Deck 11: Production and Cost Analysis I

Question 1

The law of diminishing marginal productivity states that as more units of a variable input are added, holding other inputs constant (ceteris paribus), the additional output obtained from each new unit of the variable input eventually falls.

Answer 1

True

Question 2

The forgone income that the owner of a business could have made by spending time working in another job is called:

A) explicit cost.
B) marginal cost.
C) total cost.
D) opportunity cost.

Answer 2

D

Question 3

Explicit revenue minus explicit measurable costs equals:

A) economic profit.
B) normal profit.
C) accounting profit.
D) average profit.

Answer 3

C

Question 4

If average fixed cost is $2 and average variable cost is $3, total cost is $5.

Question 5

The marginal cost curve intersects the average fixed cost curve at the minimum point of the average fixed cost curve.

Question 6

The law of diminishing marginal productivity implies that identical increases in all inputs eventually will result in smaller incremental increases in total output.

Question 7

If marginal costs are rising, average total costs must be rising.

Question 8

When average total cost is rising, the marginal cost curve must be above the average total cost curve.

Question 9

If total cost is 100, total fixed cost is 30, and output is 20, average variable cost is 3.5.

Question 10

A business owner makes 50 items by hand in six hours. She could have earned $10 an hour working for someone else. If each item sells for $5 and the explicit costs total $14, economic profit equals:

A) $0.
B) $74.
C) $176.
D) $236.

Question 11

A business owner makes 50 items by hand in six hours. She could have earned $10 an hour working for someone else. If each item sells for $5 and the explicit costs total $14, accounting profit for 50 items is:

A) $74.
B) $176.
C) $236.
D) $300.

Question 12

The vertical distance between the average total cost and average variable cost curves falls as output rises.

Question 13

A business produces 400 items and sells them for $15 each for a total of $6,000. The total cost of producing the items is $4,500 in explicit cost and $1,000 in implicit cost. Economic profit is:

A) $0.
B) $500.
C) $1,000.
D) $1,500.

Question 14

Fixed costs remain the same regardless of the level of production.

Question 15

A business produces eight items and sells them for $25 each. The total cost of producing the items is $190 for explicit costs and $200 for implicit costs. Accounting profit is:

A) −$190.
B) $10.
C) $20.
D) $200.

Question 16

Accounting profit is equal to:

A) implicit revenue minus implicit costs.
B) explicit revenue minus explicit measurable costs.
C) explicit revenue minus implicit and explicit costs.
D) implicit and explicit revenues minus implicit costs.

Question 17

As output increases, average total cost always falls because average fixed cost declines.

Question 18

Accounting profit and economic profit differ because economic profit does not take into account opportunity cost.

Question 19

If the law of diminishing marginal productivity holds true, both average total cost and marginal cost must diminish as output increases.

Question 20

In the long run all inputs are variable; in the short run some inputs are fixed.

Question 21

The reason economists and accountants have problems using cost analysis in the real world is that:

A) economists do not believe in the existence of explicit costs.
B) although implicit costs do not show up in accounting profits, they nevertheless affect managerial decisions.
C) although explicit costs do not show up in accounting profits, they nevertheless affect managerial decisions.
D) explicit costs cannot be measured.

Question 22

A production table can be used to determine:

A) a firm's profits.
B) a firm's costs.
C) how much output is produced from a given quantity of inputs.
D) how much of a product will be demanded by consumers.

Question 23

Can accounting profit be positive while economic profits are negative?

A) No. The two concepts are identical.
B) Yes, if total revenue covers opportunity costs but not explicit costs.
C) Yes, if total revenue covers explicit costs but not opportunity costs.
D) No. Economic profits must always be larger than accounting profits.

Question 24

Owen runs a delivery business and currently employs three drivers. He owns three vans that employees use to make deliveries, but he is considering hiring a fourth driver. If he hires a fourth driver, he can schedule breaks and lunch hours so that all three vans are in constant use, allowing him to increase deliveries per day from 60 to 75. It will cost an additional $75 per day to hire the fourth driver. The marginal cost per delivery of increasing output beyond 60 deliveries per day:

A) is $0 since Owen does not have to purchase another van.
B) is $5.
C) is $75.
D) cannot be calculated without knowing Owen's total fixed costs.

Question 25

Implicit and explicit revenues minus implicit and explicit costs equals:

A) accounting profit.
B) economic profit.
C) zero profit.
D) implicit profit.

