Chapter13 TheCostsofProduction

MULTIPLECHOICE 1. Accordingtothelawofsupply, a. firmsproductionlevelsarenotcorrelatedwiththepriceofagood. b. thesupplycurveslopesdownward. c. firmsarewillingtoproduceagreaterquantityofagoodwhenthepriceofthegoodishigher. d. Noneoftheabovearecorrect. ANSWER:c. firmsarewillingtoproduceagreaterquantityofagoodwhenthepriceofthegoodishigher. TYPE:MDIFFICULTY:2SECTION:13.1 2. Industrialorganizationisthestudyofhow a. laborunionsorganizeworkersinindustries. b. profitablefirmsareinorganizedindustries. c. industriesorganizeforpoliticaladvantage. d. firmsdecisionsregardingpricesandquantitiesdependonthemarketconditionstheyface. ANSWER:d. firmsdecisionsregardingpricesandquantitiesdependonthemarketconditionstheyface. TYPE:MDIFFICULTY:1SECTION:13.1 3. Economistsnormallyassumethatthegoalofafirmisto (i) sellasmuchoftheirproductaspossible. (ii) setthepriceoftheirproductashighaspossible. (iii) maximizeprofit. a. (i)and(ii) b. (ii)and(iii) c. (iii)only d. Alloftheabovearecorrect. ANSWER:c. (iii)only TYPE:MDIFFICULTY:2SECTION:13.1 4. Theamountofmoneythatafirmreceivesfromthesaleofitsoutputiscalled a. totalgrossprofit. b. totalnetprofit. c. totalrevenue. d. netrevenue. ANSWER:c. totalrevenue. TYPE:MDIFFICULTY:1SECTION:13.1 5. Theamountofmoneythatafirmpaystobuyinputsiscalled a. totalcost. b. variablecost. c. marginalcost. d. fixedcost. ANSWER:a. totalcost. TYPE:MDIFFICULTY:1SECTION:13.1 6. Profitisdefinedas a. netrevenueminusdepreciation. b. totalrevenueminustotalcost. c. averagerevenueminusaveragetotalcost. d. marginalrevenueminusmarginalcost. ANSWER:b. totalrevenueminustotalcost. TYPE:MDIFFICULTY:1SECTION:13.1

113

114 3 Chapter 13 /The Costs of Production

7. Whichofthefollowingcanbeaddedtoprofittoobtaintotalrevenue? a. netprofit b. capitalprofit c. operationalprofit d. totalcost ANSWER:d. totalcost TYPE:MDIFFICULTY:2SECTION:13.1 8. Economistsnormallyassumethatthegoalofafirmisto (i) makeprofitaslargeaspossibleevenifitmeansreducingoutput. (ii) makeprofitaslargeaspossibleevenifitmeansincurringahighertotalcost. (iii) makerevenueaslargeaspossible. a. (i)and(ii) b. (i)and(iii) c. (ii)and(iii) d. Noneoftheabovearecorrect. ANSWER:a. (i)and(ii) TYPE:MDIFFICULTY:2SECTION:13.1 9. Totalrevenueequals a. totaloutputmultipliedbypriceperunitofoutput. b. totaloutputdividedbyprofit. c. (totaloutputmultipliedbysalesprice)inventorysurplus. d. (totaloutputmultipliedbysalesprice)inventoryshortage. ANSWER:a. totaloutputmultipliedbypriceperunitofoutput. TYPE:MDIFFICULTY:1SECTION:13.1 10. Thosethingsthatmustbeforgonetoacquireagoodarecalled a. substitutes. b. opportunitycosts. c. explicitcosts. d. competitors. ANSWER:b. opportunitycosts. TYPE:MDIFFICULTY:1SECTION:13.1 11. XYZcorporationproduced300unitsofoutputbutsoldonly275oftheunitsitproduced.Theaveragecostof productionforeachunitofoutputproducedwas$100.Eachofthe275unitssoldwassoldforapriceof$95.Total revenuefortheXYZcorporationwouldbe a. $3,875. b. $26,125. c. $28,500. d. $30,000. ANSWER:b. $26,125. TYPE:MDIFFICULTY:2SECTION:13.1 12. Explicitcosts a. requireanoutlayofmoneybythefirm. b. includeallofthefirmsopportunitycosts. c. includeincomethatisforgonebythefirmsowners. d. Alloftheabovearecorrect. ANSWER:a. requireanoutlayofmoneybythefirm. TYPE:MDIFFICULTY:1SECTION:13.1

Chapter 13 /The Costs of Production 3 115

13. Whichofthefollowingwouldbecategorizedasanimplicitcost? (i) wagesofworkers (ii) rawmaterialcosts (iii) forgoneinvestmentopportunities a. (i)and(iii) b. (iii)only c. (ii)and(iii) d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:13.1 14. Anexampleofanexplicitcostofproductionwouldbe a. thecostofforgonelaborearningsforanentrepreneur. b. thelostopportunitytoinvestinothercapitalmarketswhenthemoneyisinvestedinonesbusiness. c. thecostofflourforabaker. d. Noneoftheabovearecorrect. ANSWER:c. thecostofflourforabaker. TYPE:MDIFFICULTY:2SECTION:13.1 15. Whichofthefollowingisanimplicitcost? (i) theownerofafirmforgoinganopportunitytoearnalargesalaryworkingforaWallStreetbrokeragefirm (ii) interestpaidonthefirmsdebt (iii) rentpaidbythefirmtoleaseofficespace a. (ii)and(iii) b. (i)and(iii) c. (i)only d. Alloftheabovearecorrect. ANSWER:c. (i)only TYPE:MDIFFICULTY:2SECTION:13.1 16. Anexampleofanimplicitcostofproductionwouldbe a. theincomeanentrepreneurcouldhaveearnedworkingforsomeoneelse. b. thecostofrawmaterialsforproducingbreadinabakery. c. thecostofadeliverytruckinabusinessthatrarelymakesdeliveries. d. Alloftheabovearecorrect. ANSWER:a. theincomeanentrepreneurcouldhaveearnedworkingforsomeoneelse. TYPE:MDIFFICULTY:2SECTION:13.1 17. Toaneconomist,thefieldofindustrialorganizationanswerswhichofthefollowingquestions? a. Whyareconsumerssubjecttothelawofdemand? b. Whydofirmsexperiencefallingmarginalproductoflabor? c. Howdoesthedifferenceinthenumberoffirmsaffectpricesandtheefficiencyofmarketoutcomes? d. Whydofirmsconsiderproductioncostswhendeterminingproductsupply? ANSWER:c. Howdoesthedifferenceinthenumberoffirmsaffectpricesandtheefficiencyofmarketoutcomes? TYPE:MDIFFICULTY:2SECTION:13.1 18. Accountantsareprimarilyinterestedinthe a. flowofmoneyintoandoutoffirms. b. stockofassetsoffirms. c. marginalcostsofproductionoffirms. d. taxesdueoncapitalassetsoffirms. ANSWER:a. flowofmoneyintoandoutoffirms. TYPE:MDIFFICULTY:1SECTION:13.1

116 3 Chapter 13 /The Costs of Production

19. Johnownsashoeshinebusiness.Hisaccountantmostlikelyincludeswhichofthefollowingcostsonhisfinancial statements? a. wagesJohncouldearnwashingwindows b. dividendsJohnsmoneywasearninginthestockmarketbeforeJohnsoldhisstockandboughtashoeshine booth c. thecostofshoepolish d. Alloftheabovearecorrect. ANSWER:c. thecostofshoepolish TYPE:MDIFFICULTY:2SECTION:13.1 20. Whichofthefollowingcostswouldberegardedasanimplicitcost? a. thecostofaccountingservices b. theopportunitycostoffinancialcapitalthathasbeeninvestedinthebusiness c. thecostofcompliancewithgovernmentregulation d. allcoststhatinvolveoutlaysofmoneybythefirm ANSWER:b. theopportunitycostoffinancialcapitalthathasbeeninvestedinthebusiness TYPE:MDIFFICULTY:2SECTION:13.1 21. Whichofthefollowingisanimplicitcostofowningabusiness? (i) interestexpenseonexistingbusinessloans (ii) forgonesavingsaccountinterestwhenpersonalmoneyisinvestedinthebusiness (iii) damagedorlostinventory a. (i)only b. (ii)only c. (i)and(ii) d. Alloftheabovearecorrect. ANSWER:b. (ii)only TYPE:MDIFFICULTY:2SECTION:13.1 22. Theamountofmoneythatawheatfarmercouldhaveearnedifhehadplantedbarleyinsteadofwheatis a. anexplicitcost. b. anaccountingcost c. animplicitcost. d. forgoneaccountingprofit. ANSWER:c. animplicitcost. TYPE:MDIFFICULTY:2SECTION:13.1 Usethefollowinginformationtoanswerquestions23and24. Joewantstostarthisownbusiness.Thebusinesshewantstostartwillrequirethathepurchaseafactorythatcosts $300,000.Tofinancethispurchase,hewilluse$100,000ofhisownmoney,onwhichhehasbeenearning10percent interest.Inaddition,hewillborrow$200,000,andhewillpay12percentinterestonthatloan. 23. Forthefirstyearofoperation,whatistheexplicitcostofpurchasingthefactory? a. $12,000 b. $20,000 c. $24,000 d. $44,000 ANSWER:c. $24,000 TYPE:MDIFFICULTY:2SECTION:13.1 24. Forthefirstyearofoperation,whatistheopportunitycostofpurchasingthefactory? a. $10,000 b. $20,000 c. $24,000 d. $34,000 ANSWER:d. $34,000 TYPE:MDIFFICULTY:2SECTION:13.1

Chapter 13 /The Costs of Production 3 117

25. Economicprofitisequalto a. totalrevenueminustheexplicitcostofproducinggoodsandservices. b. totalrevenueminustheopportunitycostofproducinggoodsandservices. c. totalrevenueminustheaccountingcostofproducinggoodsandservices. d. averagerevenueminustheaveragecostofproducingthelastunitofagoodorservice. ANSWER:b. totalrevenueminustheopportunitycostofproducinggoodsandservices. TYPE:MDIFFICULTY:1SECTION:13.1 26. Accountingprofitisequalto a. marginalrevenueminusmarginalcost. b. totalrevenueminustheexplicitcostofproducinggoodsandservices. c. totalrevenueminustheopportunitycostofproducinggoodsandservices. d. averagerevenueminustheaveragecostofproducingthelastunitofagoodorservice. ANSWER:b. totalrevenueminustheexplicitcostofproducinggoodsandservices. TYPE:MDIFFICULTY:1SECTION:13.1 27. Economicprofitisequalto (i) totalrevenue(explicitcosts+implicitcosts). (ii) totalrevenueopportunitycosts. (iii) accountingprofit+implicitcosts. a. (i)only b. (i)and(ii) c. (ii)and(iii). d. Alloftheabovearecorrect. ANSWER:b. (i)and(ii) TYPE:MDIFFICULTY:2SECTION:13.1 28. Accountingprofitisequalto (i) totalrevenueimplicitcosts. (ii) totalrevenueopportunitycosts. (iii) economicprofit+implicitcosts. a. (i)only b. (iii)only c. (i)and(ii) d. Noneoftheabovearecorrect. ANSWER:b. (iii)only TYPE:MDIFFICULTY:2SECTION:13.1 29. Economicprofit a. willneverexceedaccountingprofit. b. ismostoftenequaltoaccountingprofit. c. isalwaysatleastaslargeasaccountingprofit. d. isalesscompletemeasureofprofitabilitythanaccountingprofit. ANSWER:a. willneverexceedaccountingprofit. TYPE:MDIFFICULTY:2SECTION:13.1 30. Toaneconomist,itisconceivablethattheobjectivethatmotivatesanindividualentrepreneurtostartabusiness arisesfrom a. aninnateloveforthetypeofbusinessthatheorshestarts. b. adesiretoearnaprofit. c. analtruisticdesiretoprovidetheworldwithagoodproduct. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:13.1

