Deck 22: Production and Costs

Question 1

If a firm earns normal profit,then it has generated revenues

A) equal to the sum of implicit and explicit costs.
B) greater than total opportunity costs.
C) sufficient to cover explicit costs, but not implicit costs.
D) sufficient to cover implicit costs, but not explicit costs.

Answer 1

A

Question 2

Fixed costs

A) are equal to explicit costs plus implicit costs.
B) do not vary as output varies.
C) are the same as total costs for any level of output greater than zero.
D) are another name for sunk costs.

Answer 2

B

Question 3

A cost that is incurred when an actual monetary payment is made is a(n)__________ cost.

A) explicit
B) implicit
C) positive
D) expressed

Answer 3

A

Question 4

Costs that do not change with output are called __________ costs.

A) marginal
B) average
C) fixed
D) variable

Question 5

Carol says the following to an economist: "I hate playing the guitar,but I have taken lessons for 10 years,so I might as well continue.There is a chance I will become a professional guitarist one day." An economist would probably make which of the following statements?

A) In a world of scarcity and unhappy alternatives, guitar playing may be your best bet.
B) You're right; it is better not to let all that time, energy, and money on guitar lessons go to waste. That would be uneconomical and irrational.
C) The music made by a guitar is nice; maybe you should stay with it, you may come to like it.
D) The cost you have incurred for guitar lessons is sunk. You should not allow something that can't be undone to influence a current decision.

Question 6

Average fixed cost

A) is greater at lower levels of output than at higher levels.
B) does not change as output changes.
C) exists only in the short run.
D) is usually greater at higher levels of output than at lower levels of output.
E) a and c

Question 7

A cost of resources used in production for which no actual monetary payment is made is a(n)__________ cost.

A) tacit
B) implicit
C) covert
D) explicit

Question 8

Consider the following information about a business Diane opened last year: price = $10,quantity sold = 25,000; implicit cost = $55,000; explicit cost = $160,000.What was Diane's economic profit?

A) $35,000
B) $195,000
C) -$35,000
D) $90,000
E) There is not enough information provided to answer this question.

Question 9

Cy recently went into the business of producing and selling cardboard boxes.For this business,which of the following is most likely to be a fixed cost?

A) fire insurance
B) labor costs
C) paper costs
D) adhesive costs
E) b, c, and d are equally likely to be fixed costs

Question 10

Which of the following statements is true?

A) Explicit costs always equal implicit costs.
B) Zero economic profit is a smaller dollar figure than normal profit.
C) Zero economic profit is a larger dollar figure than normal profit.
D) Saying that a firm earned zero economic profit is the same as saying it earned normal profit.
E) none of the above

Question 11

Which of the following statements is false?

A) Money must change hands before a cost can be incurred.
B) No monetary payment takes place when an implicit cost is incurred.
C) Costs may be either explicit costs or implicit costs.
D) Cost implies that a sacrifice has been made.

Question 12

Consider the following information about a business Diane opened last year: price = $10,quantity sold = 25,000; implicit cost = $55,000; explicit cost = $160,000.What was Diane's accounting profit?

A) $35,000
B) $195,000
C) -$35,000
D) $90,000
E) There is not enough information provided to answer this question.

Question 13

A fixed input is an input whose quantity

A) can be changed as output changes in the short run.
B) cannot be changed as output changes in the short run.
C) cannot be changed as output changes in the long run.
D) a and c
E) b and c

Question 14

An unrecoverable cost that should be disregarded in any current or future decision is also called a(n)__________ cost.

A) sunk
B) explicit
C) implicit
D) variable

Question 15

Economic profit is the difference between total revenue and

A) explicit costs.
B) implicit costs.
C) sunk costs.
D) the sum of explicit and implicit costs.

Question 16

You paid $25 for your ticket to the football game,only to see your favorite team losing 28-0 at the end of the first quarter.That $25 should now be regarded as a(n)__________ cost that economists say should be __________ in your decision on whether or not to stay at the game or leave.

