Deck 7: Costs

Question 1

A firm built an inventory of 16-bit chips for $50,000 last year.However,the introduction of 32-bit chips lowers the market price for 16-bit chips and the inventory can only be sold for $40,000 now.What is the sunk cost?

A) $50,000
B) $40,000
C) $10,000
D) $90,000

Answer 1

C

Question 2

If a firm buys a building so as to have office space for its workers,the monthly opportunity cost of the building is best measured as

A) the monthly mortgage payment the firm must pay.
B) the price the firm paid divided by twelve.
C) zero.
D) the rent the firm could earn if it rented the building to another firm.

Answer 2

D

Question 3

When buying a piece of equipment,it is always best for the firm to pay cash instead of borrowing the funds since this renders the equipment less costly.

Answer 3

False
It depends.The opportunity cost of the capital when paying cash is the interest the firm receives on its cash reserves.This is an implicit cost.The opportunity cost of the capital when the funds are borrowed is the interest the firm must pay to the lender.This is an explicit cost.If the rate the firm receives on its cash reserves exceeds the rate at which it borrows,the firm is better off borrowing the funds to buy the equipment.

Question 4

A firm built an inventory of 16-bit chips for $50,000 last year.However,the introduction of 32-bit chips lowers the market price for 16-bit chips and the inventory can only be sold for $40,000 now.What is the opportunity cost of the inventory of 16-bit chips?

A) $50,000
B) $40,000
C) $10,000
D) $90,000

Question 5

The Nifty Gum Co.has purchased a large parcel of land for $1 million.The company recently discovered that the land is contaminated and is worthless to all possible buyers.The opportunity cost of the land is

A) $0.
B) $1 million.
C) some amount greater than $0 but less than $1 million.
D) equal to the cost of the factory that was planned to be built there.

Question 6

Your company makes copper pipes.Over the years,you have collected a large inventory of raw copper.The production process involves melting the copper and shaping it into pipes.You also have a large stockpile of pennies.Suppose the price of copper rises so much that the copper in the penny becomes worth more than one cent.Should you melt down your pennies?

Question 7

An accountant may amortize the expense of a durable good by dividing the total amount spent on the good by the number of years the good is expected to last.An economist may amortize the expense of a durable and never fully account for the total expense.

Question 8

Sarah earns $40,000 per year working for a large corporation.She is thinking of quitting this job to work full time in her own business.She will invest her savings of $50,000 (which currently has an annual 10% rate of return)into the business.Her annual opportunity cost of this new business is

A) $0.
B) $40,000.
C) $45,000.
D) $90,000.

Question 9

Simon is given a free ticket to see Coldplay Saturday night.He already has a ticket to see Sting in concert that night.The Sting ticket cost Simon $50 though he would have paid as much as $80 to go to the show.Simon knows that he can easily sell the Sting ticket on Craigslist for $60.What is his opportunity cost of seeing Coldplay?

Question 10

The cost of waiting two months for health care to address a debilitating problem in Canada is most accurately described as

A) an explicit cost.
B) an accounting cost.
C) no real cost.
D) an opportunity cost.

Question 11

Economic costs of an input include

A) only implicit costs.
B) only explicit costs.
C) both implicit and explicit costs.
D) whatever management wishes to report to the shareholders.

Question 12

Variable costs are

A) a production expense that does not vary with output.
B) a production expense that changes with the quantity of output produced.
C) equal to total cost divided by the units of output produced.
D) the amount by which a firm's cost changes if the firm produces one more unit of output.

Question 13

A firm's marginal cost can always be thought of as the change in total cost if

A) the firm produces one more unit of output.
B) the firm buys one more unit of capital.
C) the firm's average cost increases by $1.
D) the firm moves to the next highest isoquant.

Question 14

You have two career options.You can work for someone else for $50,000 a year,or,you can run your own business,with an annual revenue of $100,000,and explicit costs of $40,000 annually.Explain which career option a profit-maximizer would select and why.

