Deck 7: Costs

Question 1

Chad runs a coffee shop that has annual revenues of $300,000, supply costs of $60,000, and employee salaries of $60,000. He has the option of renting out the coffee shop for $80,000 per year, and he has three outside offers from competitors to work as a senior barista at Starbucks (for an annual salary of $30,000), at Simon's coffee house (for an annual salary of $40,000), and at Peet's coffee shop (for an annual salary of $60,000). He can only hold one job at a time. What should Chad do?

A) He should rent out his coffee shop and take the job at Starbucks.
B) He should rent out his coffee shop and take the job at Simon's.
C) He should rent out his coffee shop and take the job at Peet's.
D) He should continue to run his coffee shop.

Answer 1

D

Question 2

A landscaping company is considering renting a backhoe at $12,000 for the season. The variable cost of completing a landscaping project with the use of the backhoe is $500. Alternatively, without the use of the backhoe, the company would incur a variable cost of $1,000 per landscaping project and no fixed costs. If the landscaping company plans to complete more than _____ projects, the total cost of landscaping projects will be lower _____.

A) 24; with the backhoe
B) 18; with the backhoe
C) 44; without the backhoe
D) 12; without the backhoe

Answer 2

A

Question 3

Use the following to answer question:
Figure 7.3
(Figure 7.3) The firm's total cost is given by curve _____ on the following graph.

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

Answer 3

B

Question 4

Which of the following statements is (are) TRUE?

A) I, II, and III
B) III
C) II, III, and IV
D) III and IV

Question 5

Debbie, a popular wedding photographer, is able to photograph a wedding every Saturday of the year. She charges couples $4,000 for a complete set of photographs that cost her $2,200 to print and develop. Suppose that on one Saturday Debbie photographs her niece's wedding without charge, but her niece insists on paying Debbie $2,200 to cover her printing and developing costs. What is Debbie's economic cost of photographing her niece's wedding?

A) $0
B) $1,800
C) $2,200
D) $4,000

Question 6

Suppose that you close down your coffee shop and sell your coffee maker for $500. If you originally bought the coffee maker for $4,000 and it lost $1,000 because of depreciation (i.e., age and use), the sunk cost of the coffee maker is:

A) $3,500.
B) $3,000.
C) $2,500.
D) $1,500.

Question 7

A business anticipates future operating revenues of $200 million, future operating costs of $150 million, and sunk costs of $60 million. This business should:

A) permanently shut down because the value of staying open is negative.
B) continue operations because the sunk costs are less than the future operating revenues.
C) continue operations because the future operating revenues are greater than the future operating costs.
D) permanently shut down because the ratio of future revenues to future costs is less than 2.

Question 8

Which of the following factors are likely to result in fewer fixed costs?

A) longer time horizons
B) stronger labor unions
C) unreliable resale markets
D) greater capital requirements for production

Question 9

An entrepreneur gathers the following information to make a decision on whether to stay open for business or to shut down permanently: Future operating revenues = $18 million
Future operating costs = $14 million
Sunk costs = $8 million
The entrepreneur should:

A) continue to operate because the operating revenues exceed the operating costs.
B) shut down because the operating revenues are insufficient to cover the operating costs and sunk costs.
C) shut down because the sunk costs are greater than zero.
D) continue to operate to help pay off the sunk costs.

Question 10

Use the following to answer questions 14-15:
Figure 7.1
(Figure 7.1) At 6 units of output, FC is _____ and VC is _____.

A) $450; $250
B) $200; $250
C) $200; $150
D) $250; $200

Question 11

Which of the following is an example of a sunk cost fallacy?

A) "I paid $85 for this wool sweater, but it is too scratchy on my skin, so I think I'll give it to my mother-in-law."
B) "I'm not going to allow the sacrifice of 2,527 troops who have died in Iraq to be in vain by pulling out before the job is done."
C) "I will not buy an Under Armour hoodie until it goes on sale for at least 25% off."
D) "I'm going to buy another bag of popcorn because this popcorn is burnt."