Question 26

In the short run:

A) all inputs are variable.
B) firms can use any input combination they want.
C) firms can choose among all possible production techniques.
D) some inputs are fixed.

Question 27

In the long run:

A) no inputs can be varied and all inputs are fixed.
B) some inputs can be varied and some inputs are fixed.
C) some inputs can be varied and no inputs are fixed.
D) all inputs can be varied and no inputs are fixed.

Question 28

Rachel left her job as a graphic artist, where she earned $42,000 per year, to open her own graphic arts firm. Her explicit costs for her new business include:

A) only the expenses incurred for office space, equipment, and supplies.
B) only her forgone salary of $42,000 per year.
C) both the expenses incurred for office space, equipment, and supplies and her forgone salary of $42,000 per year.
D) neither the expenses incurred for office space, equipment, and supplies nor her forgone salary of $42,000 per year.

Question 29

Economic profit is:

A) total revenue minus explicit measurable costs.
B) explicit revenues minus explicit costs.
C) implicit and explicit revenues minus implicit and explicit costs.
D) implicit and explicit revenues minus implicit costs.

Question 30

Robert withdrew $100,000 from an account that paid 10 percent annual interest and used the funds to purchase real estate. After one year he sold the property for $120,000. The accounting profit on this deal was:

A) $120,000.
B) $100,000.
C) $20,000.
D) $10,000.

Question 31

Implicit cost refers to:

A) the amount a firm receives for selling its product or service.
B) any increase in the value of the assets owned by the firm.
C) the opportunity cost of factors of production provided by the owners of the firm.
D) salary paid to the factors of production.

Question 32

Long-run decisions are:

A) constrained because all inputs are variable.
B) constrained because all inputs are fixed.
C) constrained because some inputs are fixed and others are variable.
D) unconstrained because all inputs are variable.

Question 33

Rachel left her job as a graphic artist, where she earned $42,000 per year, to open her own graphic arts firm. Her implicit costs of the new business include:

A) only the expenses incurred for office space, equipment, and supplies.
B) only her forgone salary of $42,000 per year.
C) both the expenses incurred for office space, equipment, and supplies and her forgone salary of $42,000 per year.
D) neither the expenses incurred for office space, equipment, and supplies nor her forgone salary of $42,000 per year.

Question 34

Which of the following is the best example of a long-run decision?

A) An automobile manufacturing company considering whether to invest in robotic equipment to develop a more cost-effective production technique.
B) An automobile manufacturing company considering whether to expand its existing workforce while keeping the same factory and equipment.
C) A business consulting firm considering whether to hire some interns to assist with research and data processing.
D) A business consulting firm considering whether to add new computers while maintaining the same number of employees.

Question 35

Short-run decisions are:

A) constrained because all inputs are variable.
B) constrained because all inputs are fixed.
C) constrained because some inputs are fixed and others are variable.
D) unconstrained because all inputs are variable.

Question 36

The difference between economic profit and accounting profit is equal to:

A) zero.
B) implicit and explicit costs.
C) implicit and explicit revenues.
D) implicit revenues minus implicit costs.

Question 37

In the short run:

A) some inputs are variable and no inputs are fixed.
B) some inputs are variable and some inputs are fixed.
C) no inputs are variable and all inputs are fixed.
D) no inputs are variable and some inputs are fixed.

Question 38

A regional airline owns 10 aircraft and employs 20 pilots. The airline makes an average of three trips per day with each of its 10 aircraft. The aircraft and their ground crews are idle part of the day. Minimum rest requirements for its pilots mean that if the airline wants to increase its flights, it must hire more pilots. The decision to hire more pilots is:

A) a short-run decision because the number of aircraft is held constant while the labor input is changed.
B) a short-run decision because the number of pilots is being increased; if the number of ground crew were decreased instead, it would be a long-run decision.
C) a long-run decision because hiring pilots will increase revenues over a long period of time for the airline.
D) a long-run decision because customers will become accustomed to the new flight schedule.

Question 39

Rachel left her job as a graphic artist, where she earned $42,000 per year, to open her own graphic arts firm. Her total costs of the new business include:

A) only the expenses incurred for office space, equipment, and supplies.
B) only her forgone salary of $42,000 per year.
C) both the expenses incurred for office space, equipment, and supplies and her forgone salary of $42,000 per year.
D) neither the expenses incurred for office space, equipment, and supplies nor her forgone salary of $42,000 per year.

