting business to help local residents set up a local skill-sharing network. Dave charges $25 per hour for his consulting services. Dave also works five hours a week for the Arts Faculty to maintain its departmental web page. The Arts Faculty pays Dave $20 per hour. From this information we can conclude that:
A. | Dave should increase the number of hours he works for the Arts Faculty to make his income from it comparable to his consulting business income |
B. | Dave is obviously not maximising his wellbeing if he continues to work for the Arts Faculty |
C. | if Dave chooses one hour at the beach with his friends rather than spending one more hour with a consulting client, the forgone income of $20 is considered a cost of the choice to go to the beach |
D. | if Dave chooses one hour at the beach with his friends rather than spending one more hour with a consulting client, the forgone income of $25 is considered a cost of the choice to go to the beach |
DIF: Difficult TOP: Costs as opportunity costs
Graph 13-2
This graph depicts a total cost function for a firm that produces cookies. Use the graph to answer the following question(s).
30. Refer to Graph 13-2. Which of the statements below is most consistent with the shape of the total cost curve?
A. | producing additional cookies is equally costly, regardless of how many cookies are already being produced |
B. | producing additional cookies becomes increasingly costly only when the number of cookies already being produced is large |
C. | producing an additional cookie is always more costly than producing the previous cookie |
D. | total production of cookies decreases with additional units of input |
DIF: Moderate TOP: From the production function to the total-cost curve
31. Refer to Graph 13-2. The changing slope of the total cost curve reflects:
A. | decreasing average cost |
B. | increasing marginal product |
C. | decreasing marginal product |
D. | increasing fixed cost |
DIF: Moderate TOP: The production function
32. Refer to Graph 13-2. Which of the statements below best captures information about the underlying production function?
A. | output increases at a decreasing rate with additional units of input |
B. | output increases at an increasing rate with additional units of input |
C. | output decreases at a decreasing rate with additional units of input |
D. | output decreases at an increasing rate with additional units of input |
DIF: Moderate TOP: From the production function to the total-cost curve
33. John is a self-employed bricklayer. Examples of his variable costs include:
A. | the cost of materials for each job |
B. | the cost of owning a work vehicle |
C. | the cost of hiring a graphic designer to design his business card |
D. | all of the above |
DIF: Easy TOP: Fixed and variable costs
34. If a firm mothballs a factory so that its output is zero, which of the following costs will also be zero?
A. | variable cost |
B. | total cost |
C. | average cost |
D. | all of the above |
DIF: Easy TOP: Fixed and variable costs
35. One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximising firm is that, in the short run:
A. | output is not variable |
B. | the size of the factory is fixed |
C. | the number of workers used to produce the firm’s product is fixed |
D. | there are no fixed costs |
DIF: Moderate TOP: The relationship between short-run and long-run average total cost
