Question 1

Accounting profit differs from economic profit because:

Accepted Answer

A)  accounting cost does not include sunk cost. 
B)  economic cost includes all relevant opportunity costs. 
C)  accounting cost includes the implicit costs of production. 
D)  accounting cost does not include fixed cost. 
E)  economic cost does not include the explicit costs of production. 
A)  accounting cost does not include sunk cost. 
B)  economic cost includes all relevant opportunity costs. 
C)  accounting cost includes the implicit costs of production. 
D)  accounting cost does not include fixed cost. 
E)  economic cost does not include the explicit costs of production. B

Question 2

A firm produces three products A, B, and C. Long-run projected sales per year are 10,000 units of A, 12,000 units of B, and 8,000 units of C.
(a) Determine whether the firm should remain in business under the following conditions:
Good A sells at $5 per unit, and average variable cost (AVC) is $3.5. Good B sells at $7.5 per unit, and AVC is $5. Good C sells at $10 per unit, and AVC is $7.50. Total fixed cost is $60,000 per year.
(b) If the firm allocates fixed cost using standard accounting practices, what is the total accounting profit for each good?

Accepted Answer

a.The long-run profit from the business is π = (P – AVC)Q = (5 – 3.5)(10,000) +(7.5 – 5)(12,000) + (10 – 7.5)(8,000) – 60,000 = $5,000. The firm should continue to operate in the long run.
b.For good A the profit  $\pi$ = (1.5)(10,000) - .33(60,000) = -$4,800. For good B the profit  $\pi$ = (2.5)(12,000) - .4(60,000) = $6,000. For good C the profit  $\pi$= (2.5)(8,000) - .27(60,000) = $3,800. Allocating fixed costs in proportion to output makes it appear as if good A is unprofitable even though it is making a positive contribution and should continue to be sold.

Question 3

A firm produces 100 units of output at an average variable cost of $5 and incurs a total fixed cost of $700. Which of the following is true?

Accepted Answer

A)  The firm's average total cost is $12. 
B)  The firm's total variable cost is $1,200. 
C)  The firm's marginal cost is constant and equal to $5. 
D)  The firm's average fixed cost is $5. 
E)  The firm's total cost is $500. 
A)  The firm's average total cost is $12. 
B)  The firm's total variable cost is $1,200. 
C)  The firm's marginal cost is constant and equal to $5. 
D)  The firm's average fixed cost is $5. 
E)  The firm's total cost is $500. A

Question 4

Explain the economic logic of the short-run shutdown rule. Why does it sometimes make sense to operate at a loss?

Accepted Answer

A profit-maximizing firm faces two types

Question 5

The production manager of a clothing manufacturer estimates that the total annual cost of producing men's suits is given by the equation: C = 5,000 + 4,100Q - 8Q2 + .004Q3. If the market price of suits is constant, what is the shutdown level of output in the short run? What is the minimum price the firm can accept?

Accepted Answer

The shutdown point under competitive con

Question 6

If a firm were to stop production of its only product, the firm's total cost will be equal to

Accepted Answer

A)  zero. 
B)  its total fixed cost 
C)  its total variable cost. 
D)  its opportunity cost. 
E)  its average cost. 
A)  zero. 
B)  its total fixed cost 
C)  its total variable cost. 
D)  its opportunity cost. 
E)  its average cost.

Question 7

When average total cost is at its minimum point:

Accepted Answer

A)  marginal cost is also at its minimum point. 
B)  marginal cost is equal to zero. 
C)  marginal cost is constant. 
D)  average total cost is equal to marginal cost. 
E)  the firm is maximizing profit. 
A)  marginal cost is also at its minimum point. 
B)  marginal cost is equal to zero. 
C)  marginal cost is constant. 
D)  average total cost is equal to marginal cost. 
E)  the firm is maximizing profit.

Question 8

The following figure shows the long-run average cost curve of a firm.
Figure 6-1
  
-Refer to Figure 6-1. What is the quantity that the firm will produce if it is operating at minimum efficient scale?

Accepted Answer

A)  E 
B)  A 
C)  C 
D)  D 
E)  B 
A)  E 
B)  A 
C)  C 
D)  D 
E)  B

Question 9

A firm's total cost function is: C = 50 + 6Q + 2Q2.
(a) Compute the level of output that minimizes average total cost AC.