118 3 Chapter 13 /The Costs of Production

31. Whenafirmismakingaprofitmaximizingproductiondecision,whichofthefollowingprinciplesofeconomicsis likelytobemostimportanttothefirmsdecision? a. Thecostofsomethingiswhatyougiveuptogetit. b. Acountry'sstandardoflivingdependsonitsabilitytoproducegoodsandservices. c. Pricesrisewhenthegovernmentprintstoomuchmoney. d. Governmentscansometimesimprovemarketoutcomes. ANSWER:a. Thecostofsomethingiswhatyougiveuptogetit. TYPE:MDIFFICULTY:2SECTION:13.1 32. GordonisaseniormajoringincomputernetworkdevelopmentatSmartStateUniversity.Whilehehasbeen attendingcollege,Gordonstartedacomputerconsultingbusinesstohelpseniorcitizenssetuptheirnetwork connectionsandteachthemhowtouseemail.Gordoncharges$25perhourforhisconsultingservices.Gordonalso works5hoursaweekfortheEconomicsDepartmenttomaintainthatdepartmentsWebpage.TheEconomics DepartmentpaysGordon$20perhour.Fromthisinformationwecanconclude: a. GordonshouldincreasethenumberofhoursheworksfortheEconomicsDepartmenttomakeitcomparableto hisconsultingbusinessincome. b. GordonisobviouslynotmaximizinghiswellbeingifhecontinuestoworkfortheEconomicsDepartment. c. IfGordonchoosesonehouratthebeachwithhisfriendsratherthanspendonemorehourwithaconsulting client,theforgoneincomeof$25isconsideredacostofthechoicetogotothebeach. d. IftheEconomicsDepartmentoffersGordonafulltimejobhewilldefinitelynottakethejoboffer. ANSWER:c. IfGordonchoosesonehouratthebeachwithhisfriendsratherthanspendonemorehourwitha consultingclient,theforgoneincomeof$25isconsideredacostofthechoicetogotothebeach. TYPE:MDIFFICULTY:2SECTION:13.1 33. Economistsnormallyassumethatthegoalofafirmisto a. maximizeitstotalrevenue. b. maximizeitsprofit. c. minimizeitsexplicitcosts. d. minimizeitstotalcost. ANSWER:b. maximizeitsprofit. TYPE:MDIFFICULTY:1SECTION:13.1 34. Explicitcosts a. requireanoutlayofmoneybythefirm. b. enterintotheaccountantsmeasurementofafirmsprofit. c. enterintotheeconomistsmeasurementofafirmsprofit. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:1SECTION:13.1 35. Acertainfirmmanufacturesandsellscomputerchips.Lastyear,itsold2millionchipsatapriceof$10perchip.For lastyear,thefirms a. accountingprofitamountedto$20million. b. economicprofitamountedto$20million. c. totalrevenueamountedto$20million. d. explicitcostsamountedto$20million. ANSWER:c. totalrevenueamountedto$20million. TYPE:MDIFFICULTY:1SECTION:13.1 36. Afirmsopportunitycostsofproductionamounttoits a. explicitcostsonly. b. implicitcostsonly. c. explicitcosts+implicitcosts. d. explicitcosts+implicitcosts+totalrevenue. ANSWER:c. explicitcosts+implicitcosts. TYPE:MDIFFICULTY:1SECTION:13.1

Chapter 13 /The Costs of Production 3 119

37. Whichofthefollowingexpressionsiscorrect? a. accountingprofit=totalrevenueexplicitcosts. b. economicprofit=totalrevenuetotalopportunitycosts. c. economicprofit=totalrevenueexplicitcostsimplicitcosts. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:13.1 38. Whichofthefollowingexpressionsiscorrect? a. accountingprofit=economicprofit+implicitcosts b. accountingprofit=totalrevenueimplicitcosts c. economicprofit=accountingprofit+explicitcosts d. economicprofit=totalrevenueimplicitcosts ANSWER:a. accountingprofit=economicprofit+implicitcosts. TYPE:MDIFFICULTY:2SECTION:13.1 39. Susanusedtoworkasatelemarketer,earning$25,000peryear.Shegaveupthatjobtostartacateringbusiness.In calculatingtheeconomicprofitofhercateringbusiness,the$25,000incomethatshegaveupiscountedaspartofthe cateringfirms a. totalrevenue. b. opportunitycosts. c. explicitcosts. d. Alloftheabovearecorrect. ANSWER:b. opportunitycosts. TYPE:MDIFFICULTY:1SECTION:13.1 RefertothefollowinginformationtoanswerQuestions40and41. Zachtook$500,000outofthebankandusedittostarthisnewcookiebusiness.Thebankaccountpays4percentinterest peryear.Duringthefirstyearofhisbusiness,Zachsold12,000boxesofcookiesfor$3perbox.Also,duringthefirstyear, thecookiebusinessincurredcoststhatrequiredoutlaysofmoneyamountingto$14,000. 40. Zachsaccountingprofitfortheyearwas a. $478,000. b. $56,000. c. $2,000. d. $22,000. ANSWER:d. $22,000. TYPE:MDIFFICULTY:2SECTION:13.1 41. Zachseconomicprofitfortheyearwas a. $478,000. b. $56,000. c. $2,000. d. $22,000. ANSWER:c. $2,000. TYPE:MDIFFICULTY:2SECTION:13.1

120 3 Chapter 13 /The Costs of Production

Usethefollowinginformationtoanswerquestions42through45. Tonyisawheatfarmer,buthealsospendspartofhisdayteachingguitarlessons.Duetothepopularityofhislocal countrywesternband,FarmerTonyhasmorestudentsrequestinglessonsthanhehastimeforifheistoalsomaintainhis farmingbusiness.FarmerTonycharges$25anhourforhisguitarlessons.Onespringday,hespends10hoursinhisfields planting$130worthofseedsonhisfarm.Heexpectsthattheseedsheplantedwillyield$300worthofwheat. 42. WhatisthetotalopportunitycostofthedaythatFarmerTonyincurredforhisspringdayinthefieldplanting wheat? a. $130 b. $250 c. $300 d. $380 ANSWER:d. $380 TYPE:MDIFFICULTY:2SECTION:13.1 43. Tonysaccountantwouldmostlikelyfigurethetotalcostofhiswheatplantingtoequal a. $25. b. $130. c. $300. d. $380. ANSWER:b. $130. TYPE:MDIFFICULTY:2SECTION:13.1 44. Tonysaccountingprofitequals a. $80. b. $130. c. $170. d. $260. ANSWER:c. $170. TYPE:MDIFFICULTY:2SECTION:13.1 45. Tonyseconomicprofitequals a. $130. b. $80. c. $130. d. $170. ANSWER:b. $80. TYPE:MDIFFICULTY:2SECTION:13.1 46. Doloresusedtoworkasahighschoolteacherfor$40,000peryearbutquitinordertostartherowncatering business.Tobuythenecessaryequipment,shewithdrew$20,000fromhersavings,(whichpaid3percentinterest) andborrowed$30,000fromheruncle,whomshepays3percentinterestperyear.Lastyearshepaid$25,000for ingredientsandhadrevenueof$60,000.SheaskedLouistheaccountantandGregtheeconomisttocalculateher profitforher. a. Louissaysherprofitis$34,100andGregsaysherprofitis$6,500. b. Louissaysherprofitis$34,100andGregsaysshelost$6,500. c. Louissaysherprofitis$35,000andGregsaysshelost$5,000. d. Louissaysherprofitis$33,500andGregsaysherprofitis33,500. ANSWER:b. Louissaysherprofitis$34,100andGregsaysshelost$6,500. TYPE:MDIFFICULTY:3SECTION:13.1 47. Aproductionfunctionisarelationshipbetween a. inputsandquantityofoutput. b. inputsandrevenue. c. inputsandcosts. d. inputsandprofit. ANSWER:a. inputsandquantityofoutput. TYPE:MDIFFICULTY:1SECTION:13.2

Chapter 13 /The Costs of Production 3 121

48. Themarginalproductoflaborisequaltothe a. incrementalcostassociatedwithaoneunitincreaseinlabor. b. incrementalprofitassociatedwithaoneunitincreaseinlabor. c. increaseinlabornecessarytogenerateaoneunitincreaseinoutput. d. increaseinoutputobtainedfromaoneunitincreaseinlabor. ANSWER:d. increaseinoutputobtainedfromaoneunitincreaseinlabor. TYPE:MDIFFICULTY:1SECTION:13.2 49. Themarginalproductoflaborcanbedefinedas a. changeinprofit/changeinlabor. b. changeinoutput/changeinlabor. c. changeinlabor/changeinoutput. d. changeinlabor/changeintotalcost. ANSWER:b. changeinoutput/changeinlabor. TYPE:MDIFFICULTY:1SECTION:13.2 50. Onewouldexpecttoobservediminishingmarginalproductoflaborwhen a. crowdedofficespacereducestheproductivityofnewworkers. b. workersarediscouragedaboutthelackofhelpfromotherworkers. c. onlynewworkersaretrainedinusingthemostproductivecapital. d. unionworkersaretoldtoreducetheirworkeffortinpreparationforanewroundofcollectivebargainingtalks. ANSWER:a. crowdedofficespacereducestheproductivityofnewworkers. TYPE:MDIFFICULTY:2SECTION:13.2 51. Whenaddinganotherunitoflaborleadstoanincreaseinoutputthatissmallerthanincreasesinoutputthat resultedfromaddingpreviousunitsoflabor,wehavethepropertyof a. diminishinglabor. b. diminishingoutput. c. diminishingmarginalproduct. d. negativemarginalproduct. ANSWER:c. diminishingmarginalproduct. TYPE:MDIFFICULTY:1SECTION:13.2

122 3 Chapter 13 /The Costs of Production

Thefigurebelowdepictsaproductionfunctionforafirmthatproducescookies.Usethefiguretoanswerquestions52and 53.