36. Average total cost is equal to:
A. | average variable cost plus marginal cost |
B. | total cost less total output |
C. | average fixed cost plus average variable cost |
D. | average variable cost divided by total output |
DIF: Easy TOP: Average and marginal cost
37. As the quantity produced increases:
A. | average fixed cost decreases |
B. | fixed cost increases |
C. | variable cost always decreases |
D. | none of the above are true |
DIF: Moderate TOP: Average and marginal cost
38. Suppose a firm increases output by one unit. Which of the following statements is true?
A. | total cost will increase by an amount equal to average variable cost |
B. | total cost will increase by an amount equal to the marginal cost |
C. | variable cost will increase by an amount equal to marginal cost |
D. | average fixed cost will stay constant |
DIF: Moderate TOP: Average and marginal cost
39. Average total cost equals:
A. | change in total costs / change in quantity produced |
B. | (fixed costs + variable costs) / change in quantity produced |
C. | change in total costs / quantity produced |
D. | (fixed costs + variable costs) / quantity produced |
DIF: Easy TOP: Average and marginal cost
40. Marginal cost equals:
A. | total cost divided by total quantity |
B. | the slope of the total cost curve |
C. | total output divided by the change in total cost |
D. | none of the above |
DIF: Easy TOP: Average and marginal cost
41. Average total cost tells us the:
A. | cost of the last unit of output if total cost does not include a fixed cost component |
B. | cost of a typical unit of output if total cost is divided evenly over all the units produced |
C. | variable cost of a firm that is producing at least one unit of output |
D. | total cost of the first unit of output if total cost is divided evenly over all the units produced |
DIF: Moderate TOP: Average and marginal cost
42. Marginal cost tells us the:
A. | amount total cost rises when price rises by one unit |
B. | amount fixed cost rises when price rises by one unit |
C. | amount total cost rises when output rises by one unit |
D. | amount fixed cost rises when output rises by one unit |
DIF: Easy TOP: Average and marginal cost
43. Diminishing marginal product suggests that the marginal:
A. | product of an extra worker is less than the previous worker’s marginal product |
B. | cost of an extra worker is less than the previous worker’s marginal cost |
C. | product of an extra worker is greater than the previous worker’s marginal product |
D. | cost of an extra worker is unchanged |
DIF: Easy TOP: The production function
44. Diminishing marginal product suggests that:
A. | marginal cost is downward-sloping |
B. | additional units of output are more expensive |
C. | the firm is at full capacity |
D. | all of the above are true |
DIF: Easy TOP: The production function
45. Diminishing marginal product causes the average variable cost curve to:
A. | rise |
B. | fall |
C. | rise until it equals the total cost curve |
D. | level out |
DIF: Moderate TOP: The production function
46. At low output levels a firm’s average total cost tends to be high because:
A. | marginal costs are increasing |
B. | variable costs are spread over only a few units of output |
C. | average fixed cost is large |
D. | there is a shortage of experienced workers |
DIF: Moderate TOP: Average and marginal cost
47. The efficient scale of the firm is the quantity of output that:
A. | maximises marginal product |
B. | maximises average fixed cost |
C. | minimises average total cost |
D. | minimises average variable cost |
DIF: Easy TOP: U-shaped average total cost
48. The marginal cost curve will intersect:
A. | average variable cost at its minimum |
B. | average fixed cost at its minimum |
C. | average total cost at its minimum |
D. | both the average variable cost and the average total costs at their minimums |
DIF: Moderate TOP: The relationship between marginal cost and average total cost
49. The average total cost curve is increasing when marginal cost is:
A. | increasing |
B. | decreasing |
C. | less than average total cost |
D. | greater than average total cost |
DIF: Moderate TOP: The relationship between marginal cost and average total cost
50. Marginal cost is equal to average total cost when:
A. | marginal cost is at its minimum |
B. | average total cost is at its minimum |
C. | average variable cost is falling |
D. | average fixed cost is rising |
DIF: Moderate TOP: The relationship between marginal cost and average total cost
51. The marginal cost curve crosses the average total cost curve at:
A. | the efficient scale |
B. | economies of scale |
C. | diseconomies of scale |
D. | maximum ATC |
DIF: Moderate TOP: The relationship between marginal cost and average total cost
52. The efficient scale of a firm is achieved when:
A. | average variable cost is minimised |
B. | fixed costs are spread over the most units |
C. | marginal costs are at a minimum |
D. | average total costs are minimised |
DIF: Moderate TOP: The relationship between marginal cost and average total cost
53. Diminishing marginal product occurs:
A. | immediately after the first worker is hired |
B. | after the marginal cost curve crosses the average total cost curve. |
C. | at different times for different firms |
D. | when average variable cost begins to fall |
DIF: Moderate TOP: The production function
Graph 13-3
The set of curves above reflect information about the cost structure of a firm. Use this graph to answer the following question(s).