Accepted Answer

AVC = 6 + 2Q and MC

Question 10

The table gives the short-run production data for a manufacturing firm. Compute average cost and marginal cost for the output levels shown in the table.
 $\begin{array} { | c | c | c | c | c | } 
\hline \text { Quantity } & \begin{array} { c } 
\text { Fixed } \
\text { cost }
\end{array} & \begin{array} { c } 
\text { Variable } \
\text { cost }
\end{array} & \begin{array} { c } 
\text { Average } \
\text { cost }
\end{array} & \begin{array} { c } 
\text { Marginal } \
\text { cost }
\end{array} \
\hline 0 & 15 & - & & \
\hline 1 & & 6 & & \
\hline 2 & & 11 & & \
\hline 3 & & 15 & & \
\hline 4 & & 18 & & \
\hline 5 & & 22 & & \
\hline 6 & & 27 & & \
\hline 7 & & 33 & & \
\hline 8 & & 40 & & \
\hline
\end{array}$

Accepted Answer

Average and marginal

Question 11

When the long-run average cost is at its minimum, the long-run marginal cost:

Accepted Answer

A)  is also at its lowest value. 
B)  is decreasing. 
C)  is greater than long-run average cost. 
D)  is at its highest value. 
E)  is equal to long-run average cost. 
A)  is also at its lowest value. 
B)  is decreasing. 
C)  is greater than long-run average cost. 
D)  is at its highest value. 
E)  is equal to long-run average cost.

Question 12

Mexico is capable of producing 20 auto tires or 16 microcircuits per labor hour. Brazil is capable of producing 24 auto tires or 24 microcircuits per labor hour. Based on this information, we can conclude that:

Accepted Answer

A)  Brazil has an absolute advantage in both goods. 
B)  Brazil will export both goods to Mexico. 
C)  Mexico has a comparative advantage in tires. 
D)  Answers Brazil has an absolute advantage in both goods and Mexico has a comparative advantage in tires are both correct. 
E)  Answers Brazil has an absolute advantage in both goods, Brazil will export both goods to Mexico, and Mexico has a comparative advantage in tires are all correct. 
A)  Brazil has an absolute advantage in both goods. 
B)  Brazil will export both goods to Mexico. 
C)  Mexico has a comparative advantage in tires. 
D)  Answers Brazil has an absolute advantage in both goods and Mexico has a comparative advantage in tires are both correct. 
E)  Answers Brazil has an absolute advantage in both goods, Brazil will export both goods to Mexico, and Mexico has a comparative advantage in tires are all correct.

Question 13

"All fixed costs are sunk costs and all sunk costs are fixed costs." Examine the validity of this statement.

Accepted Answer

The statement is not fully correct as al

Question 14

The average fixed cost for a firm

Accepted Answer

A)  is constant at all levels of output. 
B)  is increasing over all levels of output. 
C)  first increases at an increasing rate and then declines. 
D)  first decreases and then increases as output increases. 
E)  is decreasing over all levels of output. 
A)  is constant at all levels of output. 
B)  is increasing over all levels of output. 
C)  first increases at an increasing rate and then declines. 
D)  first decreases and then increases as output increases. 
E)  is decreasing over all levels of output.

Question 15

What is meant by economies of scope?

Accepted Answer

A)  Economies of scope refers to the cost advantages from the joint production of multiple goods. 
B)  Economies of scope refers to the profits that firms earn when they practice price discrimination across market segments. 
C)  Economies of scope refers to efficiency that firms gain when they specialize in the production of one good. 
D)  Economies of scope refers to the efficiency gains from specialization and division of labor. 
E)  Economies of scope refers to the reduction in cost that accrues to a firm due to cumulative production experience and learning. 
A)  Economies of scope refers to the cost advantages from the joint production of multiple goods. 
B)  Economies of scope refers to the profits that firms earn when they practice price discrimination across market segments. 
C)  Economies of scope refers to efficiency that firms gain when they specialize in the production of one good. 
D)  Economies of scope refers to the efficiency gains from specialization and division of labor. 
E)  Economies of scope refers to the reduction in cost that accrues to a firm due to cumulative production experience and learning.

Question 16

Explain the relationship between short-run average cost and long-run average cost. Draw an appropriate graph to illustrate your explanation. Assume constant returns to scale.

Accepted Answer

The long-run average cost curve shows th

Question 17

Explain how each of the following events will affect the average and marginal cost curves of a firm:
i) An increase in labor costs
ii) An increase in lease payments for a facility
iii) A decrease in the cost of utilities (electricity, water heat)
iv) Stricter environmental regulation requiring installation of scrubbers on smokestacks

Accepted Answer

i) Labor costs are variable costs. Avera

Question 18

The economic profit on an investment is zero when:

Accepted Answer

A)  the total revenue from the investment exceeds the costs of the investment. 
B)  the revenue from the investment just covers the fixed cost of the investment. 
C)  the accounting profit and economic profit are equal. 
D)  the investment earns a normal rate of return. 
E)  the sunk cost of the investment is zero. 
A)  the total revenue from the investment exceeds the costs of the investment. 
B)  the revenue from the investment just covers the fixed cost of the investment. 
C)  the accounting profit and economic profit are equal. 
D)  the investment earns a normal rate of return. 
E)  the sunk cost of the investment is zero.