52.

Asthenumberofworkersincreases, a. totaloutputincreases,butatadecreasingrate. b. marginalproductincreases,butatadecreasingrate. c. marginalproductincreasesatanincreasingrate. d. totaloutputdecreases. ANSWER:a. totaloutputincreases,butatadecreasingrate. TYPE:MDIFFICULTY:2SECTION:13.2 53. Withregardtocookieproduction,thefigureimplies a. diminishingmarginalproductofworkers. b. diminishingmarginalcostofcookieproduction. c. decreasingcostofcookieproduction. d. increasingmarginalproductofworkers. ANSWER:a. diminishingmarginalproductofworkers. TYPE:MDIFFICULTY:2SECTION:13.2 54. Whichofthefollowingstatementsaboutaproductionfunctioniscorrectforafirmthatuseslabortoproduce output? a. Theproductionfunctiondepictstherelationshipbetweenthequantityoflaborandthequantityofoutput. b. Theslopeoftheproductionfunctionmeasuresmarginalcost. c. Thequantityofoutputismeasuredalongthehorizontalaxis. d. Alloftheabovearecorrect. ANSWER:a. Theproductionfunctiondepictstherelationshipbetweenthequantityoflaborandthequantityof output. TYPE:MDIFFICULTY:2SECTION:13.2

Chapter 13 /The Costs of Production 3 123

Thefigurebelowdepictsatotalcostfunctionforafirmthatproducescookies.Usethefiguretoanswerquestions55 through58.

55.

Whichofthefollowingistrueoftheproductionfunction(notpictured)thatunderliesthistotalcostfunction? (ii) Totaloutputincreasesasthequantityofinputsincreases,butatadecreasingrate. (ii) Marginalproductisdiminishingforalllevelsofinputusage. (iii) Theslopeoftheproductionfunctiondecreasesasthequantityofinputsincreases. a. (i)only b. (ii)and(iii) c. (i)and(iii) d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:3SECTION:13.2 56. Thechangingslopeofthetotalcostcurvereflects a. decreasingaveragevariablecost. b. decreasingaveragetotalcost. c. decreasingmarginalproduct. d. increasingfixedcost. ANSWER:c. decreasingmarginalproduct. TYPE:MDIFFICULTY:2SECTION:13.2 57. Whichofthefollowingstatementsbestcapturesthenatureoftheunderlyingproductionfunction? a. Outputincreasesatadecreasingratewithadditionalunitsofinput. b. Outputincreasesatanincreasingratewithadditionalunitsofinput. c. Outputdecreasesatadecreasingratewithadditionalunitsofinput. d. Outputdecreasesatanincreasingratewithadditionalunitsofinput. ANSWER:a. Outputincreasesatadecreasingratewithadditionalunitsofinput. TYPE:MDIFFICULTY:2SECTION:13.2

124 3 Chapter 13 /The Costs of Production

58. Whichofthestatementsbelowismostconsistentwiththeshapeofthetotalcostcurve? a. Producinganadditionalcookieisalwaysmorecostlythanproducingthepreviouscookie. b. Totalproductionofcookiesdecreaseswithadditionalunitsofinput. c. Producingadditionalcookiesisequallycostly,regardlessofhowmanycookiesarealreadybeingproduced. d. Producingadditionalcookiesbecomesincreasinglycostlyonlywhenthenumberofcookiesalreadybeing producedislarge. ANSWER:a. Producinganadditionalcookieisalwaysmorecostlythanproducingthepreviouscookie. TYPE:MDIFFICULTY:2SECTION:13.2 59. Whichoftheseassumptionsisoftenrealisticforafirmintheshortrun? a. Thefirmcanvaryboththesizeofitsfactoryandthenumberofworkersitemploys. b. Thefirmcanvarythesizeofitsfactory,butnotthenumberofworkersitemploys. c. Thefirmcanvarythenumberofworkersitemploys,butnotthesizeofitsfactory. d. Thefirmcanvaryneitherthesizeofitsfactorynorthenumberofworkersitemploys. ANSWER:c. Thefirmcanvarythenumberofworkersitemploys,butnotthesizeofitsfactory. TYPE:MDIFFICULTY:1SECTION:13.2 60. Assumeacertainfirmregardsthenumberofworkersitemploysasvariable,andthatitregardsthesizeofits factoryasfixed.Thisassumptionisoftenrealistic a. intheshortrun,butnotinthelongrun. b. inthelongrun,butnotintheshortrun. c. bothintheshortrunandinthelongrun. d. neitherintheshortrunnorinthelongrun. ANSWER:a. intheshortrun,butnotinthelongrun. TYPE:MDIFFICULTY:1SECTION:13.2 61. Forafirm,theproductionfunctionrepresentstherelationshipbetween a. implicitcostsandexplicitcosts. b. quantityofinputsandtotalcost. c. quantityofinputsandquantityofoutput. d. quantityofoutputandtotalcost. ANSWER:c. quantityofinputsandquantityofoutput. TYPE:MDIFFICULTY:1SECTION:13.2 62. Forafirm,therelationshipbetweenthequantityofinputsandquantityofoutputiscalledthe a. profitfunction. b. productionfunction. c. totalcostfunction. d. quantityfunction. ANSWER:b. productionfunction. TYPE:MDIFFICULTY:1SECTION:13.2 63. Foracertainfirm,thenumberofworkershiredistheonlyvariableinput.Whenthisfirmsproductionfunctionis illustratedonagraph, a. thenumberofworkersismeasuredonthehorizontalaxisandthequantityofoutputismeasuredonthevertical axis. b. thenumberofworkersismeasuredonthehorizontalaxisandvariablecostismeasuredontheverticalaxis. c. thenumberofworkersismeasuredonthehorizontalaxisandprofitismeasuredontheverticalaxis. d. totalcostismeasuredonthehorizontalaxisandthenumberofworkersismeasuredontheverticalaxis. ANSWER:a. thenumberofworkersismeasuredonthehorizontalaxisandthequantityofoutputismeasuredonthe verticalaxis. TYPE:MDIFFICULTY:1SECTION:13.2

Chapter 13 /The Costs of Production 3 125

64. Themarginalproductofaninputintheproductionprocessistheincreasein a. totalrevenueobtainedfromanadditionalunitofthatinput. b. profitobtainedfromanadditionalunitofthatinput. c. totalrevenueobtainedfromanadditionalunitofthatinput. d. quantityofoutputobtainedfromanadditionalunitofthatinput. ANSWER:d. quantityofoutputobtainedfromanadditionalunitofthatinput. TYPE:MDIFFICULTY:1SECTION:13.2 65. Whenafirmsonlyvariableinputislabor,thentheslopeoftheproductionfunctionmeasuresthe a. quantityoflabor. b. quantityofoutput. c. totalcost. d. marginalproductoflabor. ANSWER:d. marginalproductoflabor. TYPE:MDIFFICULTY:1SECTION:13.2 66. LetLrepresentthenumberofworkershiredbyafirmandletQrepresentthatfirmsquantityofoutput.Assume twopointsonthefirmsproductionfunctionare(L=12,Q=122)and(L=13,Q=130).Thenthemarginalproduct ofthe13thworkeris a. 8unitsofoutput. b. 10unitsofoutput. c. 122unitsofoutput. d. 130unitsofoutput. ANSWER:a. 8unitsofoutput. TYPE:MDIFFICULTY:2SECTION:13.2 67. Ona100acrefarm,afarmerisabletoproduce3,000bushelsofwheatwhenhehires2workers.Heisableto produce4,400bushelsofwheatwhenhehires3workers.Whichofthefollowingpossibilitiesisconsistentwiththe propertyofdiminishingmarginalproduct? a. Thefarmerisabletoproduce5,600bushelsofwheatwhenhehires4workers. b. Thefarmerisabletoproduce5,800bushelsofwheatwhenhehires4workers. c. Thefarmerisabletoproduce6,000bushelsofwheatwhenhehires4workers. d. Alloftheabovearecorrect. ANSWER:a. Thefarmerisabletoproduce5,600bushelsofwheatwhenhehires4workers. TYPE:MDIFFICULTY:2SECTION:13.2 68. Supposeacertainfirmisabletoproduce160unitsofoutputperdaywhen15workersarehired.Thefirmisableto produce176unitsofoutputperdaywhen16workersarehired(holdingotherinputsfixed).Thenthemarginal productofthe16thworkeris a. 10unitsofoutput. b. 11unitsofoutput. c. 16unitsofoutput. d. 176unitsofoutput. ANSWER:c. 16unitsofoutput. TYPE:MDIFFICULTY:1SECTION:13.2 69. Atotalcostcurveshowstherelationshipbetweenthe a. quantityofaninputusedandthetotalcostofproduction. b. quantityofoutputproducedandthetotalcostofproduction. c. totalcostofproductionandprofit. d. totalcostofproductionandtotalrevenue. ANSWER:b. thequantityofoutputproducedandthetotalcostofproduction. TYPE:MDIFFICULTY:1SECTION:13.2

126 3 Chapter 13 /The Costs of Production

70. Whichofthefollowingcostsdonotvarywiththeamountofoutputafirmproduces? a. averagefixedcosts b. fixedcostsandaveragefixedcosts c. marginalcostsandaveragefixedcosts d. fixedcosts ANSWER:d. fixedcosts TYPE:MDIFFICULTY:1SECTION:13.3 71. Anexampleofafixedcostwouldbe (i) rawmaterialssuppliedatagovernmentregulatedprice. (ii) rentpaidonafactory. (iii) machinemaintenance. a. (ii)only b. (i)and(ii) c. (ii)and(iii) d. Alloftheabovearecorrect. ANSWER:b. (i)and(ii) TYPE:MDIFFICULTY:2SECTION:13.3 72. Fixedcostscanbedefinedascoststhat a. varyinverselywithproduction. b. varyinproportionwithproduction. c. areincurredonlywhenproductionislargeenough. d. areincurredevenifnothingisproduced. ANSWER:d. areincurredevenifnothingisproduced. TYPE:MDIFFICULTY:1SECTION:13.3 73. SupposeJanisstartingupasmalllemonadestandbusiness.VariablecostsforJanslemonadestandwouldinclude thecostof a. buildingthelemonadestand. b. hiringanartisttodesignalogoforhersign. c. lemonademix. d. Alloftheabovearecorrect. ANSWER:c. lemonademix. TYPE:MDIFFICULTY:2SECTION:13.3 74. Ifafirmproducesnothing,whichofthefollowingcostswillbezero? a. totalcost b. fixedcost c. opportunitycost d. variablecost ANSWER:d. variablecost TYPE:MDIFFICULTY:1SECTION:13.3 75. Oneassumptionthatdistinguishesshortruncostanalysisfromlongruncostanalysisforaprofitmaximizingfirm isthatintheshortrun, a. outputisnotvariable. b. thenumberofworkersusedtoproducethefirm'sproductisfixed. c. thesizeofthefactoryisfixed. d. therearenofixedcosts. ANSWER:c. thesizeofthefactoryisfixed. TYPE:MDIFFICULTY:2SECTION:13.3