Question 40

Which of the following is an example of a short-run decision?

A) An automobile manufacturing company considering whether to invest in robotic equipment to develop a more cost-effective production technique.
B) An automobile manufacturing company considering whether to expand its existing workforce.
C) A business consulting firm considering whether to open a new office in another city where many of its clients are based.
D) A business consulting firm considering whether to hire new consultants, move to a larger space, and purchase additional equipment.

Question 41

The increase in output obtained by hiring an additional worker is known as:

A) the average product.
B) the marginal product.
C) the total product.
D) value added.

Question 42

Total output per worker is also called:

A) marginal product.
B) average product.
C) total product.
D) variable product.

Question 43

Refer to the graph shown. Marginal product is negative at point:

A) A.
B) B.
C) C.
D) D.

Question 44

Refer to the table shown. The average product when eight workers are employed is: $\begin{array}{|c|c|}\hline \text {Number of workers}&\text {Total output}\\\hline 1 & 4 \\\hline 2 & 10 \\\hline 3 & 18 \\\hline 4 & 28 \\\hline 5 & 35 \\\hline 6 & 41 \\\hline 7 & 45 \\\hline 8 & 48 \\\hline 9 & 50 \\\hline 10 & 49 \\\hline\end{array}$

A) 3.
B) 4.
C) 5.
D) 6.

Question 45

Refer to the table shown. If total output is 41, level of employment is: $$\begin{array} { | c | c | } \hline \text { Number of workers } & \text { Mar ginal product of workers } \\\hline 1 & 5 \\\hline 2 & 7 \\\hline 3 & 8 \\\hline 4 & 10 \\\hline 5 & 11 \\\hline 6 & 7 \\\hline 7 & 5 \\\hline 8 & 3 \\\hline 9 & 0 \\\hline 10 & - 1 \\\hline\end{array}$$

A) 4.
B) 5.
C) 6.
D) 7.

Question 46

Refer to the table shown. If the average product is 8, the number of workers is: $$\begin{array} { | c | c | } \hline \text { Number of workers } & \text { Mar ginal product of workers } \\\hline 1 & 5 \\\hline 2 & 7 \\\hline 3 & 8 \\\hline 4 & 10 \\\hline 5 & 11 \\\hline 6 & 7 \\\hline 7 & 5 \\\hline 8 & 3 \\\hline 9 & 0 \\\hline 10 & - 1 \\\hline\end{array}$$

A) 2.
B) 4.
C) 6.
D) 8.

Question 47

Refer to the table shown. A firm would be most likely to hire between: $$\begin{array} { | c | c | } \hline \text { Number of workers } & \text { Mar pinal product of workers } \\\hline 1 & 5 \\\hline 2 & 7 \\\hline 3 & 8 \\\hline 4 & 10 \\\hline 5 & 11 \\\hline 6 & 7 \\\hline 7 & 5 \\\hline 8 & 3 \\\hline 9 & 0 \\\hline 10 & - 1 \\\hline\end{array}$$

A) 1 and 3 workers.
B) 3 and 4 workers.
C) 5 and 8 workers.
D) 8 and 10 workers.

Question 48

Refer to the graph shown. With efficient production, this firm can maximize production at point:

A) A.
B) B.
C) C.
D) D.

Question 49

Refer to the graph shown, which shows total product. At point A:

A) marginal product is at its minimum point.
B) marginal product is at its maximum point.
C) marginal product is zero.
D) average product is at its maximum point.

Question 50

Refer to the table shown. Diminishing marginal productivity begins when the: $\begin{array}{|c|c|}\hline \text {Number of workers}&\text {Total output}\\\hline 1 & 4 \\\hline 2 & 10 \\\hline 3 & 18 \\\hline 4 & 28 \\\hline 5 & 35 \\\hline 6 & 41 \\\hline 7 & 45 \\\hline 8 & 48 \\\hline 9 & 50 \\\hline 10 & 49 \\\hline\end{array}$

A) third worker is hired.
B) fourth worker is hired.
C) fifth worker is hired.
D) sixth worker is hired.

Question 51

Refer to the table shown. If the number of workers is three, total output is: $$\begin{array} { | c | c | } \hline \text { Number of workers } & \text { Mar ginal product of workers } \\\hline 1 & 2 \\\hline 2 & 5 \\\hline 3 & 9 \\\hline 4 & 14 \\\hline 5 & 16 \\\hline 6 & 17 \\\hline 7 & 18 \\\hline 8 & 18 \\\hline 9 & 17 \\\hline 10 & 15 \\\hline\end{array}$$

A) 9.
B) 16.
C) 27.
D) 36.