Question 12

The presence of capital rental markets gives firms:

A) the ability to hire more labor in periods of high demand by keeping capital costs fixed.
B) reduced flexibility in substituting among various labor and capital inputs.
C) the ability to hire more capital in periods of high demand by keeping capital costs fixed.
D) the flexibility to adjust capital usage to output levels, making capital costs variable.

Question 13

Lilly's Lumberyard had the following revenues and costs last year: Costs If Lilly did not own a lumberyard, she would earn $115,000 per year as a store manager for Home Depot. Lilly's Lumberyard had an economic cost of _____ and an economic profit of _____.

A) $225,000; -$75,000
B) $400,000; $35,000
C) $405,000; -$5,000
D) $210,000; $0

Question 14

Use the following to answer questions 14-15:
Figure 7.1
(Figure 7.1) The total cost of producing 7 units of output is:

A) $200.
B) $100.
C) $300.
D) $500.

Question 15

Use the following to answer question:
Figure 7.2
(Figure 7.2) Consider a firm with the following cost structure: Which panel represents the cost curves of the firm?

A) panel a
B) panel b
C) panel c
D) panel d

Question 16

Which of the following statements is (are) TRUE?

A) II
B) I
C) I and III
D) I, II, and III

Question 17

Corporate bankruptcy restructuring allows a firm to treat its debt payments as:

A) average fixed costs.
B) sunk costs.
C) marginal costs.
D) depreciation expenses.

Question 18

A fixed cost:

A) does not change with the level of the firm's output.
B) is associated with the firm's variable inputs.
C) decreases as the firm increases output.
D) captures the wear and tear of using capital in production.

Question 19

Which of the following statements is (are) TRUE?

A) I and IV
B) I, II, III, and IV
C) II and IV
D) I, III, and IV

Question 20

Use the following to answer question:
Figure 7.4
(Figure 7.4) What could cause the movement from TC₁ to TC₂?

A) a decrease in the firm's fixed costs of production
B) economies of scale
C) a technological change that increases the productivity of inputs
D) an increase in input prices

Question 21

Use the following to answer question:
Figure 7.11
(Figure 7.11) The short-run total cost curve is represented by the letters _____, and the long-run total cost curve is represented by the letters _____.

A) WXA; ZXY
B) ZXA; WXY
C) WXY; ZXA
D) ZXY; WXA

Question 22

Use the following to answer question:
Figure 7.12
(Figure 7.12) The short-run average total cost curve is given by ______, and the long-run average total cost curve is given by______.

A) CZW; AZY
B) CZY; AZW
C) AZY; CZW
D) AZW; CZY

Question 23

A firm is producing 4 units of output at an average total cost of $40. When the firm produces 5 units of output, average total cost rises to $50. What is the marginal cost of the fifth unit of output?

A) $10
B) $30
C) $90
D) $120

Question 24

A firm's production function is given by Q = KL, where MP_L = K and MP_K = L. The wage rate (W) = $50 and the rental per unit of capital (R) is $12.50. In the short run, capital (K) is fixed at 10 units. The short-run average total cost of producing 100 units of output is _____, and the long-run average total cost of producing 100 units of output is _____.

A) $14.75; $8.80
B) $6.25; $5
C) $6.25; $4.20
D) $14.75; $9

Question 25

Suppose a firm's total cost and marginal cost are given by TC = 192 + 10Q + 3Q² and MC = 10 + 6Q. What is the output level that minimizes average total cost?

A) 8
B) 1.5
C) 21
D) 4

Question 26

Use the following to answer question:
Figure 7.10
(Figure 7.10) Suppose the firm is producing at point Z and wants to reduce its output to Q₁. Which of the following statements is TRUE?

A) In the short run, the firm will move to point A, where total costs of production are higher than at point C.
B) The firm will move along its long-run expansion path from point Z to point A.
C) In the short run, the firm will move to point A, where total costs of production are lower than at point C.
D) In the long run, the firm will move to point A, where total costs of production are lower than at point C.

Question 27

Use the following to answer question:
Figure 7.8
(Figure 7.8) The average fixed cost at 70 units of output is _____, and the firm's fixed cost of production is _____.