Chapter 13 /The Costs of Production 3 127

76. Thecostofproducingthetypicalunitofoutputisthefirms a. averagetotalcost. b. opportunitycost. c. variablecost. d. marginalcost. ANSWER:a. averagetotalcost. TYPE:MDIFFICULTY:2SECTION:13.3 77. Averagetotalcostisequalto a. output/totalcost. b. totalcosttotalquantityofoutput. c. averagevariablecost+totalfixedcost. d. totalcost/output. ANSWER:d. totalcost/output. TYPE:MDIFFICULTY:1SECTION:13.3 78. Theamountbywhichtotalcostriseswhenthefirmproducesoneadditionalunitofoutputiscalled a. averagecost. b. marginalcost. c. fixedcost. d. variablecost. ANSWER:b. marginalcost. TYPE:MDIFFICULTY:1SECTION:13.3 79. Thecostofproducinganadditionalunitofoutputisthefirms a. marginalcost. b. productivityoffset. c. variablecost. d. averagevariablecost. ANSWER:a. marginalcost. TYPE:MDIFFICULTY:1SECTION:13.3 80. Averagetotalcostequals a. changeintotalcostsdividedbyquantityproduced. b. changeintotalcostsdividedbychangeinquantityproduced. c. (fixedcosts+variablecosts)dividedbyquantityproduced. d. (fixedcosts+variablecosts)dividedbychangeinquantityproduced. ANSWER:c. (fixedcosts+variablecosts)dividedbyquantityproduced. TYPE:MDIFFICULTY:2SECTION:13.3 81. Variablecostdividedbyquantityproducedis a. averagetotalcost. b. marginalcost. c. profit. d. Noneoftheabovearecorrect. ANSWER:d. Noneoftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:13.3 82. Marginalcostequals (i) changeintotalcostdividedbychangeinquantityproduced. (ii) changeinvariablecostdividedbychangeinquantityproduced. (iii) theaveragefixedcostofthecurrentunit. a. (i)and(ii) b. (ii)and(iii) c. (ii)only d. Alloftheabovearecorrect. ANSWER:a. (i)and(ii) TYPE:MDIFFICULTY:2SECTION:13.3

128 3 Chapter 13 /The Costs of Production

83. Variablecostdividedbychangeinquantityproducedis a. averagevariablecost. b. marginalcost. c. averagetotalcost. d. Noneoftheabovearecorrect. ANSWER:d. Noneoftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:13.3 84. Marginalcostequals a. totalcostdividedbyquantityofoutputproduced. b. totaloutputdividedbythechangeintotalcost. c. theslopeofthetotalcostcurve. d. Noneoftheabovearecorrect. ANSWER:c. theslopeofthetotalcostcurve. TYPE:MDIFFICULTY:2SECTION:13.3 85. Averagetotalcosttellsusthe a. totalcostofthefirstunitofoutput,iftotalcostisdividedevenlyoveralltheunitsproduced. b. costofatypicalunitofoutput,iftotalcostisdividedevenlyoveralltheunitsproduced. c. costofthelastunitofoutput,iftotalcostdoesnotincludeafixedcostcomponent. d. variablecostofafirmthatisproducingatleastoneunitofoutput. ANSWER:b. costofatypicalunitofoutput,iftotalcostisdividedevenlyoveralltheunitsproduced. TYPE:MDIFFICULTY:2SECTION:13.3 86. Marginalcosttellsusthe a. valueofallresourcesusedinaproductionprocess. b. marginalincrementtoprofitabilitywhenpriceisconstant. c. amountbywhichtotalcostriseswhenoutputisincreasedbyoneunit. d. amountbywhichoutputriseswhenlaborisincreasedbyoneunit. ANSWER:c. amountbywhichtotalcostriseswhenoutputisincreasedbyoneunit. TYPE:MDIFFICULTY:2SECTION:13.3 Forquestions87through90,assumethatagivenfirmexperiencesdecreasingmarginalproductoflaborwiththeaddition ofeachworkerregardlessofthecurrentoutputlevel. 87. Averagetotalcostwillbe a. alwaysrising. b. alwaysfalling. c. constant. d. Ushaped. ANSWER:d. Ushaped. TYPE:MDIFFICULTY:2SECTION:13.3 88. Averagefixedcostwillbe a. alwaysrising. b. alwaysfalling. c. Ushaped. d. constant. ANSWER:b. alwaysfalling. TYPE:MDIFFICULTY:2SECTION:13.3 89. Averagevariablecostwillbe a. alwaysrising. b. alwaysfalling. c. Ushaped. d. constant. ANSWER:a. alwaysrising. TYPE:MDIFFICULTY:2SECTION:13.3

Chapter 13 /The Costs of Production 3 129

90. Marginalcostwillbe a. alwaysrising. b. alwaysfalling. c. Ushaped. d. constant. ANSWER:a. alwaysrising. TYPE:MDIFFICULTY:2SECTION:13.3 Usethefigurebelowtoanswerquestion91.

91.

Whichoftheabovemarginalcostcurvesreflectstheexistenceofdiminishingmarginalproduct? a. A b. B c. C d. D ANSWER:a. A TYPE:MDIFFICULTY:2SECTION:13.3 92. Ifmarginalcostisrising, a. averagevariablecostmustbefalling. b. averagefixedcostmustberising. c. marginalproductmustbefalling. d. marginalproductmustberising. ANSWER:c. marginalproductmustbefalling. TYPE:MDIFFICULTY:2SECTION:13.3 93. Diminishingmarginalproductsuggeststhatthemarginal a. costofanextraworkerisunchanged. b. costofanextraworkerislessthanthepreviousworkersmarginalcost. c. productofanextraworkerislessthanthepreviousworkersmarginalproduct. d. productofanextraworkerisgreaterthanthepreviousworkersmarginalproduct. ANSWER:c. productofanextraworkerislessthanthepreviousworkersmarginalproduct. TYPE:MDIFFICULTY:2SECTION:13.3

130 3 Chapter 13 /The Costs of Production

94. Diminishingmarginalproductsuggeststhat a. additionalunitsofoutputbecomelesscostlyasmoreoutputisproduced. b. marginalcostisupwardsloping. c. thefirmisatfullcapacity. d. Alloftheabovearecorrect. ANSWER:b. marginalcostisupwardsloping. TYPE:MDIFFICULTY:2SECTION:13.3 95. Theaveragefixedcostcurve a. alwaysdeclineswithincreasedlevelsofoutput. b. alwaysriseswithincreasedlevelsofoutput. c. declinesaslongasitisabovemarginalcost. d. declinesaslongasitisbelowmarginalcost. ANSWER:a. alwaysdeclineswithincreasedlevelsofoutput. TYPE:MDIFFICULTY:2SECTION:13.3 96. Averagetotalcostisveryhighwhenasmallamountofoutputisproducedbecause a. averagevariablecostishigh. b. averagefixedcostishigh. c. marginalcostishigh. d. Alloftheabovearecorrect. ANSWER:b. averagefixedcostishigh. TYPE:MDIFFICULTY:2SECTION:13.3 97. Totalcostnecessarilyrisesdueto (i) risingmarginalcost. (ii) fallingmarginalcost. (iii) increasingmarginalproduct. a. (i)only b. (i)and(ii) c. (ii)only d. Noneoftheabovearecorrect. ANSWER:d. Noneoftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:13.3 98. Theefficientscaleofthefirmisthequantityofoutputthat a. maximizesmarginalproduct. b. maximizesprofit. c. minimizesaveragetotalcost. d. minimizesaveragevariablecost. ANSWER:c. minimizesaveragetotalcost. TYPE:MDIFFICULTY:1SECTION:13.3 99. Whenmarginalcostislessthanaveragetotalcost, a. marginalcostmustbefalling. b. averagevariablecostmustbefalling. c. averagetotalcostisfalling. d. averagetotalcostisrising. ANSWER:c. averagetotalcostisfalling. TYPE:MDIFFICULTY:2SECTION:13.3 100. Whenmarginalcostexceedsaveragetotalcost, a. averagefixedcostmustberising. b. averagetotalcostmustberising. c. averagetotalcostmustbefalling. d. marginalcostmustbefalling. ANSWER:b. averagetotalcostmustberising. TYPE:MDIFFICULTY:2SECTION:13.3

Chapter 13 /The Costs of Production 3 131

101. Averagetotalcostisincreasingwhenever a. totalcostisincreasing. b. marginalcostisincreasing. c. marginalcostislessthanaveragetotalcost. d. marginalcostisgreaterthanaveragetotalcost. ANSWER:d. marginalcostisgreaterthanaveragetotalcost. TYPE:MDIFFICULTY:2SECTION:13.3 102. Johnnyisasophomoreincollegeandhasa1.5cumulativegradepointaverage(GPA).JohnnyscumulativeGPA willfallevenfurthernextsemesterifheperformsworsethan (i) hiscumulativeGPA. (ii) heeverperformedbefore. (iii) hedidlastsemester. a. (i)and(ii) b. (i)and(iii) c. (ii)and(iii) d. Alloftheabovearecorrect. ANSWER:a. (i)and(ii) TYPE:MDIFFICULTY:3SECTION:13.3 103. Johnnyisasophomoreincollegeandhasa1.5cumulativegradepointaverage(GPA).JohnnyscumulativeGPA willbebetternextsemesterifhe (i) performsbetterthanhedidlastsemester. (ii) performsbetterthanhiscumulativeGPA. (iii) givesanaverageperformance. a. (ii)only b. (iii)only c. (i)and(iii) d. Alloftheabovearecorrect. ANSWER:a. (ii)only TYPE:MDIFFICULTY:3SECTION:13.3 104. Marginalcostisequaltoaveragetotalcostwhen a. averagevariablecostisfalling. b. averagefixedcostisrising. c. marginalcostisatitsminimum. d. averagetotalcostisatitsminimum. ANSWER:d. averagetotalcostisatitsminimum. TYPE:MDIFFICULTY:2SECTION:13.3 105. Themarginalcostcurvecrossestheaveragetotalcostcurveat a. theefficientscale. b. theminimumpointontheaveragetotalcostcurve. c. apointwherethemarginalcostcurveisrising. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:13.3 106. Ifmarginalcostisbelowaveragetotalcost,thenaveragetotalcost a. isconstant. b. isfalling. c. isrising. d. mayriseorfalldependingonthesizeoffixedcosts. ANSWER:b. isfalling. TYPE:MDIFFICULTY:2SECTION:13.3

132 3 Chapter 13 /The Costs of Production

107. Atalllevelsofproductionbeyondthepointwherethemarginalcostcurvecrossestheaveragevariablecostcurve, averagevariablecost a. rises. b. remainsunaffected. c. falls. d. Alloftheabovearepossible,itdependsontheshapeofthemarginalcostcurve. ANSWER:a. rises. TYPE:MDIFFICULTY:2SECTION:13.3 Usethefigurebelowtoanswerquestion108.