Question 15

Economists proclaim that competitive firms make zero economic profit in the long run.This shows how

A) detached economists are from the real world.
B) unrealistic economic theory is.
C) firms cover all their cost, both monetary and non-monetary.
D) firms cover only monetary cost when economic profits are zero.

Question 16

Consider the following two situations.
(i) You purchase a $10 movie ticket in advance over the Internet,but when arriving at the theater,you realize that you lost the ticket.The only way to see the movie is to purchase a new ticket.
(ii) On the way to seeing a movie,you drop a $10 bill.You still can afford the movie,but you have lost the $10.
How should you,rational person,respond to the two situations?

A) You should still see the movie in both situations.
B) You should respond the same way to each situation, whether it is to see the movie or not.
C) In the first situation, you should skip the movie; in the second, you should still see the movie.
D) In each situation, you should not see the movie.

Question 17

Johnny has worked as a CPA for five years and wants to open his own public accounting practice.The cost of his college degree in accounting represents

A) the opportunity cost of this endeavor.
B) a sunk cost.
C) an expense.
D) a variable cost.

Question 18

Applications to MBA programs rose during the economic downturn in 2008.This is best explained by:

A) The opportunity cost of attending an MBA dropped for most applicants due to poor job prospects.
B) More teachers were available to teach MBA classes due to the lower opportunity cost of teaching.
C) The explicit costs of attending an MBA program fell in 2008.
D) The implicit costs of attending an MBA program rose in 2008.

Question 19

Four years after graduating from college you must decide if you want to go on as an accountant (your college major)or if you want to make a career change and become a singer.The cost of your education will matter for your decision.

Question 20

Fixed costs are

A) a production expense that does not vary with output.
B) a production expense that changes with the quantity of output produced.
C) equal to total cost divided by the units of output produced.
D) the amount by which a firm's cost changes if the firm produces one more unit of output.

Question 21

In the short run,the point at which diminishing marginal returns to labor begin is the point at which the marginal cost curve

A) peaks.
B) bottoms out.
C) is upward sloping.
D) is downward sloping.

Question 22

Which of the following statements is NOT true?

A) AC = AFC + AVC
B) C = F + VC
C) AVC = wage/MPL
D) AFC = AC - AVC

Question 23

If average cost is positive,

A) marginal cost equals average cost.
B) marginal cost exceeds average cost.
C) marginal cost is less average cost.
D) Not enough information is provided.

Question 24

If the marginal cost of producing a good is increasing as a firm produces more of the good,then which of the following must be TRUE?

A) AFC is rising.
B) AVC is rising.
C) MC > AVC.
D) MPL is falling.

Question 25

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q.The average cost of the 5th T-shirt is

A) 2.
B) 12.
C) 52.
D) 60.

Question 26

When a firm produces one unit,the variable cost is $3.When the firm produces two units,the variable cost is $6.What is the marginal cost associated with two units of production?

A) $2
B) 5¢
C) $6
D) $3

Question 27

Suppose the short-run production function is q = 10 ∗ L.If the wage rate is $10 per unit of labor,then AVC equals

A) q.
B) q/10.
C) 10/q.
D) 1.

Question 28

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q.The marginal cost of the 5th T-shirt is

A) 2.
B) 10.
C) 12.
D) 60.

Question 29

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q.Which of the following statements is TRUE at all levels of production?

A) MC = AVC
B) MC = AC
C) MC > AFC
D) All of the above.

Question 30

When diminishing marginal returns set in,

A) average product is increasing.
B) average variable cost is decreasing.
C) average cost is decreasing.
D) None of above.

Question 31

If the total cost of production for 1000 widgets is $2000 and marginal cost is constant at $1,what is the average cost if 2000 widgets are produced?