A) explicit; included
B) explicit; disregarded
C) sunk; included
D) sunk; disregarded

Question 17

Which of the following statements is true?

A) Costs are always explicit, never implicit.
B) Costs are always implicit, never explicit.
C) George runs a stationery shop; he paid Frank $5,000 for the carpet he installed in the shop. The $5,000 for carpet is an implicit cost.
D) An implicit cost is a cost that represents the value of resources used in production for which no actual monetary payment is made.
E) none of the above

Question 18

Which of the following statements is true?

A) The short run is always somewhere between six and twelve months.
B) In the short run, changes in output can only be brought about by a change in the quantity of variable inputs.
C) The long run is any period of time over one year.
D) In the short run, there are variable costs but no fixed costs.
E) b and d

Question 19

Which of the following statements is false?

A) Since (total) fixed costs are constant as output changes in the short run, it follows that average fixed cost is constant in the short run.
B) Marginal cost is the cost of producing an additional unit of output.
C) Changes in variable costs are reflected dollar-for-dollar in changes in total cost.
D) Fixed costs exist in the short run, but not in the long run.

Question 20

Five months ago Wilson opened up a health club.Which of the following is an implicit cost related to the health club?

A) Wilson paid $120 for an outside laundry service to clean the towels used at the club.
B) Wilson paid $100 for the pest control exterminator to spray the health club.
C) Wilson previously worked as an accountant, earning $3,000 a month.
D) Wilson usually eats four hamburgers a day, priced at $3 each.

Question 21

As the marginal physical product curve rises,

A) the marginal cost curve rises.
B) the marginal cost curve falls.
C) the total cost curve rises.
D) the total cost curve falls.

Question 22

At 100 units of output,total cost is $22,000 and total variable cost is $14,000.At 100 units of output,what is the value of average total cost,average variable cost,and average fixed cost,respectively?

A) $22; $14; $8
B) $220; $140; $80
C) $740; $340; $400
D) $340; $740; $60
E) $400; $340: There is not enough information provided to determine the average fixed cost.

Question 23

Exhibit 22-1

Refer to Exhibit 22-1.The numbers that go in blanks (A)and (B)are,respectively,

A) 20 and 30.
B) 0 and 21.
C) 20 and 25
D) 1 and 2.
E) 20 and 21.

Question 24

Which of these statements is false?

A) There are no fixed costs in the long run.
B) Total costs are equal to total fixed costs plus total variable costs.
C) In the short run, all inputs are fixed inputs.
D) A fixed cost is a cost that does not change as output changes.

Question 25

As the marginal physical product of a variable input __________,the marginal cost __________.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) b and c

Question 26

The change in output that results from changing a variable input by one unit,holding all other inputs fixed,is called the marginal __________ product of the variable input.

A) physical
B) value
C) average
D) explicit

Question 27

The change in total cost that results from a change in output is __________ cost.

A) average fixed
B) average variable
C) average total
D) marginal

Question 28

Which of the following curves should one look at to observe the law of diminishing marginal returns?

A) the average fixed cost curve
B) the total fixed cost curve
C) the marginal physical product curve
D) the long run average total cost curve

Question 29

Exhibit 22-1

Refer to Exhibit 22-1.Diminishing marginal returns set in with the addition of which unit of the variable input?

A) the fourth
B) the fifth
C) the sixth
D) the second
E) the third

Question 30

If labor is the variable input,then marginal cost equals

A) MPP divided by the wage rate.
B) average variable (labor) costs divided by MPP.
C) average variable (labor) costs multiplied by MPP.
D) the wage rate divided by MPP.
E) the wage rate multiplied by MPP.

Question 31

Suppose that a firm produces hard candies using both machines and labor,and that its quantity of machines is currently fixed but it can vary the number of workers.As more workers are added to operate the machines,output increases.Is this a refutation of the law of diminishing marginal returns?