108.

Whichofthefollowingcanbeinferredfromthefigureabove? (i) Marginalcostisincreasingatalllevelsofoutput. (ii) Marginalproductisincreasingatlowlevelsofoutput. (iii) Marginalproductisdecreasingathighlevelsofoutput. a. (i)and(ii) b. (ii)and(iii) c. (i)and(iii) d. Alloftheabovearecorrect. ANSWER:b. (ii)and(iii) TYPE:MDIFFICULTY:3SECTION:13.3

Chapter 13 /The Costs of Production 3 133

Thecurvesbelowreflectinformationaboutthecoststructureofafirm.Usethefiguretoanswerquestions109through115.

109.

Whichofthecurvesismostlikelytorepresentaveragetotalcost? a. A b. B c. C d. D ANSWER:b. B TYPE:MDIFFICULTY:2SECTION:13.3 110. Whichofthecurvesismostlikelytorepresentaveragefixedcost? a. A b. B c. C d. D ANSWER:d. D TYPE:MDIFFICULTY:2SECTION:13.3 111. Whichofthecurvesismostlikelytorepresentaveragevariablecost? a. A b. B c. C d. D ANSWER:c. C TYPE:MDIFFICULTY:2SECTION:13.3 112. Whichofthecurvesismostlikelytorepresentmarginalcost? a. A b. B c. C d. D ANSWER:a. A TYPE:MDIFFICULTY:2SECTION:13.3

134 3 Chapter 13 /The Costs of Production

113. Thisparticularfirmisnecessarilyexperiencingincreasingmarginalproductwhencurve a. Aisfalling. b. Bisfalling. c. Cisfalling. d. Disfalling. ANSWER:a. Aisfalling. TYPE:MDIFFICULTY:3SECTION:13.3 114. Thisparticularfirmisnecessarilyexperiencingdiminishingmarginalproductwhencurve (i) Aisrising. (ii) Bisrising. (iii) Cisrising. a. (i)only b. (iii)only c. (i)and(ii) d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:3SECTION:13.3 115. CurveAisUshapedbecauseof a. diminishingmarginalproduct. b. increasingmarginalproduct. c. thefactthatincreasingmarginalproductfollowsdecreasingmarginalproduct. d. thefactthatdecreasingmarginalproductfollowsincreasingmarginalproduct. ANSWER:d. thefactthatdecreasingmarginalproductfollowsincreasingmarginalproduct. TYPE:MDIFFICULTY:3SECTION:13.3 116. Totalcostcanbedividedintotwotypes.Thosetwotypesare a. fixedcostsandvariablecosts. b. fixedcostsandmarginalcosts. c. variablecostsandmarginalcosts. d. averagecostsandmarginalcosts. ANSWER:a. fixedcostsandvariablecosts. TYPE:MDIFFICULTY:1SECTION:13.3 117. Somecostsdonotvarywiththequantityofoutputproduced.Thosecostsarecalled a. marginalcosts. b. averagecosts. c. fixedcosts. d. incurredcosts. ANSWER:c. fixedcosts. TYPE:MDIFFICULTY:1SECTION:13.3 118. Foraconstructioncompanythatbuildshouses,whichofthefollowingcostswouldbeafixedcost? a. the$50,000peryearsalarypaidtoaconstructionforeman b. the$30,000peryearsalarypaidtothecompanysbookkeeper c. the$10,000peryearpremiumpaidtoaninsurancecompany d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:1SECTION:13.3 119. Foralargefirmthatproducesandsellsautomobiles,whichofthefollowingcostswouldbeavariablecost? a. the$20millionpaymentthatthefirmpayseachyearforaccountingservices b. thecostofthesteelthatisusedinproducingautomobiles c. therentthatthefirmpaysforofficespaceinasuburbofSt.Louis d. Alloftheabovearecorrect. ANSWER:b. thecostofthesteelthatisusedinproducingautomobiles TYPE:MDIFFICULTY:2SECTION:13.3

Chapter 13 /The Costs of Production 3 135

120. Whichofthefollowingexpressionsiscorrect? a. marginalcost=(changeinquantityofoutput)/(changeintotalcost). b. averagetotalcost=totalcost/quantityofoutput. c. totalcost=variablecost+marginalcost. d. Alloftheabovearecorrect. ANSWER:b. averagetotalcost=totalcost/quantityofoutput. TYPE:MDIFFICULTY:2SECTION:13.3 121. Averagetotalcost(ATC)iscalculatedasfollows: a. ATC=(changeintotalcost)/(changeinquantityofoutput). b. ATC=(changeintotalcost)/(changeinquantityofinput). c. ATC=totalcost/quantityofoutput. d. ATC=totalcost/quantityofinput. ANSWER:c. ATC=totalcost/quantityofoutput. TYPE:MDIFFICULTY:1SECTION:13.3 122. Implicitcosts a. donotrequireanoutlayofmoneybythefirm. b. donotenterintotheeconomistsmeasurementofafirmsprofit. c. arealsoknownasvariablecosts. d. Alloftheabovearecorrect. ANSWER:a. donotrequireanoutlayofmoneybythefirm. TYPE:MDIFFICULTY:2SECTION:13.3 123. Whichofthefollowingmeasuresofcostisbestdescribedastheincreaseintotalcostthatarisesfromanextraunit ofproduction? a. variablecost b. averagevariablecost c. averagetotalcost d. marginalcost ANSWER:d. marginalcost TYPE:MDIFFICULTY:1SECTION:13.3 124. Whichofthefollowingmeasuresofcostisbestdescribedasthecostofatypicalunitofoutputiftotalcostis dividedevenlyoveralltheunitsproduced? a. averagefixedcost b. averagevariablecost c. averagetotalcost d. marginalcost ANSWER:c. averagetotalcost TYPE:MDIFFICULTY:1SECTION:13.3 125. Marginalcostincreasesasthequantityofoutputincreases.Thisreflectsthepropertyof a. increasingtotalcost. b. diminishingtotalcost. c. increasingmarginalproduct. d. diminishingmarginalproduct. ANSWER:d. diminishingmarginalproduct. TYPE:MDIFFICULTY:2SECTION:13.3 126. Intheshortrun,afirmincursfixedcosts a. onlyifitincursvariablecosts. b. onlyifitproducesnooutput. c. onlyifitproducesapositivequantityofoutput. d. ifitproducesnooutputorifitproducesapositivequantityofoutput. ANSWER:d. ifitproducesnooutputorifitproducesapositivequantityofoutput. TYPE:MDIFFICULTY:1SECTION:13.3

136 3 Chapter 13 /The Costs of Production

RefertothefollowinginformationtoanswerQuestions127through131. Acertainfirmproducesandsellsstaplers.Lastyear,itproduced5,000staplersandsoldeachstaplerfor$8.Inproducing the5,000staplers,itincurredvariablecostsof$30,000andatotalcostof$45,000. 127. Thefirmsfixedcostsamountedto a. $15,000. b. $30,000. c. $40,000. d. $50,000. ANSWER:a. $15,000. TYPE:MDIFFICULTY:1SECTION:13.3 128. Inproducingthe5,000staplers,thefirmsaveragefixedcostwas a. $3. b. $4. c. $5. d. $7. ANSWER:a. $3. TYPE:MDIFFICULTY:2SECTION:13.3 129. Inproducingthe5,000staplers,thefirmsaveragevariablecostwas a. $2. b. $4. c. $6. d. $8. ANSWER:c. $6. TYPE:MDIFFICULTY:1SECTION:13.3 130. Inproducingthe5,000staplers,thefirmsaveragetotalcostwas a. $6. b. $7. c. $8. d. $9. ANSWER:d. $9. TYPE:MDIFFICULTY:1SECTION:13.3 131. Thefirmseconomicprofitfortheyearwas a. $35,000. b. $5,000 c. $10,000. d. $40,000. ANSWER:b. $5,000 TYPE:MDIFFICULTY:2SECTION:13.3 RefertothefiguresbelowtoanswerQuestions132through134

Chapter 13 /The Costs of Production 3 137

Figure1 132.

Figure2

Figure3

Figure4

Whichofthefiguresrepresentsthetotalcostcurveforafirm? a. Figure1 b. Figure2 c. Figure3 d. Figure4 ANSWER:b. Figure2 TYPE:MDIFFICULTY:1SECTION:13.3 133. Whichofthefiguresrepresentsthemarginalcostcurveforafirm? a. Figure1 b. Figure2 c. Figure3 d. Figure4 ANSWER:a. Figure1 TYPE:MDIFFICULTY:1SECTION:13.3 134. Whichofthefiguresrepresentstheproductionfunctionforafirm? a. Figure1 b. Figure2 c. Figure3 d. Figure4 ANSWER:DTYPE:MDIFFICULTY:1SECTION:13.3 135. Whichofthefollowingstatementsaboutcostsiscorrect? a. Whenmarginalcostislessthanaveragetotalcost,averagetotalcostisrising. b. ThetotalcostcurveisUshaped. c. Asthequantityofoutputincreases,marginalcosteventuallyrises. d. Alloftheabovearecorrect. ANSWER:c. Asthequantityofoutputincreases,marginalcosteventuallyrises. TYPE:MDIFFICULTY:2SECTION:13.3 136. Whenevermarginalcostisgreaterthanaveragetotalcost, a. marginalcostisrising. b. marginalcostisfalling. c. averagetotalcostisrising. d. averagetotalcostisfalling. ANSWER:c. averagetotalcostisrising. TYPE:MDIFFICULTY:2SECTION:13.3 137. Thefirmsefficientscaleisthequantityofoutputthatminimizes a. averagetotalcost. b. averagefixedcost. c. averagevariablecost. d. marginalcost. ANSWER:a. averagetotalcost. TYPE:MDIFFICULTY:1SECTION:13.3

138 3 Chapter 13 /The Costs of Production

Usethefollowinginformationtoanswerquestions138through144. MeasuresofCostforABCInc.WidgetFactory Quantity ofWidgets 0 1 2 3 4 5 6 138. Variable Costs $1 $3 $6 $10 $21 Total Costs Fixed Costs $10

$13 $16 $25 $10

Theaveragefixedcostofproducingfivewidgetsis a. $1.00. b. $2.00. c. $3.00. d. Noneoftheabovearecorrect. ANSWER:b. $2.00. TYPE:MDIFFICULTY:2SECTION:13.3 139. Theaveragevariablecostofproducingfourwidgetsis a. $2.00 b. $2.50 c. $3.33 d. $5.00 ANSWER:b. $2.50 TYPE:MDIFFICULTY:2SECTION:13.3 140. Theaveragetotalcostofproducingonewidgetis a. $1.00. b. $10.00. c. $11.00. d. $22.00. ANSWER:c. $11.00. TYPE:MDIFFICULTY:2SECTION:13.3 141. Themarginalcostofproducingthesixthwidgetis a. $1.00. b. $3.50. c. $5.00. d. $6.00. ANSWER:d. $6.00. TYPE:MDIFFICULTY:2SECTION:13.3 142. Whatisthevariablecostofproducingzerowidgets? a. $0 b. $1.00 c. $10.00 d. $10.00 ANSWER:a. $0 TYPE:MDIFFICULTY:2SECTION:13.3