54. Refer to Graph 13-3. Which of the curves is most likely to represent average fixed cost?
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: Cost curves and their shapes
55. Refer to Graph 13-3. Which of the curves is most likely to represent average total cost?
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: Cost curves and their shapes
56. Refer to Graph 13-3. Which of the curves is most likely to represent marginal cost?
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: Cost curves and their shapes
57. Refer to Graph 13-3. Which of the curves is most likely to represent average variable cost?
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: Cost curves and their shapes
58. Refer to Graph 13-3. This firm is necessarily experiencing increasing marginal product when curve:
A. | A is falling |
B. | B is falling |
C. | C is falling |
D. | D is falling |
DIF: Moderate TOP: Cost curves and their shapes
59. Refer to Graph 13-3. Curve A is necessarily U-shaped because of:
A. | diminishing marginal product |
B. | increasing marginal product |
C. | the fact that decreasing marginal product follows increasing marginal product |
D. | the fact that increasing marginal product follows decreasing marginal product |
DIF: Moderate TOP: U-shaped average total cost
60. When a factory is operating in the short run:
A. | total cost and variable cost are usually the same |
B. | average fixed cost rises as output increases |
C. | it cannot adjust the quantity of fixed inputs |
D. | it cannot alter variable costs |
DIF: Moderate TOP: The relationship between short-run and long-run average total cost
61. In the long run:
A. | variable inputs are rarely used |
B. | variable inputs change to fixed inputs |
C. | some inputs, such as plant and machinery, remain fixed |
D. | all inputs are considered to be variable |
DIF: Easy TOP: The relationship between short-run and long-run average total cost
Graph 13-4
This graph depicts average total cost functions for a firm that produces automobiles. Use the graph to answer the following question(s).
62. Refer to Graph 13-4. Which of the curves is most likely to characterise the short-run average total cost curve of the biggest factory?
A. | ATCA |
B. | ATCB |
C. | ATCC |
D. | ATCD |
DIF: Moderate TOP: The relationship between short-run and long-run average total cost
63. Refer to Graph 13-4. Which curve represents the long-run average total cost?
A. | ATCA |
B. | ATCB |
C. | ATCC |
D. | ATCD |
DIF: Moderate TOP: The relationship between short-run and long-run average total cost
64. Refer to Graph 13-4. In the long run, the firm can operate on which of the following average total cost curves?
A. | ATCA |
B. | ATCB |
C. | ATCC |
D. | any of the above |
DIF: Moderate TOP: The relationship between short-run and long-run average total cost
65. Refer to Graph 13-4. If the firm is currently operating on ATCB, what options does it have if it wants to change its level of automobile production over the next couple of weeks?
A. | The firm has no options. It cannot change output level in the short run. |
B. | it can operate at any level of output between points M and N |
C. | it can operate at any level of output, as long as it stays on ATCD |
D. | it can operate at any level of output as long as it stays on ATCB |
DIF: Difficult TOP: The relationship between short-run and long-run average total cost