A) $43; $3,010
B) $11; $560
C) $0.10; $7
D) $7; $490

Question 28

Suppose a firm's total cost and marginal cost functions are given by TC = 18 + Q + 2Q² and MC = 1 + 4Q, respectively. What is the output level that minimizes average total cost?

A) 5
B) 3
C) 4.45
D) 6

Question 29

Suppose a firm's total cost is given by TC = 100 + 4Q + 2Q². Which of the following statements is (are) TRUE?

A) I and II
B) II and III
C) III
D) I and IV

Question 30

Which of the following statements is (are) TRUE?

A) I, II, and III
B) I and III
C) II
D) II and III

Question 31

Use the following to answer question:
Table 7.2
(Table 7.2) Carl's Detailing is a small business that travels to people's homes to meticulously clean their high-end sports cars. Carl hires detailers (labor) at a wage of $80 per day per worker. A van that is used to carry cleaning supplies to clients' homes has a fixed cost of $20 per day. The table shows the relationship between the number of cars cleaned and the number of detailers. The marginal cost of cleaning the first car is _____, and the marginal cost of cleaning the third car is _____.

A) $80; $480
B) $80; $240
C) $100; $260
D) $100; $300

Question 32

Use the following to answer question:
Figure 7.7
(Figure 7.7) Which of the following statements is (are) TRUE?

A) II
B) I and III
C) II and III
D) I

Question 33

Suppose a firm's total cost is given by TC = 150 + 0.50Q + 1.5Q². What is the firm's average variable cost of producing 10 units of output?

A) $5.55
B) $15.50
C) $15
D) $17

Question 34

Use the following to answer question:
Figure 7.6
(Figure 7.6) Which of the following statements is (are) TRUE?

A) I and II
B) II
C) III
D) I

Question 35

A firm is producing 50 units of output at a total cost of $1,000, with a per-unit variable cost of $8. What is the firm's average fixed cost?

A) $12
B) $4
C) $20
D) $28

Question 36

Use the following to answer question:
Figure 7.9
(Figure 7.9) Suppose the firm is producing at point A. If the firm wants to produce more output, it will:

A) not be able to because capital is fixed.
B) move to point W in the short run and point Z in the long run.
C) move to a point between W and Z in the short run.
D) move to point Z in the short run and point W in the long run.

Question 37

Which of the following statements is (are) TRUE?

A) I, II, and III
B) II, III, and IV
C) II and III
D) I

Question 38

Charlie's Umbrellas has a production function given by Q = 10K^0.5L^0.5, where MP_L = 5K^0.5/L^0.5 and MP_K = 5L^0.5/K^0.5. Charlie is using 9 units of capital (K) in the short run. The wage (W) is $80 per day and the rental per unit of capital (R) is $5 per day. What is Charlie's total cost of producing 60 umbrellas?

A) $445
B) $365
C) $108
D) $276

Question 39

Which of the following statements is (are) TRUE?

A) I, II, and III
B) I and II
C) II and III
D) I and III

Question 40

Which of the following statements is (are) TRUE?

A) Short-run average total cost curves intersect the long-run average total cost curve at its minimum point.
B) It is not possible for two short-run average total cost curves to cross.
C) The long-run average total cost curve is derived by tracing out all of the firm's short-run average total cost curves.
D) The long-run average total cost curve indicates that it is more costly to produce output in the long run, especially when input prices are rising because of inflation.

Question 41

A firm is producing 10,000 units of output at a total cost of $5,000. If the firm increases output by 5,000 units and its total costs rise by $2,000, the firm has:

A) economies of scale.
B) economies of scope.
C) constant returns to scale.
D) diseconomies of scale.

Question 42

A firm's long-run total cost curve is given by LTC = 2,000Q - 10Q² + 1/3Q³, and long-run marginal cost is given by LMC = 2,000 - 20Q + Q². What is the quantity of output that minimizes long-run average total cost?

A) 15
B) 165
C) 500
D) 210

Question 43

Use the following to answer question:
Figure 7.14
(Figure 7.14) Refer to the graph. Do you agree or disagree with the following statement? Why? "If the firm can sell its product for $30 and it's selling 12 units, it should close its doors and produce nothing, since it is losing money."