Chapter 13 /The Costs of Production 3 139

143. Whatisthemarginalcostofproducingthefirstwidget? a. $1.00 b. $10.00 c. $11.00 d. Itcan'tbedeterminedfromtheinformationgiven. ANSWER:a. $1.00 TYPE:MDIFFICULTY:2SECTION:13.3 144. Whatisthevariablecostofproducingfivewidgets? a. $13.00 b. $14.00 c. $15.00 d. Itcan'tbedeterminedfromtheinformationgiven. ANSWER:c. $15.00 TYPE:MDIFFICULTY:2SECTION:13.3 Usethefollowinginformationtoanswerquestions145through149. Adrian'sPremiumBoxingServicesubcontractswithachocolatemanufacturertoboxpremiumchocolatesfortheirmail ordercataloguebusiness.Sherentsasmallroomfor$150aweekinthedowntownbusinessdistrictthatservesasher factory.Shecanhireworkersfor$275aweek. Chocolates Numberof Producedper MarginalProduct TotalCostof Workers Week ofLabor CostofFactory CostofWorkers Inputs 0 0 1 330 150 275 425 2 630 3 150 825 975 4 890 5 950 60 1,375 6 10 1,800 145. Whatisthemarginalproductofthesecondworker? a. 110 b. 200 c. 260 d. 300 ANSWER:d. 300 TYPE:MDIFFICULTY:2SECTION:13.3 146. Whatisthetotalcostassociatedwithmaking890boxesofpremiumchocolatesperweek? a. 1,250 b. 1,325 c. 1,400 d. 1,575 ANSWER:a. 1,250 TYPE:MDIFFICULTY:2SECTION:13.3 147. DuringtheweekofJuly4th,Adriandoesn'tboxanychocolates.Whatarehercostsduringtheweek? a. 0 b. 150 c. 275 d. 425 ANSWER:b. 150 TYPE:MDIFFICULTY:2SECTION:13.3

140 3 Chapter 13 /The Costs of Production

148. Oneweek,Adrianearnsaprofitof$125.Ifherrevenuefortheweekis$1100,howmanyboxesofchocolatedidshe produce? a. 140 b. 330 c. 780 d. 950 ANSWER:c. 780 TYPE:MDIFFICULTY:2SECTION:13.3 149. Adrianhasreceivedanorderfor3000boxesofchocolatesfornextweek.Ifsheexpectsthatthetrendinthemarginal productoflaborwillcontinueinthesamedirection,itismostlikelythatherbestdecisionwillbeto a. notcommittomeetingtheorderuntilshecanmovetoalargerroomandhiremoreworkerstoboxthe chocolates. b. closeherbusinessuntilsheisabletohiremoreproductiveworkers. c. hireabout12newworkersandhopeshecansatisfytheorder. d. committomeetingtheorderandthentakethreeweekstocompletethejob. ANSWER:a. notcommittomeetingtheorderuntilshecanmovetoalargerroomandhiremoreworkerstoboxthe chocolates. TYPE:MDIFFICULTY:2SECTION:13.3 Usethefollowinginformationtoanswerquestions150through154. TeachersHelperisasmallcompanythathasasubcontracttoproduceinstructionalmaterialsfordisabledchildrenin publicschooldistricts.Theownerrentsseveralsmallroomsinanofficebuildinginthesuburbsfor$600amonthandhas leasedcomputerequipmentthatcosts$480amonth. Output (Instructional Modulesper Month) 0 1 2 3 4 5 6 7 8 9 10 150.

FixedCosts 1,080 1,080

Variable Costs 400 1,350 1,900 2,500 4,100 5,400 7,300

TotalCost 1,480

Average FixedCost

Average Variable Cost

Average TotalCost

Marginal Cost 400 450

965 2,430 475 216 4,280 135 10,880 980

700

Whatisthemarginalcostofcreatingthetenthinstructionalmoduleinagivenmonth? a. $900 b. $1,250 c. $2,500 d. $3,060 ANSWER:c. $2,500 TYPE:MDIFFICULTY:2SECTION:13.3 151. Whatistheaveragevariablecostforthemonthifsixinstructionalmodulesareproduced? a. $180 b. $533.33 c. $700 d. $713.33 ANSWER:b. $533.33 TYPE:MDIFFICULTY:2SECTION:13.3

Chapter 13 /The Costs of Production 3 141

152. Whatistheaveragefixedcostforthemonthifnineinstructionalmodulesareproduced? a. $108 b. $120 c. $150 d. $811.11 ANSWER:b. $120 TYPE:MDIFFICULTY:2SECTION:13.3 153. Howmanyinstructionalmodulesareproducedwhenmarginalcostis$1,300? a. 4 b. 5 c. 7 d. 8 ANSWER:d. 8 TYPE:MDIFFICULTY:2SECTION:13.3 154. Onemonth,Teacher'sHelperproduced18instructionalmodules.Whatwastheaveragefixedcostforthatmonth? a. 60 b. 108 c. 811 d. Itcan'tbedeterminedfromtheinformationgiven. ANSWER:a. 60 TYPE:MDIFFICULTY:2SECTION:13.3 155. Atwhatlevelofoutputwillaveragevariablecostequalaveragetotalcost? a. whenmarginalcostequalsaveragetotalcost b. foralllevelsofoutputinwhichaveragevariablecostisfalling c. whenmarginalcostequalsaveragevariablecost d. Thereisnotalevelofoutputwherethisoccurs,aslongasfixedcostsarepositive. ANSWER:d. Thereisnotalevelofoutputwherethisoccurs,aslongasfixedcostsarepositive. TYPE:MDIFFICULTY:2SECTION:13.3 Usethefollowinginformationtoanswerquestions156through158. FarmerJackisawatermelonfarmer.IfJackplantsnoseedsonhisfarm,hegetsnoharvest.Ifheplants1bagofseeds,he gets30watermelons.Ifheplants2bagsofseeds,hegets50watermelons.Ifheplants3bagsofseedshegets60 watermelons.Abagofseedscosts$100,andthecostsofseedsarehisonlycosts. 156. Whichofthefollowingstatementsis(are)true? (i) FarmerJackexperiencesdecreasingmarginalproduct. (ii) FarmerJacksproductionfunctionisnonlinear. (iii) FarmerJackstotalcostcurveislinear. a. (i)only b. (i)and(ii) c. (ii)only d. (i)and(iii) ANSWER:b. (i)and(ii) TYPE:MDIFFICULTY:2SECTION:13.3 157. Whichofthefollowingstatementsis(are)trueofJacksmarginalcost? (i) HismarginalcostcurveisUshaped. (ii) Hismarginalcostdecreaseswithincreasedwatermelonoutput. (iii) Hismarginalcostreflectsdiminishingmarginalproduct. a. (ii)only b. (iii)only c. (i)and(iii) d. Alloftheabovearecorrect. ANSWER:b. (iii)only TYPE:MDIFFICULTY:2SECTION:13.3

142 3 Chapter 13 /The Costs of Production

158. Jacksproductionfunctionwill a. decreaseatadecreasingrate. b. decreaseatanincreasingrate. c. increaseatadecreasingrate. d. increaseatanincreasingrate. ANSWER:c. increaseatadecreasingrate. TYPE:MDIFFICULTY:2SECTION:13.3 159. Harry'sHotdogsisasmallstreetvendorbusinessownedbyHarryHuggins.Harryistryingtogetabetter understandingofhiscostsbycategorizingthemasfixedorvariable.Whichofthefollowingcostsaremostlikelyto beconsideredfixedcosts? a. thecostofmustard b. thecostofhotdogbuns c. wagespaidtoworkersthatsellhotdogs d. thecostofbookkeepingservices ANSWER:d. thecostofbookkeepingservices TYPE:MDIFFICULTY:2SECTION:13.3 160. HarryPotterisasmallstreetvendorservicewhocontractstoproduceandsellmoldedplasticsouvenirs(keychains, commemorativeplasticcoins,plasticanimals,etc.)atsmall,countycarnivals.Asownerofthefirm,Harrymust decidehowmuchofeachproducttoproduce.Akeyelementofthisdecisionis a. howcostswillvaryashechangesthelevelofproduction. b. thecostofbookkeepingservices. c. thefixedcostofproduction. d. thecostofhissellingbooth. ANSWER:a. howcostswillvaryashechangesthelevelofproduction. TYPE:MDIFFICULTY:2SECTION:13.3 161. Harry'sHotdogsisasmallstreetvendorbusinessownedbyHarryHuggins.IfHarrymakes15hotdogsinhisfirst hourofbusinessandincursatotalcostof$16.50,hisaveragetotalcostperhotdogis a. $1.10. b. $6.50. c. $16.50 d. Itisimpossibletodeterminewithoutspecificinformationonvariablecost. ANSWER:a. $1.10. TYPE:MDIFFICULTY:2SECTION:13.3 162. Whenafirmisabletoputidleequipmenttousebyhiringanotherworker, a. variablecostswillrise. b. variablecostswillfall. c. fixedcostswillfall. d. fixedcostsandvariablecostswillrise. ANSWER:a. variablecostswillrise. TYPE:MDIFFICULTY:2SECTION:13.3 163. ThirstyThelmaownsandoperatesasmalllemonadestand.WhenThelmaisproducingasmallquantityof lemonadeshehasfewworkersandherequipmentisnotbeingfullyutilized.Becauseshecaneasilyputheridleresources touse, a. themarginalcostofanextraworkerislarge. b. themarginalcostofonemoreglassoflemonadeissmall. c. themarginalproductofanextraworkerissmall. d. herlemonadestandislikelytobecrowdedwithworkers. ANSWER:b. themarginalcostofonemoreglassoflemonadeissmall. TYPE:MDIFFICULTY:2SECTION:13.3