66. Refer to Graph 13-4. This firm experiences constant returns to scale at which output levels?
A. | output levels above N |
B. | output levels between M and N |
C. | output levels below M |
D. | all of the above levels if the firm is operating in the long run |
DIF: Moderate TOP: The relationship between short-run and long-run average total cost
67. Refer to Graph 13-4. At levels of output below point M, the firm experiences:
A. | economies of scale |
B. | accounting profit |
C. | economic profit |
D. | diseconomies of scale |
DIF: Moderate TOP: Economies and diseconomies of scale
68. The long-run average total cost curve is:
A. | flatter than the short-run average total cost curve |
B. | not U-shaped |
C. | always decreasing as output increases |
D. | always increasing as output increases |
DIF: Easy TOP: Economies and diseconomies of scale
69. The long-run average total cost curve is:
A. | steeper than the short-run average total cost curve as the firm incurs more fixed costs in the long run |
B. | never steeper than short-run average total cost curves, as the firm can always choose the same input combinations as the short-run |
C. | steeper or flatter than the short-run average cost curve, but it depends on the long-run marginal cost curve |
D. | we cannot say without more detailed information on the firm’s costs |
DIF: Difficult TOP: the relationship between short-run and long-run average total cost
70. Economies of scale occur when:
A. | long-run average total costs rise as output increases |
B. | average fixed costs are falling |
C. | long-run average total costs fall as output increases |
D. | average fixed costs are constant |
DIF: Easy TOP: Economies and diseconomies of scale
71. Diseconomies of scale occur when:
A. | long-run average total costs rise as output increases |
B. | long-run average total costs fall as output increases |
C. | average fixed costs are falling |
D. | average fixed costs are constant |
DIF: Easy TOP: Economies and diseconomies of scale
72. Constant returns to scale occur when:
A. | long-run average total costs are constant as output increases |
B. | marginal product of labour is falling |
C. | the firm’s long-run average cost curve is falling as output increases |
D. | the firm’s long-run average cost curve is rising as output increases |
DIF: Moderate TOP: Economies and diseconomies of scale
73. Specialisation among workers occurs when:
A. | each worker is allowed to perfect one particular task |
B. | each worker is responsible for a number of different tasks |
C. | quality management allows workers to switch from one task to another |
D. | all of the above are true |
DIF: Easy TOP: Economies and diseconomies of scale
74. If a firm wants to capitalise on economies of scale, it may be able to do so by:
A. | giving its employees a limited task that they can master |
B. | employing a larger number of workers |
C. | producing a larger quantity of output |
D. | doing all of the above |
DIF: Moderate TOP: Economies and diseconomies of scale
75. Economies of scale arise when:
A. | workers are able to specialise in a particular task |
B. | an economy is self-sufficient in production |
C. | individuals in a society are self-sufficient |
D. | fixed costs are large relative to variable costs |
DIF: Easy TOP: Economies and diseconomies of scale
Table 13-1
Measures of Cost for Splashy Cardboard Kayak Factory.
Quantity of kayaks | Fixed costs ($) | Variable costs ($) | Total costs ($) |
0 | 15 | ||
1 | 4 | ||
2 | 6 | 21 | |
3 | 9 | 24 | |
4 | 13 | 28 | |
5 | 18 | 33 | |
6 | 15 | 25 | 40 |
76. Refer to Table 13-1. The average fixed cost of producing five kayaks is:
A. | $15 |
B. | $3 |
C. | $5 |
D. | none of the above |
DIF: Easy TOP: Fixed and variable costs
77. Refer to Table 13-1. The average variable cost of producing two kayaks is:
A. | $2 |
B. | $11.50 |
C. | $3 |
D. | $4 |
DIF: Easy TOP: Fixed and variable costs
78. Refer to Table 13-1. The average total cost of producing four kayaks is:
A. | $28 |
B. | $3.25 |
C. | $7 |
D. | it can’t be determined from the above information |
DIF: Moderate TOP: Fixed and variable costs
79. Refer to Table 13-1. What is the variable cost of producing zero kayaks?
A. | $0 |
B. | $2 |
C. | $20 |
D. | it can’t be determined from the information above |
DIF: Moderate TOP: Fixed and variable costs
80. Refer to Table 13-1. The marginal cost of producing the sixth kayak is:
A. | $15 |
B. | $7 |
C. | $25 |
D. | it can’t be determined from the information given |
DIF: Moderate TOP: Fixed and variable costs
81. Refer to Table 13-1. What is the variable cost of producing five kayaks?
A. | $18 |
B. | $17 |
C. | $12 |
D. | it can’t be determined from the information given |
DIF: Moderate TOP: Fixed and variable costs
82. Refer to Table 13-1. What is the marginal cost of producing the first kayak?
A. | it can’t be determined from the information given |
B. | $0 |
C. | $15 |
D. | $4 |
DIF: Moderate TOP: Fixed and variable costs
Table 13-2
Adrienne’s Premium Boxing Service subcontracts with a chocolate manufacturer to box premium chocolates for their mail order catalogue business. Adrienne rents a small room for $150 a week in the downtown business district that serves as her factory. She can hire workers for $275 a week. Costs are in dollars per week.