Question 44

Producing 200 units of good Y and 100 units of good X in the same factory costs the firm $50,000. In contrast, producing 200 units of good Y in one factory and 100 units of good X in another factory costs the firm $75,000. So if the firm produces the two goods together, it achieves:

A) quadratic returns to scale.
B) diseconomies of scope.
C) economies of scope.
D) diseconomies of scale and diseconomies of scope.

Question 45

Suppose the total cost of producing goods Q₁ and Q₂ jointly is given by TC = 100 + 50Q₁Q₂ - (Q₁Q₂)^0.5. The total cost of producing Q₁ and Q₂ in two separate facilities is given by TC = 75 + 3,000Q₁ + 1,000Q₂ + + . If the firm produces Q₁ = 40 and Q₂ = 100, the firm should produce the goods _____ because of _____ of scope.

A) jointly; economies
B) in separate facilities; diseconomies
C) jointly; diseconomies
D) in separate facilities; economies

Question 46

Use the following to answer question:
Figure 7.13
(Figure 7.13) _____ of scale occur between _____ units of output.

A) Economies; 4 and 6
B) Diseconomies; 1 and 5
C) Diseconomies; 5 and 9
D) Economies; 5 and 9

Question 47

A firm with a production function Q = KL (where K is units of capital and L is units of labor) has an expansion path that is given by K = 2L. The wage rate (W) is $20 and the rental on capital is $10. Complete the following table, assuming that the firm is using the optimal mix of inputs for any given output level.

Question 48

Answer the following questions.

Question 49

Fran is considering permanently closing down her beauty salon. A consultant advises her that if she stays open for business, she will have operating revenues of $300,000 and operating costs of $280,000. In addition, Fran has paid $40,000 for fixtures that can be resold for $15,000 after she closes the beauty salon.

Question 50

The firm's long-run total cost is given by LTC = 100Q - 10Q² + (1/3)Q³, and long-run marginal cost is given by LMC = 100 - 20Q + Q². At what output level does the firm have economies of scale?

A) Q < 15
B) Q < 175
C) Q < 4,000
D) Q < 88

Question 51

Use the following to answer question:
Figure 7.15
(Figure 7.15) Complete the following table:

Question 52

A firm produces two goods Q₁ and Q₂. For economies of scope to occur, it must be TRUE that:

A) TC(Q₁,0) + TC(0,Q₂) > TC(Q₁,Q₂).
B) TC(Q₁,0) + TC(0,Q₂) < TC(Q₁,Q₂).
C)
D) (TC(Q₁1,0) + TC(0,Q₁2))/(TC(Q₁1, Q₁2)) < 1.

Question 53

Use the following to answer question:
Figure 7.16
(Figure 7.16) Graph the firm's total cost curve as it corresponds to points A, B, and C.

Question 54

Stan started a lawn-fertilizing business and is considering purchasing a powered fertilizer spreader or a self-propelled spreader. The powered spreader has a fixed cost of $4,000 for the season, whereas the self-propelled spreader has a fixed cost of only $100 for the season. The variable costs of fertilizing a lawn with the powered spreader and self-propelled spreader are $7 and $15, respectively.

Question 55

Suppose a firm with a production function Q = KL (where MP_L = K and MP_K = L) is producing 125 units of output by using 5 workers and 25 units of capital. The wage rate (W) per worker is $10 and the rental per unit of capital (R) is $2. If it decreases output to 45 units, long-run average total cost _____ at 125 units of output to _____ at 45 units of output.

A) rises from $1.80; $2
B) rises from $0.80; $1.33
C) falls from $0.80; $0.60
D) falls from $1.80; $1.15

Question 56

The firm's long-run total cost is given by LTC = 5,000Q - 100Q² + Q³, and its long-run marginal cost is given by LMC = 5,000 - 200Q + 3Q². At what output level is the firm subject to diseconomies of scale?

A) Q > 30
B) Q > 50
C) Q > 245
D) Q < 245

Question 57

Suppose that a windshield business changes from paying its workers an hourly wage rate to a piece rate system (i.e., paying workers for each windshield installed). The new compensation scheme increases workers' productivity by 44%, with only a negligible effect on their earnings. Graphically illustrate how the change in compensation affects the total cost of windshield installation.