Chapter 13 /The Costs of Production 3 143

164. Whenafirmisoperatingatanefficientscale, a. averagevariablecostisminimized. b. averagefixedcostisminimized. c. averagetotalcostisminimized. d. Noneoftheabovearecorrect. ANSWER:c. averagetotalcostisminimized. TYPE:MDIFFICULTY:2SECTION:13.3 165. Whichofthefollowingmustalwaysbetrueasthequantityofoutputincreases? a. Marginalcostmustrise. b. Averagetotalcostmustrise. c. Averagevariablecostmustrise. d. Averagefixedcostmustfall. ANSWER:d. Averagefixedcostmustfall. TYPE:MDIFFICULTY:2SECTION:13.3 166. Whichofthefollowingstatementsisfalse? a. Themarginalcostofthefifthunitofoutputequalsthetotalcostoffiveunitsminusthetotalcostoffourunits. b. Thetotalvariablecostofsevenunitsequalstheaveragevariablecostofsevenunitstimesseven. c. Ifmarginalcostisrising,thenaveragevariablecostmustberising. d. Themarginalcostofthefifthunitofoutputequalsthetotalvariablecostoffiveunitsminusthetotalvariable costoffourunits. ANSWER:c TYPE:MDIFFICULTY:2SECTION13.3 167. Whenmarginalcostisrising,averagevariablecost a. mustberising. b. mustbefalling. c. mustbeconstant. d. couldberisingorfalling. ANSWER:d. couldberisingorfalling. TYPE:MDIFFICULTY:3SECTION:13.3 168. ConsiderthefollowinginformationaboutbreadproductionatBethsBakery: Worker MarginalProduct 1 5 2 7 3 10 4 11 5 8 6 6 7 4

Bethpaysallherworkersthesamewageandlaborisheronlyvariablecost.Fromthisinformationwecanconclude thatBethsmarginalcost a. declinesasoutputincreasesfrom0to33,butincreasesafterthat. b. declinesasoutputincreasesfrom0to11,butincreasesafterthat. c. increasesasoutputincreasesfrom0to11,butdeclinesafterthat. d. continuallyincreasesasoutputrises. ANSWER:a. declinesasoutputincreasesfrom0to33,butincreasesafterthat. TYPE:MDIFFICULTY:3SECTION:13.3

144 3 Chapter 13 /The Costs of Production

169. ConsiderthefollowinginformationaboutbaseballproductionatBobsBaseballFactory: Worker MarginalProduct 1 3 2 5 3 8 4 10 5 7 6 4 7 2 Bobpaysallhisworkersthesamewageandlaborishisonlyvariablecost.Fromthisinformationwecanconclude thatBobsaveragevariablecostdecreases a. asoutputrisesfrom0to10,butrisesafterthat. b. asoutputrisesfrom0to26,butrisesafterthat. c. asoutputrisesfrom0to33,butincreasesafterthat. d. continuallyasoutputrises. ANSWER:c. asoutputrisesfrom0to33,butincreasesafterthat. TYPE:MDIFFICULTY:3SECTION:13.3 170. AtBertsBootery,thetotalcostofproducingtwentypairsofbootsis$400.Themarginalcostofproducingthe twentyfirstpairofbootsis$83.Wecanconcludethattheaverage a. variablecostof21pairsofbootsis$23. b. totalcostof21pairsofbootsis$23. c. totalcostof21pairsofbootsis$15.09 d. totalcostof21pairsofbootscannotbecalculatedfromtheinformationgiven. ANSWER:b. totalcostof21pairsofbootsis$23. TYPE:MDIFFICULTY:3SECTION:13.3 171. Oneofthemostimportantpropertiesofcostcurvesisthat a. formostproducers,theaveragetotalcostcurvenevercrossesthemarginalcostcurve. b. theaveragefixedcostcurvemusteventuallyrise. c. theaveragetotalcostcurvefirstrises,thenfallswithincreasedoutput. d. themarginalcostcurveeventuallyriseswiththequantityofoutput. ANSWER:d. themarginalcostcurveeventuallyriseswiththequantityofoutput. TYPE:MDIFFICULTY:2SECTION:13.3 172. Whenafactoryisoperatingintheshortrun, a. itcannotaltervariablecosts. b. totalcostandvariablecostareusuallythesame. c. averagefixedcostrisesasoutputincreases. d. itcannotadjustthequantityoffixedinputs. ANSWER:d. itcannotadjustthequantityoffixedinputs. TYPE:MDIFFICULTY:2SECTION:13.4 173. Inthelongrun, a. inputsthatwerefixedintheshortrunremainfixed. b. inputsthatwerefixedintheshortrunbecomevariable. c. inputsthatwerevariableintheshortrunbecomefixed. d. variableinputsarerarelyused. ANSWER:b. inputsthatwerefixedintheshortrunbecomevariable. TYPE:MDIFFICULTY:2SECTION:13.4

Chapter 13 /The Costs of Production 3 145

Thefigurebelowdepictsaveragetotalcostfunctionsforafirmthatproducesautomobiles.Usethefiguretoanswer questions174through178.

174.

Whichofthecurvesismostlikelytocharacterizetheshortrunaveragetotalcostcurveofthesmallestfactory? a. ATCA b. ATCB c. ATCC

d. ATCD ANSWER:a. ATCA TYPE:MDIFFICULTY:1SECTION:13.4 175. Whichcurverepresentsthelongrunaveragetotalcost? a. ATCA b. ATCB c. ATCC d. ATCD ANSWER:d. ATCD TYPE:MDIFFICULTY:1SECTION:13.4 176. Inthelongrun,thefirmcanoperateonwhichofthefollowingaveragetotalcostcurves? a. ATCA b. ATCB c. ATCC d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:1SECTION:13.4

146 3 Chapter 13 /The Costs of Production

177. Thisfirmexperiencesdiseconomiesofscaleatwhatoutputlevels? a. outputlevelsaboveN b. outputlevelsbetweenMandN c. outputlevelsbelowM d. Alloftheabovearecorrect,ifthefirmisoperatinginthelongrun. ANSWER:a. outputlevelsaboveN TYPE:MDIFFICULTY:2SECTION:13.4 178. AtlevelsofoutputbelowMthefirmexperiences a. economiesofscale. b. diseconomiesofscale. c. economicprofit. d. accountingprofit. ANSWER:a. economiesofscale. TYPE:MDIFFICULTY:2SECTION:13.4 179. Thelongrunaveragetotalcostcurveisalways a. flatterthantheshortrunaveragetotalcostcurve,butnotnecessarilyhorizontal. b. horizontal. c. fallingasoutputincreases. d. risingasoutputincreases. ANSWER:a. flatterthantheshortrunaveragetotalcostcurve,butnotnecessarilyhorizontal. TYPE:MDIFFICULTY:2SECTION:13.4 180. Thelengthoftheshortrun a. isdifferentfordifferenttypesoffirms. b. canneverexceed3years. c. canneverexceed1year. d. isalwayslessthan6months. ANSWER:a. isdifferentfordifferenttypesoffirms. TYPE:MDIFFICULTY:1SECTION:13.4 181. Economiesofscaleoccurwhen a. longrunaveragetotalcostsriseasoutputincreases. b. longrunaveragetotalcostsfallasoutputincreases. c. averagefixedcostsarefalling. d. averagefixedcostsareconstant. ANSWER:b. longrunaveragetotalcostsfallasoutputincreases. TYPE:MDIFFICULTY:2SECTION:13.4 182. Diseconomiesofscaleoccurwhen a. averagefixedcostsarefalling. b. averagefixedcostsareconstant. c. longrunaveragetotalcostsriseasoutputincreases. d. longrunaveragetotalcostsfallasoutputincreases. ANSWER:c. longrunaveragetotalcostsriseasoutputincreases. TYPE:MDIFFICULTY:2SECTION:13.4 183. Constantreturnstoscaleoccurwhen a. longruntotalcostsareconstantasoutputincreases. b. longrunaveragetotalcostsareconstantasoutputincreases. c. thefirm'slongrunaveragecostcurveisfallingasoutputincreases. d. thefirm'slongrunaveragecostcurveisrisingasoutputincreases. ANSWER:b. longrunaveragetotalcostsareconstantasoutputincreases. TYPE:MDIFFICULTY:2SECTION:13.4

Chapter 13 /The Costs of Production 3 147

184. Specializationamongworkersoccurswhen a. qualitymanagementallowsworkerstoswitchfromonetasktoanother. b. eachworkerisallowedtoperfectoneparticulartask. c. eachworkerisresponsibleforanumberofdifferenttasks. d. Alloftheabovearecorrect. ANSWER:b. eachworkerisallowedtoperfectoneparticulartask. TYPE:MDIFFICULTY:1SECTION:13.4 185. Ifafirmwantstocapitalizeoneconomiesofscale,itmaybeabletodosoby a. assigninglimitedtaskstotheiremployees,sotheycanmasterthosetasks. b. employingasmallernumberofworkers. c. producingasmallerquantityofoutput. d. Alloftheabovearecorrect. ANSWER:a. assigninglimitedtaskstotheiremployees,sotheycanmasterthosetasks. TYPE:MDIFFICULTY:2SECTION:13.4 186. Inreferencetosettingtheproductionlevel,afirmscostcurves a. bythemselvesdonottelluswhatdecisionsthefirmwillmake. b. dictatewhatdecisionsthefirmwillmake. c. havenobearingonwhatdecisionsthefirmwillmake. d. Noneoftheabovearecorrect. ANSWER:a. bythemselvesdonottelluswhatdecisionsthefirmwillmake. TYPE:MDIFFICULTY:2SECTION:13.4 187. Economiesofscalearisewhen a. aneconomyisselfsufficientinproduction. b. individualsinasocietyareselfsufficient. c. fixedcostsarelargerelativetovariablecosts. d. workersareabletospecializeinaparticulartask. ANSWER:d. workersareabletospecializeinaparticulartask. TYPE:MDIFFICULTY:2SECTION:13.4 188. Howlongdoesittakeafirmtogofromtheshortruntothelongrun? a. sixmonths b. oneyear c. twoyears d. Itdependsonthenatureofthefirm. ANSWER:d. Itdependsonthenatureofthefirm. TYPE:MDIFFICULTY:1SECTION:13.4 189. Inthelongrun,afirmthatproducesandsellscomputersgetstochoose a. howmanyworkerstohire. b. thesizeofitsfactories. c. whichshortrunaveragetotalcostcurvetouse. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:13.4 190. When,forafirm,longrunaveragetotalcostdecreasesasthequantityofoutputincreases,wehaveasituationof a. economiesofscale. b. diseconomiesofscale. c. coordinationproblemsarisingfromthelargesizeofthefirm. d. fixedcostsgreatlyexceedingvariablecosts. ANSWER:a. economiesofscale. TYPE:MDIFFICULTY:1SECTION:13.4

148 3 Chapter 13 /The Costs of Production

191. Constantreturnstoscalereferstoasituationinwhich,forafirm, a. allofthefirmsshortrunaveragetotalcostcurvesarehorizontal. b. shortrunaveragetotalcostdoesnotchangeasthequantityofoutputchanges. c. longrunaveragetotalcostdoesnotchangeasthequantityofoutputchanges. d. Alloftheabovearecorrect. ANSWER:c. longrunaveragetotalcostdoesnotchangeasthequantityofoutputchanges. TYPE:MDIFFICULTY:2SECTION:13.4 192. LongrunaveragetotalcostcurvesareoftenUshaped a. forthesamereasonsthataveragetotalcostcurvesareoftenUshaped. b. becauseofconstantreturnstoscale. c. becauseofincreasingcoordinationproblemsatlowlevelsofproductionandincreasingspecializationofworkers athighlevelsofproduction. d. becauseofincreasingspecializationofworkersatlowlevelsofproductionandincreasingcoordinationproblems athighlevelsofproduction. ANSWER:d. becauseofincreasingspecializationofworkersatlowlevelsofproductionandincreasingcoordination problemsathighlevelsofproduction. TYPE:MDIFFICULTY:3SECTION:13.4 RefertothediagrambelowtoanswerQuestions193through195.