A) $2
B) $1.5
C) $1
D) $0.5

Question 32

Suppose a firm can only vary the quantity of labor hired in the short run.An increase in the cost of capital will

A) increase the firm's marginal cost.
B) decrease the firm's marginal cost.
C) have no effect on the firm's marginal cost.
D) More information is needed to answer the question.

Question 33

Suppose the short-run production function is q = L⁰.⁵.If the marginal cost of producing the tenth unit is $5,what is the wage per unit of labor?

A) $1
B) 5¢
C) 25¢
D) It cannot be determined without more information.

Question 34

When a firm produces 1000 widgets with total cost of $2000 and fixed cost of $1000,what is the average variable cost?

A) $2
B) $1
C) $0.5
D) $0.2

Question 35

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month.Joey's dad is thinking of increasing the rent to $400 per month.As a result Joey's marginal cost of cutting grass will

A) increase by $100 divided by the amount of grass cut.
B) increase by $100.
C) decrease by $100.
D) not change.

Question 36

Suppose the short-run production function is q = 10 ∗ L.If the wage rate is $10 per unit of labor,then MC equals

A) q.
B) q/10.
C) 10/q.
D) 1.

Question 37

If average cost is decreasing,

A) marginal cost equals average cost.
B) marginal cost exceeds average cost.
C) marginal cost is less than average cost.
D) Not enough information is provided.

Question 38

If the total cost of production for 1000 widgets is $2000 and marginal cost is constant at $1,what is the average fixed cost for the 1000 widgets?

A) $2
B) $1.5
C) $1
D) $0.5

Question 39

Suppose the short-run production function is q = 10 ∗ L.If the wage rate is $10 per unit of labor,then AFC equals

A) 0.
B) 1.
C) 10/q.
D) It cannot be determined from the information provided.

Question 40

In the short run,the point at which average cost is minimized,the line from the origin to the point on the

A) total cost curve is tangent to the curve.
B) total cost curve has the largest slope.
C) total variable cost curve has the largest slope.
D) total variable cost curve has the smallest slope.

Question 41

Which of the following will cause the average cost curve of making cigarettes to shift?

A) a $5 million penalty charged to each cigarette maker
B) a $1 per pack tax on cigarettes
C) a $1 an hour wage increase paid to all cigarette production workers
D) All of the above

Question 42

Consider a general Cobb-Douglas production function
q = ALᵃKᵇ
where A,a and b are positive constants.
Using this production function,derive the short-run cost function for a fixed capital stock,K₀,wage rate w,and capital rental rate r.

Question 43

Marginal cost is equal to

A) the increase in total cost from increasing the amount of labor by one unit.
B) the increase in variable cost from increasing the amount of labor by one unit.
C) Both A and B.
D) Neither A nor B.

Question 44

Which of the following will cause the average fixed cost curve of making cigarettes to shift?

A) a $5 million penalty charged to each cigarette maker
B) a $1 per pack tax on cigarettes
C) a $3 per hour wage increase
D) an increase in the demand for cigarettes

Question 45

If the average cost of producing a good is increasing as a firm produces more of the good,then which of the following must be TRUE?

A) AFC is falling.
B) AVC is rising.
C) MC > AVC.
D) All of the above.

Question 46

A consumer purchases a book by driving across town to a bookstore,standing in line for five minutes to pay the cashier,and then pays $5.The same book is purchased by another consumer who spends two minutes placing the order over the Internet for $10.The book necessarily cost the first consumer less.

Question 47

The marginal cost curve intersects the average fixed cost curve at its minimum.

Question 48

The "Law of Diminishing Marginal Returns" could also be termed the "Law of Increasing Marginal Costs."

Question 49

After employing her last laborer,Rachel notices that her Average Product has decreased.True or False: Her marginal cost is greater than her average variable cost.

Question 50

In the long run,fixed costs are

A) sunk.
B) avoidable.
C) larger than in the short run.
D) not included in production decisions.

