Exam 6: Cost Theory and Estimation

Accounting costs and explicit costs are the same.

Fairview Construction, Inc., has the following short-run total cost schedule: (i) What is the firm's average fixed cost when Q = 5? (ii) What is the firm's average variable cost when Q = 7? (iii) What is the firm's average total cost when Q = 8? (iv) What is the firm's marginal cost when Q = 9? (v) At what level of output does the firm begin to experience diminishing returns?

Learning curves slope upward.

Average total cost is equal to marginal cost where marginal cost is at a minimum.

The point at which the marginal product of a variable input is at a maximum corresponds to the point at which marginal cost is at a maximum.

The level of output at which the average product of a variable input is at a maximum corresponds to the level of output where short-run average total cost is at a minimum.

Logistics merges a firm's design and manufacturing functions into a centrally managed unit.

The vertical distance between the short-run average total and average variable cost curves is equal to marginal cost.

The slope of a ray drawn from the origin to any point on a total cost curve is equal to average total cost at that point.

Barb and Cheryl are college students. They are trying to decide what to do over the next summer. Barb's mother has suggested that they both come and work at her plastics manufacturing company where each will earn $5,250 over the summer. Cheryl's mother, who runs the local farmer's market, suggests that they go to a local resort area and sell fresh fruit and vegetables to tourists. Their markup on the produce would be one-third, so each $1.00 of revenue would involve a variable cost of $0.75. In addition to purchasing the produce, they would have to rent a location. The cost to rent a small roadside stand for the summer is $2,500. (i) How many dollars worth of produce will they have to sell in order to break even in an accounting sense? (ii) How many dollars worth of produce will they have to sell in order to break even in an economic sense?

Cost-volume-profit analysis is used to determine the profit-maximizing level of output.