193.

Thethreeaveragetotalcostcurvesonthediagramcorrespondtothreedifferent a. timehorizons. b. products. c. firms. d. factorysizes. ANSWER:d. factorysizes. TYPE:MDIFFICULTY:2SECTION:13.4 194. Thefirmexperienceseconomiesofscaleifitchangesitslevelofoutput a. fromQ1toQ2. b. fromQ2toQ3. c. fromQ3toQ4.

d. fromQ4toQ5. ANSWER:a. fromQ1toQ2. TYPE:MDIFFICULTY:2SECTION:13.4

Chapter 13 /The Costs of Production 3 149

195. Thefirmexperiencesdiseconomiesofscaleifitchangesitslevelofoutput a. fromQ1toQ2. b. fromQ2toQ3. c. fromQ3toQ4. d. fromQ4toQ5. ANSWER:d. fromQ4toQ5. TYPE:MDIFFICULTY:2SECTION:13.4 196. Thefundamentalreasonthatmarginalcosteventuallyrisesasoutputincreasesisbecauseof a. economiesofscale. b. diseconomiesofscale. c. diminishingmarginalproduct. d. risingaveragefixedcost. ANSWER:c. diminishingmarginalproduct. TYPE:MDIFFICULTY:2SECTION:13.4 197. TomownsafactoryinwhichhehasproducedTVsforfiveyears.Hehaskepttrackofhisaveragetotalcostashis levelofproductionvaries.Thisinformationissummarizedbelow: Output AverageTotalCost 10 $500 20 $400 30 $300 40 $400 50 $500 Fromthisinformationwecanconcludethat a. Tomsfactoryexhibitsbotheconomiesanddiseconomiesofscale. b. Tomsfactoryexhibitsonlydiseconomiesofscale. c. Tomsfactoryexhibitsconstantreturnstoscale. d. Noneoftheabovearecorrect. ANSWER:d. Noneoftheabovearecorrect. TYPE:MDIFFICULTY:3SECTION:13.4 198. Whichofthefollowingstatementsisfalse? a. Inthelongrun,therearenofixedcosts. b. Marginalcostisindependentoffixedcosts. c. Economiesofscaleisashortrunconcept. d. Diminishingmarginalproductexplainsincreasingmarginalcost. ANSWER:c. Economiesofscaleisashortrunconcept. TYPE:MDIFFICULTY:2SECTION:13.4 TRUE/FALSE 1. Examinationofthecostsofproductionisunnecessarytothefieldofindustrialorganization. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.1 2. Economistsnormallyassumethatpeoplestarttheirownbusinessestohelpsocietymaximizeitsincome. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.1 3. Wheneconomistsspeakofafirmscosts,theyareusuallyexcludingtheopportunitycosts. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.1 4. Economistsandaccountantsusuallydisagreeontheinclusionofimplicitcostsintothecostanalysisofafirm. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:13.1 5. Implicitcostsarecoststhatdonotrequireanoutlayofmoneybythefirm. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:13.1

150 3 Chapter 13 /The Costs of Production

6. Accountantskeeptrackofthemoneythatflowsintoandoutoffirms. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:13.1 7. Accountantsoftenignoreimplicitcosts. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:13.1 8. Economistsandaccountantsbothincludeforgoneincomeasacosttoasmallbusinessowner. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.1 9. Althougheconomistsandaccountantstreatmanycostsdifferently,theybothtreatthecostofcapitalthesame. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.1 10. Inthelongrun,afactoryisusuallyconsideredafixedinput. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.2 11. Whentryingtounderstandthedecisionmakingprocessofdifferentfirms,economistsassumethatpeoplethinkat themargin. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.2 12. Theshapeofthetotalcostcurveisunrelatedtotheshapeoftheproductionfunction. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.2 13. Diminishingmarginalproductexistswhenthetotalcostcurvebecomesflatterasoutputsincreases. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.3 14. Diminishingmarginalproductexistswhentheproductionfunctionbecomesflatterasinputsincrease. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3 15. Severalrelatedmeasuresofcostcanbederivedfromafirmstotalcost. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3 16. Fixedcostsareincurredevenwhenafirmdoesnotproduceanything. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3 17. Variablecostsusuallychangeasthefirmaltersthequantityofoutputproduced. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3 18. Variablecostsequalfixedcostswhennothingisproduced. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.3 19. Thecostofproducinganadditionalunitofagoodisnotthesameastheaveragecostofthegood. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3 20. Averagevariablecostisequaltototalvariablecostdividedbyquantityofoutput. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3 21. Theaveragetotalcostcurveisunaffectedbydiminishingmarginalproduct. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.3 22. Theaveragetotalcostcurvereflectstheshapeofboththeaveragefixedcostandaveragevariablecostcurves. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3 23. Ifthemarginalcostcurveisrising,soistheaveragetotalcostcurve. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.3 24. Themarginalcostcurveintersectstheaveragetotalcostcurveattheminimumpointoftheaveragetotalcostcurve. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3 25. Asecondorthirdworkermayhaveahighermarginalproductthanthefirstworkerincertaincircumstances. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3

Chapter 13 /The Costs of Production 3 151

26. AssumeJackreceivedallAsinhisclasseslastsemester.IfJackgetsallCsinhisclassesthissemester,hisGPAmay ormaynotfall. ANSWER:TTYPE:TFDIFFICULTY:3SECTION:13.3 27. Averagetotalcostandmarginalcostaremerelywaystoexpressinformationthatisalreadycontainedinafirm's totalcost. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3 28. Averagetotalcostrevealshowmuchtotalcostwillchangeasthefirmaltersitslevelofproduction. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.3 29. Theshapeofthemarginalcostcurvetellsaproducersomethingaboutthemarginalproductofherworkers. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3 30. Whenaveragetotalcostrisesifaproducereitherincreasesordecreasesproduction,thenthefirmissaidtobe operatingatefficientscale. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.3 31. Fixedcostsarethosecoststhatremainfixednomatterhowlongthetimehorizonis. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.4 32. Diseconomiesofscaleoftenarisebecausehigherproductionlevelsallowspecializationamongworkers. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.4 33. Thefactthatmanydecisionsarefixedintheshortrunbutvariableinthelongrunhaslittleimpactonthefirm'scost curves. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.4 34. Insomecases,specializationallowslargerfactoriestoproducegoodsataloweraveragecostthansmallerfactories. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.4 35. Theuseofspecializationtoachieveeconomiesofscaleisonereasonmodernsocietiesareasprosperousastheyare. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.4 36. Asafirmmovesalongitslongrunaveragecostcurve,itisadjustingthesizeofitsfactorytothequantityof production. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.4 37. Becauseofthegreaterflexibilitythatfirmshaveinthelongrun,allshortruncostcurveslieonorabovethelong runcurve. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.4 38. Thereisgeneralagreementamongeconomiststhatthelongruntimeperiodexceedsoneyear. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:13.4 39. AdamSmith'sexampleofthepinfactorydemonstratesthateconomiesofscaleresultfromspecialization. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:13.4 SHORTANSWER 1. Whatareopportunitycosts?Howdoexplicitandimplicitcostsrelatetoopportunitycosts? ANSWER:Theopportunitycostofanitemreferstoallthosethingsthatmustbeforgonetoacquirethatitem.Bothexplicit andimplicitcostsareincludedasopportunitycosts. TYPE:SDIFFICULTY:2SECTION:13.1

152 3 Chapter 13 /The Costs of Production

2. Akeydifferencebetweenaccountantsandeconomistsistheirdifferenttreatmentofthecostofcapital.Doesthis causeanaccountantsestimateoftotalcoststobehigherorlowerthananeconomistsestimate?Explain. ANSWER:Anaccountantwouldnotincludetheforgoneinterestincomethatthemoneycouldhaveearnedelsewhereifit hadnotbeeninvestedinthebusiness.Therefore,anaccountantsestimateoftotalcostwillbelessthanan economists. TYPE:SDIFFICULTY:2SECTION:13.1 3. Theproductionfunctiondepictsarelationshipbetweenwhichtwovariables?Also,drawaproductionfunctionthat exhibitsdiminishingmarginalproduct. ANSWER:Itdepictsarelationshipbetweenoutputandagiveninput.Thegraphshouldshowoutputincreasing,butata decreasingrateasinputsincrease. TYPE:SDIFFICULTY:2SECTION:13.2 4. Howwouldaproductionfunctionthatexhibitsdecreasingmarginalproductaffecttheshapeofthetotalcostcurve? Explainordrawagraph. ANSWER:Thetotalcostcurvewillincreaseatanincreasingrate,orinotherwords,thetotalcostcurvegetssteeperasthe amountproducedrises. TYPE:SDIFFICULTY:2SECTION:13.3 5. Whateffect,ifany,doesdiminishingmarginalproducthaveontheshapeofthemarginalcostcurve? ANSWER:Diminishingmarginalproductcausesthemarginalcostcurvetorise. TYPE:SDIFFICULTY:2SECTION:13.3 6. BobEdwardsownsabagelshop.Bobhiresaneconomistwhoassessestheshapeofthebagelshopsaveragetotal cost(ATC)curveasafunctionofthenumberofbagelsproduced.Theresults indicateaUshapedaveragetotalcostcurve.BobseconomistexplainsthatATCis Ushapedfortworeasons.Thefirstistheexistenceofdiminishingmarginal product,whichcausesittorise.Whatwouldbethesecondreason?Assumethat themarginalcostcurveislinear.(Hint:Thesecondreasonrelatestoaveragefixed cost) ANSWER:Averagefixedcostalwaysdeclinesasoutputrisesbecausefixedcostisbeing spreadoveralargernumberofunits,thuscausingtheaveragetotalcostcurveto fall. TYPE:SDIFFICULTY:3SECTION:13.3 7. Iftheaveragetotalcostcurveisfalling,whatisnecessarilytrueofthemarginalcost curve?Iftheaveragetotalcostcurveisrising,whatisnecessarilytrueofthe marginalcostcurve? ANSWER:Whenaveragetotalcostcurveisfallingitisnecessarilyabovethemarginal costcurve.Iftheaveragetotalcostcurveisrising,itisnecessarilybelowthe marginalcostcurve. TYPE:SDIFFICULTY:2SECTION:13.3 8. Accordingtothemathematicallawsthatgoverntherelationshipbetweenaverage totalcostandmarginalcost,wheremustthesetwocurvesintersect? ANSWER:Thetwocurveswillcrossattheminimumpointontheaveragetotalcost curve. TYPE:SDIFFICULTY:2SECTION:13.3