A) Yes, because the law definitely states that output will decrease as more workers are added.
B) No, because we must be observing output in the long run if the stated scenario is occurring.
C) Yes, because the only way that this could occur is if the number of machines being used is also increasing.
D) No, because it is entirely possible for output to increase even when the law is in operation.

Question 32

Exhibit 22-1

Refer to Exhibit 22-l.The numbers that go in blanks (C)and (D)are,respectively,

A) 25 and 20.
B) 20 and 22.
C) 25 and 24.
D) 22 and 20.
E) none of the above

Question 33

Suppose that one fixed and one variable input are used to produce good X.As the marginal physical product of the variable input increases,the marginal cost

A) increases.
B) decreases.
C) remains constant.
D) There is not enough information to answer the question.

Question 34

Exhibit 22-1

Refer to Exhibit 22-l.The numbers that go in blanks (E)and (F)are,respectively,

A) 25 and 20.
B) 20 and 22.
C) 15 and 10.
D) 22 and 20.
E) none of the above

Question 35

The law of diminishing marginal returns holds for a situation in which

A) all inputs are variable.
B) all inputs are fixed.
C) some inputs are variable and some inputs are fixed.
D) all inputs are increased in the same proportion.

Question 36

The marginal physical product (MPP)of a variable input is

A) total output divided by the quantity of the input used.
B) the change in total output that results from changing the variable input by one unit.
C) the change in total revenue that results from changing the variable input by one unit.
D) the change in total output that results from changing the fixed input by one unit.
E) the change in total costs that results from a change in output.

Question 37

"As additional units of a variable input are added to a fixed input,eventually the marginal physical product of the variable input will decline." This is a statement of the

A) law of supply.
B) average-marginal rule.
C) law of diminishing marginal utility.
D) law of diminishing marginal returns.

Question 38

A rising marginal cost curve is a reflection of a

A) rising marginal physical product curve.
B) falling marginal physical product curve.
C) falling average fixed cost curve.
D) rising average variable cost curve.

Question 39

At 500 units of output,total cost is $35,000 and total variable cost is $22,000.What does total fixed cost equal at 500 units?

A) $57,000
B) $900
C) $13,000
D) $34
E) There is not enough information provided to answer this question.

Question 40

The law of diminishing marginal returns is

A) the same concept as economies of scale.
B) another name for the law of diminishing marginal utility.
C) important for long-run economic analysis.
D) relevant to the production of goods, but not services.
E) none of the above

Question 41

Exhibit 22-2

Refer to Exhibit 22-2.The dollar amounts that go in blanks (A)and (B)are,respectively,

A) $30.00 and $40.00.
B) $3.33 and $2.50.
C) $1.00 and $0.75.
D) $10.00 and $10.00.
E) $6.67 and $5.00.

Question 42

Exhibit 22-2

Refer to Exhibit 22-2.Diminishing marginal returns set in with the addition of which unit of the variable input?

A) the first
B) the second
C) the third
D) the fourth
E) the fifth

Question 43

Exhibit 22-2

Refer to Exhibit 22-2.The dollar amounts that go in blanks (C)and (D)are,respectively,

A) $10.00 and $1.00.
B) $30.00 and $34.00.
C) $3.00 and $4.00.
D) $6.67 and $10.00.
E) $1.00 and $1.50.

Question 44

Economies of scale are said to exist when inputs are increased by some percentage and output increases by a(n)__________ percentage,causing unit costs to __________.

A) greater; fall
B) smaller; fall
C) greater; rise
D) smaller; rise
E) equal; fall

Question 45

Suppose a given marginal cost curve starts out downward sloping and at some level of output turns upward and becomes upward sloping.The point at which it turns upward is the point at which

A) marginal physical product increases.
B) total cost rises.
C) average fixed cost declines.
D) average variable cost is below marginal cost.
E) diminishing marginal returns set in.

Question 46

Which of the following statements is true?