Question 19

If short-run average cost is increasing then:

Accepted Answer

A)  average fixed cost must be increasing. 
B)  marginal cost must be decreasing. 
C)  marginal cost must be greater than short-run average cost. 
D)  the production function displays decreasing returns to scale. 
E)  average variable cost must be decreasing. 
A)  average fixed cost must be increasing. 
B)  marginal cost must be decreasing. 
C)  marginal cost must be greater than short-run average cost. 
D)  the production function displays decreasing returns to scale. 
E)  average variable cost must be decreasing.

Question 20

A firm's long-run average cost curve is estimated by the equation: LAC = 1,000 - 2.5Q + .005Q2. What is the minimum efficient scale of production?

Accepted Answer

Long-run average cost is at a minimum wh

Accounting profit differs from economic profit because:

A firm produces 100 units of output at an average variable cost of $5 and incurs a total fixed cost of $700. Which of the following is true?

Explain the economic logic of the short-run shutdown rule. Why does it sometimes make sense to operate at a loss?

If a firm were to stop production of its only product, the firm's total cost will be equal to

When average total cost is at its minimum point:

The following figure shows the long-run average cost curve of a firm. Figure 6-1 -Refer to Figure 6-1. What is the quantity that the firm will produce if it is operating at minimum efficient scale?

A firm's total cost function is: C = 50 + 6Q + 2Q². (a) Compute the level of output that minimizes average total cost AC.

The table gives the short-run production data for a manufacturing firm. Compute average cost and marginal cost for the output levels shown in the table. Quantity Fixed cost Variable cost Average cost Marginal cost 0 15 - 1 6 2 11 3 15 4 18 5 22 6 27 7 33 8 40

When the long-run average cost is at its minimum, the long-run marginal cost:

Mexico is capable of producing 20 auto tires or 16 microcircuits per labor hour. Brazil is capable of producing 24 auto tires or 24 microcircuits per labor hour. Based on this information, we can conclude that:

"All fixed costs are sunk costs and all sunk costs are fixed costs." Examine the validity of this statement.

The average fixed cost for a firm

What is meant by economies of scope?

Explain the relationship between short-run average cost and long-run average cost. Draw an appropriate graph to illustrate your explanation. Assume constant returns to scale.

The economic profit on an investment is zero when:

If short-run average cost is increasing then:

A firm's long-run average cost curve is estimated by the equation: LAC = 1,000 - 2.5Q + .005Q². What is the minimum efficient scale of production?

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Perfect Competition

Monopoly

Oligopoly

Game Theory and Competitive Strategy

Regulation, Public Goods, and Benefit-Cost Analysis

Decision Making Under Uncertainty

The Value of Information

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Linear Programming

Auctions and Competitive Bidding Available Online

Filters

Exam 6: Cost Analysis

Accounting profit differs from economic profit because:

A firm produces 100 units of output at an average variable cost of $5 and incurs a total fixed cost of $700. Which of the following is true?

Explain the economic logic of the short-run shutdown rule. Why does it sometimes make sense to operate at a loss?

If a firm were to stop production of its only product, the firm's total cost will be equal to

When average total cost is at its minimum point:

The following figure shows the long-run average cost curve of a firm. Figure 6-1 -Refer to Figure 6-1. What is the quantity that the firm will produce if it is operating at minimum efficient scale?

A firm's total cost function is: C = 50 + 6Q + 2Q2. (a) Compute the level of output that minimizes average total cost AC.

The table gives the short-run production data for a manufacturing firm. Compute average cost and marginal cost for the output levels shown in the table. Quantity Fixed cost Variable cost Average cost Marginal cost 0 15 - 1 6 2 11 3 15 4 18 5 22 6 27 7 33 8 40

When the long-run average cost is at its minimum, the long-run marginal cost:

Mexico is capable of producing 20 auto tires or 16 microcircuits per labor hour. Brazil is capable of producing 24 auto tires or 24 microcircuits per labor hour. Based on this information, we can conclude that:

"All fixed costs are sunk costs and all sunk costs are fixed costs." Examine the validity of this statement.

The average fixed cost for a firm

What is meant by economies of scope?

Explain the relationship between short-run average cost and long-run average cost. Draw an appropriate graph to illustrate your explanation. Assume constant returns to scale.

The economic profit on an investment is zero when:

If short-run average cost is increasing then:

A firm's long-run average cost curve is estimated by the equation: LAC = 1,000 - 2.5Q + .005Q2. What is the minimum efficient scale of production?

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Perfect Competition

Monopoly

Oligopoly

Game Theory and Competitive Strategy

Regulation, Public Goods, and Benefit-Cost Analysis

Decision Making Under Uncertainty

The Value of Information

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Linear Programming

Auctions and Competitive Bidding Available Online

Filters

A firm's total cost function is: C = 50 + 6Q + 2Q². (a) Compute the level of output that minimizes average total cost AC.

A firm's long-run average cost curve is estimated by the equation: LAC = 1,000 - 2.5Q + .005Q². What is the minimum efficient scale of production?