Question 51

Consider a general cost function C(q),with Average Cost=C(q)/q.Prove using calculus that the quantity which minimizes the Average Cost function is also at the point where the Marginal Cost equals the Average Cost.To do this,first derive the necessary condition for the AC to be at a minimum.

Question 52

Suppose each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the short run,an increase in the price of shovels will result in

A) fewer shovels being purchased.
B) more workers being hired.
C) a decrease in the firm's output.
D) no change in the firm's output.

Question 53

Evren wants to go into the donut business.For $500 per month he can rent a bakery complete with all the equipment he needs to make a dozen different kinds of donuts (K = l,r = 500).He must pay unionized donut bakers a monthly salary of $400 each.He projects his monthly production function to be
Q = 5KL
where Q is tons of donuts.
a.With the current level of capital,what is the marginal product of labor? Is the marginal product diminishing? Explain.
b.If Evren wishes to make 25 tons of donuts,how many bakers are required given the current level of capital? How much will it cost to produce this (total cost)?
c.Derive Evren's short-run cost function with K=1.
d.Derive the marginal cost curve from your answer to c.and show the relationship between the marginal cost and marginal product of labor.

Question 54

Suppose firm has a constant marginal product of labor - one additional worker adds four units of output given any initial quantity of workers.What do the average variable and marginal costs look like for this firm? Provide a graph of the MC and AVC.

Question 55

Which of the following will cause the marginal cost curve of making cigarettes to shift?

A) a $5 million penalty charged to each cigarette maker
B) a $1 per pack tax on cigarettes
C) a $1 million advertising campaign by the American Cancer Society
D) All of the above

Question 56

A specific tax of $1 per unit of output will affect a firm's

A) average total cost, average variable cost, average fixed cost, and marginal cost.
B) average total cost, average variable cost, and average fixed cost.
C) average total cost, average variable cost, and marginal cost.
D) marginal cost only.

Question 57

Ed's construction company has the following short-run cost function: q³ - 10q² + 36q.
a.What level of output will minimize the average cost? What is the AC at this point?
b.Does the production process indicate diminishing returns? How can you tell?

Question 58

Explain why the marginal cost curve intersects a U-shaped average cost curve at its minimum point.

Question 59

If a particular production process is subject to diminishing marginal returns to labor at every level of output,then at every level of output

A) AC is upward sloping.
B) MC exceeds AVC.
C) AFC is constant.
D) All of the above.

Question 60

Alison lives in a small town where she plans to hire workers to help her make candy.Her production function for candy is
q = 4LK.⁵
She begins producing with K=4.The cost of capital is $50/unit.The wage depends on the amount of workers she employs.Specifically,w(L)= 10 + 2L.
a.Does Alison's production function exhibit diminishing marginal return to labor? Explain.
b.Derive Alison's short-run cost function.
c.What is the shape of Alison's Marginal Cost.
d.Does the relationship w/MP = MC hold? Show this explicitly.

Question 61

The slope of the isocost line tells the firm how much

A) capital must be reduced to keep total cost constant when hiring one more unit of labor.
B) capital must be increased to keep total cost constant when hiring one more unit of labor.
C) more expensive a unit of capital costs relative a unit of labor.
D) the isocost curve will shift outward if the firm wishes to produce more.

Question 62

When the isocost line is tangent to the isoquant,then

A) MPL = MPK.
B) the firm is producing that level of output at minimum cost.
C) the firm has achieved the right economies of scale.
D) All of the above.

Question 63

Suppose that capital and labor must be kept in a fixed proportion to produce a particular good.For example,digging a trench requires one worker who has one shovel.What does this imply about returns to scale?

A) There are constant returns to scale.
B) There are increasing returns to scale.
C) There are decreasing returns to scale.
D) Nothing.

Question 64

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,the firm will experience

A) increasing returns to scale.
B) constant returns to scale.
C) decreasing returns to scale.
D) The returns to scale cannot be determined from the information provided.