A) If the marginal cost curve is above the AFC curve, the AFC curve must be rising.
B) Average total cost equals average variable cost minus average fixed cost.
C) As output increases, the average variable cost curve gets closer to the average total cost curve.
D) The AFC curve is horizontal as output increases.

Question 47

Diseconomies of scale are said to exist when inputs are increased by some percentage and output increases by a(n)__________ percentage,causing unit costs to __________.

A) greater; fall
B) smaller; fall
C) greater; rise
D) smaller; rise
E) equal; fall

Question 48

In the long run,

A) all costs are variable costs.
B) all costs are fixed costs.
C) there are no variable costs.
D) b and c

Question 49

Exhibit 22-2

Refer to Exhibit 22-2.What is the average total cost of producing 140 units of output?

A) $1.79
B) $7.33
C) $4.23
D) $10.00
E) There is not enough information provided to answer the question.

Question 50

If the average variable cost curve is falling,

A) the MC curve must be below it.
B) marginal cost is greater than average variable cost.
C) the MC curve is necessarily falling.
D) the MC curve is necessarily horizontal (neither rising nor falling).
E) the MC curve is necessarily rising.

Question 51

Exhibit 22-2

Refer to Exhibit 22-2.What is the average total cost of producing 90 units of output?

A) $4.75
B) $1.17
C) $1.07
D) $2.11
E) There is not enough information provided to answer the question.

Question 52

The marginal cost curve passes through the __________ curve at its lowest point.

A) average variable cost
B) average total cost
C) average fixed cost
D) a and b
E) a, b, and c

Question 53

If the wage rate is constant and diminishing marginal returns have already set in,then

A) the wage rate must increase.
B) marginal cost increases.
C) marginal cost decreases.
D) the wage rate must decrease.

Question 54

Exhibit 22-2

Refer to Exhibit 22-2.What is the average variable cost of producing 90 units of output?

A) $1.00
B) $1.17
C) $1.59
D) $1.44
E) There is not enough information provided to answer the question.

Question 55

There are 30 students in a class.The average grade for the first 29 students is 87.The grade of the remaining student is 84.Given this student's grade,the average grade of the 30-student class will be

A) 87.
B) higher than 87.
C) lower than 87.
D) 84.

Question 56

The average-marginal rule states that if the marginal magnitude is

A) less than the average magnitude, the average magnitude falls.
B) greater than the average magnitude, the average magnitude falls.
C) rising, the average magnitude is necessarily above it.
D) falling, the average magnitude is necessarily below it.
E) c and d

Question 57

Exhibit 22-2

Refer to Exhibit 22-2.What is the average total cost of producing 120 units of output?

A) $0.67
B) $1.83
C) $1.07
D) $12.50
E) There is not enough information provided to answer the question.

Question 58

If the marginal cost (MC)curve is rising and is above the average fixed cost (AFC)curve,then

A) the AFC curve is rising.
B) the AFC curve is declining, although the MC curve has nothing to do with this.
C) the AFC curve is at its minimum point.
D) the AFC curve is at its maximum point.
E) Nothing certain can be said about the AFC curve without additional information.

Question 59

Which of the following statements is true?

A) In the short run, there are no fixed costs, only variable costs.
B) In the short run, there are fixed and variable costs, but in the long run there are only fixed costs.
C) In the short run, there are fixed and variable costs, but fixed costs are the only costs a firm is concerned with.
D) In the long run, there are no costs, fixed or variable.
E) none of the above

Question 60

Which of the following cost curves is never U-shaped?

A) the average total cost curve
B) the average fixed cost curve
C) the marginal cost curve
D) the average variable cost curve

Question 61

Exhibit 22-3

Refer to Exhibit 22-3.The average fixed cost of producing 25 units of output is

A) $500.00.
B) $20.00.
C) $50.00.
D) $2.50.
E) indeterminable with the information given.

Question 62

Exhibit 22-2

Refer to Exhibit 22-2.What is the average variable cost of producing 120 units of output?