83. Refer to Table 13-2. What is the marginal product of the fourth worker?
A. | 40 |
B. | 110 |
C. | 260 |
D. | 275 |
DIF: Difficult TOP: The production function
84. Refer to Table 13-2. What is the total cost associated with making 890 boxes of premium chocolates per week?
A. | $975 |
B. | $1100 |
C. | $1250 |
D. | $1375 |
DIF: Difficult TOP: The production function
85. Refer to Table 13-2. During the week of 25 April, Adrienne doesn’t box any chocolates. What are her costs during the week?
A. | $0 |
B. | $75 |
C. | $150 |
D. | $425 |
DIF: Difficult TOP: Fixed and variable costs
86. Refer to Table 13-2. One week, Adrienne exactly breaks even. If her revenue for the week is $1525, how many boxes of chocolate did she produce?
A. | five |
B. | 60 |
C. | 950 |
D. | 1375 |
DIF: Difficult TOP: The production function
87. Refer to Table 13-2. Adrienne has received an order for 3000 boxes of chocolates for next week. If she expects that the trend in the marginal product of labour will continue in the same direction, it is most likely that her best decision will be to:
A. | hire about 12 new workers and hope she can satisfy the order |
B. | commit to meeting the order and then take three weeks to complete the job |
C. | not commit to meeting the order until she can move to a larger room and hire more workers to box the chocolates |
D. | close her business until she is able to hire more productive workers |
DIF: Difficult TOP: The production function
Table 13-3
Consider the following firm which makes high-performance racing bicycles. All costs are given in dollars. Output is shown on a monthly basis. The firm’s fixed costs include a rent of $800 and a lease cost of $400 per month.
88. Refer to Table 13-3. What is the marginal cost of producing the tenth bicycle in a given month?
A. | $300 |
B. | $304 |
C. | $321 |
D. | $340 |
DIF: Difficult TOP: Average and marginal cost
89. Refer to Table 13-3. What is the average variable cost for the month if six bicycles are produced?
A. | $200 |
B. | $265 |
C. | $465 |
D. | $1590 |
DIF: Difficult TOP: Average and marginal cost
90. Refer to Table 13-3. What is the average fixed cost for the month if 10 bicycles are produced?
A. | $120 |
B. | $284.40 |
C. | $404.40 |
D. | $1200 |
DIF: Difficult TOP: Average and marginal cost
91. Refer to Table 13-3. How many bicycles are produced when marginal cost is $321?
A. | four |
B. | seven |
C. | nine |
D. | 10 |
DIF: Difficult TOP: Average and marginal cost
92. Refer to Table 13-3. One month the firm worked overtime to produce 16 bicycles. What was the average fixed cost for that month?
A. | 340 |
B. | 75 |
C. | 120 |
D. | it can’t be determined from the information given |
DIF: Difficult TOP: Average and marginal cost
93. Refer to Table 13-3. At what level of output will average variable cost equal average total cost?
A. | when marginal cost equals average variable cost |
B. | when marginal cost equals average total cost |
C. | there is no level of output where this occurs, as long as fixed costs are positive |
D. | this holds true for all levels of output in which average variable cost is falling |
DIF: Difficult TOP: Average and marginal cost
94. Harry’s Hotdogs is a small street vendor business owned by Harry Huggins. Harry is trying to get a better understanding of his costs by categorising them as fixed or variable. Which of the following costs are most likely to be considered fixed costs?