Question 58

Menard quit his high-school teaching job, which paid $60,000 per year, to start a business that prepares students for the SAT exam. His first year in business generated the following revenues and costs:

Question 59

Jim owns Nickelback Bar, dedicated to the rock band Nickelback. Jim pays his landlord, a strip mall, a $3,000 monthly rent. If Jim breaks the lease before the end of the calendar year, he is required to pay $2,000 for each of the remaining months. Jim just purchased $40,000 of Nickelback-themed bar fixtures; the fixtures have absolutely no value in any alternative use. Each weekend Jim contracts with a security company that provides four security guards for a total of $1,200.

Question 60

Gillian quit her sales job, which paid $60,000 per year, and became a middle-school science teacher earning $48,000 per year. What is Gillian's opportunity cost of switching careers?

Question 61

Use the following to answer question:
Figure 7.17
(Figure 7.17) Answer the following questions.

Question 62

A firm's long-run total cost function is given by LTC = 115,000Q - 500Q² + Q³, where long-run marginal cost is given by LMC = 115,000 - 1,000Q + 3Q². At what range of output does this firm have economies of scale?

Question 63

Answer the following questions.

Question 64

Use the following to answer question:
Figure 7.18
(Figure 7.18) Using the information provided in Figure 7.18, graph the firm's MC, ATC, and AVC curves in one diagram. Indicate the minimum points on the AVC and ATC curves. In a separate diagram, show the firm's AFC curve.

Question 65

Use the following to answer question:
Figure 7.19
(Figure 7.19) Where the firm is producing, at point Y, graph the:

Question 66

Use the following to answer question:
Consider the table. What important characteristic describes this firm's production process?

Question 67

Answer the following questions.

Question 68

Dillon operates Ducks Unlimited, which raises mallard ducks to sell to dog food companies. Dillon leases the land for $5,000 per month and hires workers at $1,000 per month per worker. Complete the following table, which shows how the number of workers varies with the number of ducks raised.

Question 69

Suppose a firm's total cost function is given by TC = 6,000 + 2Q + 0.25Q², where MC = 2 + 0.5Q.

Question 70

Determine whether each of the following statements is TRUE or FALSE.

Question 71

Suppose that a firm is producing 100 units of output at a total cost of $20,000.

Question 72

Complete the following table.

Question 73

Amy owns Accurate Accounting, Inc., and her business costs for the year are as follows:
Building rent = $30,000
Accounting staff = $200,000
Supplies (e.g., paper, pencils, ink, toner) = $10,000
Annual software license = $15,000
Accurate Accounting, Inc. prepared 600 corporate tax returns for the year. Complete the following table.

Question 74

Suppose a firm's total cost and marginal cost are given by TC = 200 + 10Q + 9Q² and MC = 10 + 18Q. What output level minimizes average total cost?

Question 75

Assume a company has the long-run production function featured in the accompanying table. Suppose the price of capital and labor per unit both equal $50. Graph the company's long-run average cost curve.

Question 76

SeakayakingUK is a small business that makes sea kayaks. The owner, Nigel, hires labor at a wage of $100 per day per worker. The factory costs $200 per day whether or not any kayaks are made. The table shows the relationship between the number of kayaks produced and the number of workers. Calculate and graph the marginal and average costs (fixed, variable, total). What do you observe about the relationship between average cost and marginal cost?

Question 77

Complete the following table:

Question 78

Given the cost function TC = 200 + 4Q + 2Q², the average cost equation is_____. This means that the average variable cost portion is _____ and average fixed costs portion is _____.

Question 79

A firm has a production function of Q = KL + L, where MP_L = K + 1 and MP_K = L. The
wage rate (W) is $100 per worker and the rental (R) is $100 per unit of capital.

Question 80

A coffee shop's production function is given by Q = KL, where MP_L = K and MP_K = L. The barista wage rate is $10 and the rental per square foot is $15. In the short run, store size is fixed at 500 square feet. The short-run average total cost of serving 1,500 cups of coffee is _____, and the long-run average total cost of producing 1,500 cups of coffee is _____.