A) $0.67
B) $1.17
C) $1.00
D) $1.44
E) There is not enough information provided to answer the question.

Question 63

The law of diminishing marginal returns

A) is a short run concept.
B) is a long run concept.
C) is both a short run and a long run concept.
D) does not hold in the real world.

Question 64

Average variable cost equals

A) average total cost minus average fixed cost.
B) total variable cost divided by the change in output.
C) total variable cost divided by output.
D) price of the variable input times the quantity of the variable input.
E) a and c

Question 65

Constant returns to scale are said to exist when inputs are increased by some percentage and output increases by a(n)__________ percentage,causing unit costs to __________.

A) greater; fall
B) smaller; fall
C) greater; rise
D) smaller; rise
E) equal; remain constant

Question 66

If inputs are increased by 10 percent and output increases by 20 percent,then __________ are said to exist.

A) economies of scale
B) constant returns to scale
C) diseconomies of scale
D) diminishing marginal returns

Question 67

Situation 22-1

Refer to Situation 22-l.What will Diane's approximate average fixed costs be if she sells 36,500 donuts in one year?

A) $0.30
B) $0.088
C) $0.138
D) $0.55

Question 68

The short run is

A) a period of time in which all inputs are fixed.
B) a period of time in which all inputs are variable.
C) a period of time in which some inputs are fixed.
D) always less than a year.
E) a and d

Question 69

If inputs are increased by 10 percent and output increases by 10 percent,then __________ are said to exist.

A) economies of scale
B) constant returns to scale
C) diseconomies of scale
D) diminishing marginal returns

Question 70

Marginal cost is the change in

A) total cost that results from a change in output.
B) total revenue that results from a change in output.
C) fixed cost that results from a change in output.
D) a and b
E) all of the above

Question 71

Situation 22-1

Refer to Situation 22-l.What will Diane's total costs be if she sells 2,500 donuts in her first week and then goes out of business?

A) $20,750
B) $10,950
C) $20,880
D) $30,500

Question 72

Situation 22-1

Refer to Situation 22-1.What will Diane's total variable costs be if she sells 36,500 donuts in one year?

A) $10,950
B) $18,450
C) $22,080
D) $12,500

Question 73

Which of the following is probably not an acceptable solution to the problem of diseconomies of scale?

A) reorganization
B) building a larger plant
C) dividing operations
D) hiring new managers

Question 74

If the LRATC curve is falling,then

A) the law of diminishing marginal returns is operating.
B) economies of scale are present.
C) constant returns to scale are present.
D) diseconomies of scale are present.

Question 75

Implicit cost is a

A) cost that is incurred when a monetary payment is made.
B) cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered.
C) cost that represents the value of resources used in production for which no monetary payment is made.
D) sunk cost.
E) b and d

Question 76

Economic profit is

A) total revenue minus total cost (including both explicit and implicit costs).
B) the same as accounting profit.
C) accounting profit plus implicit costs.
D) accounting profit minus implicit costs.
E) a and d

Question 77

Minimum efficient scale refers to the

A) smallest plant size a firm can utilize and still maintain production.
B) lowest point on a given SRATC curve.
C) output level at which the LRATC curve touches each SRATC curve.
D) lowest output level at which average total costs are minimized.

Question 78

Situation 22-1

Refer to Situation 22-l.What will Diane's average total costs be if she sells 2,500 donuts in her first week and then goes out of business?

A) $8.30
B) $1.81
C) $1.08
D) $9.71

Question 79

Exhibit 22-3

Refer to Exhibit 22-3.The average fixed cost of producing 10 units of output is

A) $50.00.
B) $10.00.
C) $2.50.
D) $1.00.
E) $500.00.

Question 80

If the "minimum efficient scale" in an industry is at 25 percent of market sales,what is the maximum number of efficient firms the economy can support in this industry?

A) 75
B) 25
C) 10
D) 4