Question 65

At the XYZ Co.,a unit of capital costs three times as much as a unit of labor.If MPK = 10,MPL = 5,then this firm

A) is minimizing its cost at current output level.
B) should use more capital and less labor to raise output at current cost.
C) should use less capital and more labor to raise output at current cost.
D) None of above.

Question 66

At the XYZ Co.,a unit of capital costs three times as much as a unit of labor.If the isoquants are convex,and the firm does not change its input mix in the long run,we can conclude that

A) MPK = 3 ∗ MPL.
B) the firm will not hire any capital.
C) the firm will hire 3 times as much labor as capital.
D) the firm will hire 3 times as much capital as labor.

Question 67

When the isocost line is tangent to the isoquant,then

A) MRTS = w/r.
B) the firm is producing that level of output at minimum cost.
C) the last dollar spent on capital yields as much extra output as the last dollar spent on labor.
D) All of the above.

Question 68

The production of cigarettes is highly automated; however,a worker is required to monitor each machine.Machines and workers do not interact with one another.Given this information,there are most likely

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

Question 69

A firm can minimize cost by

A) picking the bundle of inputs where the lowest isocost line touches the isoquant.
B) picking the bundle of inputs where the isoquant is tangent to the isocost line.
C) picking the bundle of inputs where the last dollar spent on one input gives as much extra output as the last dollar spent on any other input.
D) All of the above.

Question 70

Assuming that w and r are both positive,if the long-run expansion path is horizontal,then

A) MPK = 0.
B) MRTS is a function of capital only.
C) w = r.
D) All of the above.

Question 71

A change in relative factor prices will always result in

A) a change in the slope of the isoquants.
B) a tangency between the new isocost line and a new isoquant.
C) a rotation of the isocost lines.
D) All of the above.

Question 72

If the isoquants are straight lines or L-shaped,then a cost-minimizing firm will

A) not be able to minimize costs.
B) find the lowest isocost line touching the relevant isoquant.
C) find the highest isocost line touching the relevant isoquant.
D) choose not to produce any output.

Question 73

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,an increase in the price of shovels will result in

A) fewer shovels being purchased to produce the same number of trenches.
B) more workers being hired to produce the same number of trenches.
C) the firm wishing to produce more trenches.
D) no change in the firm's input mix.

Question 74

If the marginal rate of technical substitution for a cost minimizing firm is 10,and the wage rate for labor is $5,what is the rental rate for capital in dollars?

A) )5
B) 1
C) 2
D) 10

Question 75

If the wage increases the isocost line will

A) stay the same.
B) shift outward in parallel fashion.
C) rotate inward around the point where only capital is employed in production.
D) shift inward in parallel fashion.

Question 76

The slope of the isoquant tells the firm how much

A) output increases when labor increases by one unit.
B) output increases when capital and labor are doubled.
C) capital must decrease to keep output constant when labor increases by one unit.
D) a unit of capital costs relative to the cost of labor.

Question 77

Which of the following does NOT represent a possible shape of the long-run average cost curve?

A) downward-sloping
B) upward sloping
C) U-shaped
D) vertical

Question 78

Suppose MPL = 0.5 ∗ (q/L)and MPK = 0.5 ∗ (q/K).In the long run,the firm will hire equal amounts of capital and labor

A) all of the time.
B) only when w = r.
C) only when w = 0.5 ∗ r.
D) at no point in time.

Question 79

Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,the firm's cost function is

A) TC = (w/r) ∗ q.
B) TC = (w + r)/q.
C) TC = (w + r).
D) TC = (w + r) ∗ q.

Question 80

If an isocost line crosses the isoquant twice,a cost minimizing firm will

A) use a different isocost line to select the bundle of inputs.
B) use the input bundle associated with the intersection on the higher point of the isoquant.
C) use the input bundle associated with the intersection on the lower point of the isoquant.
D) Both B and C.