Question 52

Refer to the table shown. The firm would definitely not hire: $\begin{array}{|c|c|}\hline \text {Number of workers}&\text {Total output}\\\hline 1 & 4 \\\hline 2 & 10 \\\hline 3 & 18 \\\hline 4 & 28 \\\hline 5 & 35 \\\hline 6 & 41 \\\hline 7 & 45 \\\hline 8 & 48 \\\hline 9 & 50 \\\hline 10 & 49 \\\hline\end{array}$

A) 5 workers.
B) 7 workers.
C) 9 workers.
D) 10 workers.

Question 53

Refer to the table shown. If the average product is 6, the number of workers could equal: $\begin{array}{|c|c|}\hline \text {Number of workers}&\text {Total output}\\\hline 1 & 4 \\\hline 2 & 10 \\\hline 3 & 18 \\\hline 4 & 28 \\\hline 5 & 35 \\\hline 6 & 41 \\\hline 7 & 45 \\\hline 8 & 48 \\\hline 9 & 50 \\\hline 10 & 49 \\\hline\end{array}$

A) 1.
B) 3.
C) 5.
D) 7.

Question 54

Refer to the graph shown which shows total product. At point B:

A) marginal product is at its minimum.
B) marginal product is at its maximum.
C) marginal product is zero.
D) average product is at its maximum.

Question 55

When labor is the variable input, the average product equals the:

A) marginal product divided by the number of workers.
B) marginal product multiplied by the number of workers.
C) number of workers divided by the quantity of output.
D) quantity of output divided by the number of workers.

Question 56

Refer to the table shown. A firm would be least likely to hire: $$\begin{array} { | c | c | } \hline \text { Number of workers } & \text { Mar ginal product of workers } \\\hline 1 & 5 \\\hline 2 & 7 \\\hline 3 & 8 \\\hline 4 & 10 \\\hline 5 & 11 \\\hline 6 & 7 \\\hline 7 & 5 \\\hline 8 & 3 \\\hline 9 & 0 \\\hline 10 & - 1 \\\hline\end{array}$$

A) 6 workers.
B) 7 workers.
C) 8 workers.
D) 9 workers.

Question 57

Refer to the table shown. If seven workers are employed, total output equals: $\begin{array}{|c|c|}\hline \text {Number of workers}&\text {Mar ginal product of workers}\\\hline 1 & 5 \\\hline 2 & 7 \\\hline 3 & 8 \\\hline 4 & 10 \\\hline 5 & 11 \\\hline 6 & 7 \\\hline 7 & 5 \\\hline 8 & 3 \\\hline 9 & 0 \\\hline 10 & -1 \\\hline\end{array}$

A) 5.
B) 35.
C) 53.
D) 56.

Question 58

Refer to the table shown. When average product is 8, total output is: $$\begin{array} { | c | c | } \hline \text { Number of workers } & \text { Mar ginal product of workers } \\\hline 1 & 5 \\\hline 2 & 7 \\\hline 3 & 8 \\\hline 4 & 10 \\\hline 5 & 11 \\\hline 6 & 7 \\\hline 7 & 5 \\\hline 8 & 3 \\\hline 9 & 0 \\\hline 10 & - 1 \\\hline\end{array}$$

A) 20.
B) 32.
C) 40.
D) 48.

Question 59

Refer to the table shown. The marginal product of the sixth worker is: $\begin{array}{|c|c|}\hline \text {Number of warkers}&\text {Total output}\\\hline 1 & 4 \\\hline 2 & 10 \\\hline 3 & 18 \\\hline 4 & 28 \\\hline 5 & 35 \\\hline 6 & 41 \\\hline 7 & 45 \\\hline 8 & 48 \\\hline 9 & 50 \\\hline 10 & 49 \\\hline\end{array}$

A) 6.
B) 7.
C) 8.
D) 9.

Question 60

Refer to the table shown. At what level of employment is the marginal product of labor 7? $\begin{array}{|c|c|}\hline \text {Number of workers}&\text {Total output}\\\hline 1 & 4 \\\hline 2 & 10 \\\hline 3 & 18 \\\hline 4 & 28 \\\hline 5 & 35 \\\hline 6 & 41 \\\hline 7 & 45 \\\hline 8 & 48 \\\hline 9 & 50 \\\hline 10 & 49 \\\hline\end{array}$

A) 2
B) 4
C) 5
D) 7

Question 61

The relationship between the quantity of inputs and the quantity of output is called the:

A) production function.
B) average product.
C) marginal product.
D) law of diminishing returns.