A. | hotdog buns |
B. | mustard |
C. | the cost of bookkeeping services |
D. | wages paid to workers that sell hotdogs |
DIF: Moderate TOP: Average and marginal cost
95. Harry Hoarder runs a small street vendor service which contracts to produce and sell moulded plastic souvenirs (key chains, commemorative plastic coins, plastic animals, etc.) at small theatre shows. As owner of the firm, Harry must decide how much of each product to produce. The key element of this decision is:
A. | the fixed cost of production |
B. | the cost of his selling booth |
C. | how costs will vary as he changes the level of production |
D. | the cost of book keeping services |
DIF: Moderate TOP: Fixed and variable costs
96. Harry’s Hotdogs is a small street vendor business owned by Harry Huggins. If Harry makes 10 hotdogs in his first hour of business and incurs a total cost of $16.50, his average total cost per hotdog is:
A. | $1.65 |
B. | $6.50 |
C. | this is impossible to determine without specific information on fixed cost |
D. | this is impossible to determine without specific information on variable cost |
DIF: Moderate TOP: Average and marginal cost
97. Suppose an apple orchardist increases the number of fruit pickers hired for a season. The number of apple trees remains the same. As a result the orchardist’s:
A. | variable costs will fall |
B. | variable costs will rise |
C. | total costs will fall |
D. | fixed costs and total costs will rise |
DIF: Moderate TOP: Cost curves and their shapes
98. Thirsty Thelma owns and operates a small lemonade stand. When Thelma is producing a small quantity of lemonade, she has few workers and her equipment is not being fully utilised. Because she can easily put her idle resources to use:
A. | the marginal cost of an extra worker is large |
B. | the marginal product of an extra worker is small |
C. | the marginal cost of one more glass of lemonade is small |
D. | her lemonade stand is likely to be crowded with workers |
DIF: Difficult TOP: Average and marginal cost
99. If a firm is operating at an efficient scale, average total cost must:
A. | rise as output is increased |
B. | fall as output is increase |
C. | be at its maximum |
D. | none of the above will be true |
DIF: Moderate TOP: The relationship between marginal cost and average total cost
100. One of the most important properties of cost curves is that:
A. | the average fixed cost must eventually rise |
B. | the average total cost curve first rises, then falls with increased output |
C. | for most producers, the average total cost curve must never cross the marginal cost curve |
D. | the marginal cost eventually rises with the quantity of output |
DIF: Moderate TOP: The relationship between marginal cost and average total cost
SHORT ANSWER
1. What are opportunity costs? How do explicit and implicit costs relate to opportunity costs?
DIF: Easy TOP: Costs as opportunity costs
2. A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant’s estimate of total costs to be higher or lower than an economist’s estimate? Explain.
DIF: Easy TOP: Costs as opportunity costs
3. The production function depicts a relationship between which two variables? Draw a production function that exhibits diminishing marginal product.
DIF: Easy TOP: The production function
4. How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph.
DIF: Easy TOP: From the production function to the total-cost curve
5. Consider the following graph of a firm in the short-run.
Identify the average fixed cost curve, the marginal cost curve, the average variable cost curve and the average total cost curve.
DIF: Moderate TOP: Cost curves and their shapes
6. Bob Edwards owns Bob’s Bagels. He hires an economist who assesses the shape of the bagel shop’s average total cost (ATC) curve as a function of the number of bagels produced. The results indicate a U-shaped average total cost curve. Bob’s economist explains that the ATC curve is U-shaped for two reasons, the first being the existence of diminishing marginal product, which causes it to rise. What would the second reason be? Assume that the marginal cost curve is linear. (Hint: The second reason relates to average fixed cost.)
DIF: Difficult TOP: Cost curves and their shapes
7. If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the average total cost curve is rising, what is necessarily true of the marginal cost curve?
DIF: Moderate TOP: The relationship between marginal cost and average total cost
8. If the long-run average total cost curve is flat, then what does this imply about specialisation? What will be the firm’s efficient scale?
DIF: Moderate TOP: Economies and diseconomies of scale
10. Define the Law of Diminishing returns:
DIF: Moderate TOP: The production function