Question 62

Mr. Woodard's cabinet shop is experiencing rapid growth in sales. As sales have increased, Mr. Woodard has found it necessary to hire more workers. However, he has observed that doubling the number of workers has less than doubled his output. What is the likely explanation?

A) The law of diminishing marginal utility
B) The law of diminishing marginal productivity
C) The law of supply
D) The law of demand

Question 63

The law of diminishing marginal productivity holds:

A) when all inputs are variable.
B) in the long run.
C) when all inputs are fixed.
D) in the short run.

Question 64

Total cost is:

A) the sum of variable costs and fixed costs.
B) average variable cost times quantity.
C) the sum of average fixed cost and marginal cost.
D) the sum of fixed cost and average variable cost.

Question 65

Fixed costs exist only in the:

A) long run when some inputs are fixed.
B) long run when all inputs are fixed.
C) short run when some inputs are fixed.
D) short run when all inputs are fixed.

Question 66

Marginal product eventually:

A) declines because some inputs are fixed.
B) increases because some inputs are fixed.
C) declines because some inputs are variable.
D) increases because some inputs are variable.

Question 67

Variable costs:

A) exist only in the short run.
B) change as output changes.
C) are positive even when a firm produces no output.
D) do not vary with output.

Question 68

The law of diminishing marginal productivity implies that the marginal product of a variable input:

A) never declines.
B) always declines.
C) eventually declines.
D) is constant.

Question 69

Variable costs:

A) do not exist in the long run.
B) are the only costs that exist in the long run.
C) do not exist in the short run.
D) are the only costs that exist in the short run.

Question 70

Which of the following costs is independent of output?

A) Variable costs
B) Total costs
C) Marginal costs
D) Fixed costs

Question 71

Fixed costs plus variable costs equal:

A) total costs.
B) average total costs.
C) average costs.
D) marginal costs.

Question 72

Refer to the table shown. Marginal product declines when which worker is hired? $$\begin{array} { | c | c | } \hline \text { Number of workers } & \text { Mar ginal product of workers } \\\hline 1 & 2 \\\hline 2 & 5 \\\hline 3 & 9 \\\hline 4 & 14 \\\hline 5 & 16 \\\hline 6 & 17 \\\hline 7 & 18 \\\hline 8 & 18 \\\hline 9 & 17 \\\hline 10 & 15 \\\hline\end{array}$$

A) The 5th worker
B) The 6th worker
C) The 7th worker
D) The 9th worker

Question 73

Refer to the graph shown. Within which part of the production function is the firm most likely to operate?

A) A
B) B
C) C
D) B and C

Question 74

Refer to the table shown. The marginal product of the third worker is: $$\begin{array} { | c | c | } \hline \text { Number of workers } & \text { Mar ginal product of workers } \\\hline 1 & 2 \\\hline 2 & 5 \\\hline 3 & 9 \\\hline 4 & 14 \\\hline 5 & 16 \\\hline 6 & 17 \\\hline 7 & 18 \\\hline 8 & 18 \\\hline 9 & 17 \\\hline 10 & 15 \\\hline\end{array}$$

A) 2.
B) 8.
C) 9.
D) 17.

Question 75

Costs that are spent and cannot be changed in the period of time under consideration are called:

A) variable costs.
B) total costs.
C) marginal costs.
D) fixed costs.

Question 76

If a firm shuts down for a week, during that week its:

A) total cost is zero.
B) total cost equals total fixed cost.
C) total cost equals total variable cost.
D) total variable cost exceeds total fixed cost.

Question 77

Total fixed costs:

A) are positive even when no output is produced.
B) are zero when no output is produced.
C) decrease as output increases.
D) increase as output increases.

Question 78

Refer to the graph shown. Within which section(s) of the production function is marginal product decreasing?

A) A
B) B
C) A and B
D) B and C

Question 79

Refer to the graph shown. Within which section(s) of the production function is marginal product increasing?

A) A
B) B
C) C
D) A and B

Question 80

What kind of costs remain the same regardless of the level of production?

A) Fixed
B) Variable
C) Total
D) Marginal