Deck 7: Supply: The Costs of Doing Business

Question 1

Marginal cost equals:

A)total cost divided by total quantity.
B)the slope of the demand curve under perfect competition.
C)the slope of the total product curve when the latter is at its maximum.
D)the change in total cost divided by the change in total output.
E)the slope of the supply curve.

Answer 1

D

Question 2

Short run refers to a period of time during which:

A)all the factors are constant.
B)all the factors are variable.
C)the producer can shift from one plant size to another.
D)some factors are fixed while some others are variable.
E)the producer cannot change the level of output.

Answer 2

D

Question 3

When more and more units of a variable factor are combined with constant amount of fixed factor,such that the variable factor becomes abundant compared to the fixed factor,the output will eventually:

A)increase at an increasing rate.
B)increase at a diminishing rate.
C)increase at a constant rate.
D)remain unchanged.
E)fall to zero.

Answer 3

B

Question 4

Diminishing marginal returns means that as you combine more units of a variable resource with a set of fixed resources:

A)the average physical product increases at an increasing rate.
B)the marginal physical product decreases.
C)the total production decreases.
D)the marginal physical product becomes negative.
E)the marginal physical product increases at a decreasing rate.

Question 5

Fixed costs are costs paid for:

A)plant,equipment,and land that cannot be moved.
B)obsolete plant and equipment not used anymore.
C)plant and equipment in the long run.
D)hiring temporary workers.
E)resources that do not change with changes in output.

Question 6

Which of the following reflects the correct relationship between average total cost (ATC) and marginal cost (MC)?

A)When MC > ATC; ATC is falling.
B)When ATC is minimum; ATC < MC.
C)When MC < ATC; ATC is falling.
D)When MC < ATC; ATC is constant.
E)When ATC < MC; MC is falling.

Question 7

If labor is the only variable input,an increase in the quantity of labor:

A)does not have any effect on the quantity of output.
B)causes the output to increase initially at a diminishing rate and then at an increasing rate.
C)causes the output to increase at a constant rate till the last worker is hired.
D)causes the output to increase initially at an increasing rate and then at a decreasing rate.
E)causes the output to decrease at a constant rate till the last laborer is hired.

Question 8

Assume that one laborer produces 6 units of output,two laborers produce 14 units,three laborers 22 units,four laborers 24 units,and five laborers 25 units.Diminishing returns set in when the firm hires:

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

Question 9

If a firm is experiencing diminishing returns,then:

A)the firm must be hiring less-qualified units of the variable resource.
B)the firm must be experiencing diseconomies of scale.
C)marginal physical product must be decreasing.
D)average physical product must be decreasing.
E)total physical product must be decreasing.

Question 10

The law of diminishing returns applies:

A)in the long run because all inputs are variable.
B)in the short run because some inputs remain fixed.
C)in both the short run and the long run.
D)to fixed inputs in the long run.
E)to fixed inputs in the short run.

Question 11

Marginal fixed cost:

A)is a positive constant irrespective of output level.
B)declines as output is increased because a fixed numerator is divided by an ever-growing denominator.
C)generally increases as output is increased.
D)is equal to average variable cost and average total cost at their minimum points.
E)is always equal to zero and is therefore ignored by economists.

Question 12

If average variable cost is falling,then:

A)average fixed cost is rising.
B)marginal cost must be falling.
C)marginal cost must be rising.
D)marginal cost lies below average variable cost.
E)marginal cost lies above average variable cost.

Question 13

"As I add more workers to the factory line,the additional output produced by each additional worker seems to decline.Eventually,the workers just get in each others' way." This statement by a factory supervisor refers to:

A)the law of comparative advantage.
B)the law of demand.
C)the law of supply.
D)the law of diminishing marginal utility.
E)the law of diminishing marginal returns.

Question 14

After hiring a new employee,a manager finds that the total output has increased.When the manager hires another employee however,he realizes that although the total production has increased,the increment is less than the previous case.This is the result of:

A)diseconomies of scale.
B)a general economic downturn.
C)diminishing marginal returns.
D)the lack of skills of the two employees.
E)constant returns to scale.

Question 15

If the total cost of producing 2 pounds of cheese is $6 and the total cost of producing 4 pounds of cheese is $8,then:

A)total cost is declining.
B)average total cost is declining.
C)average total cost is increasing.
D)average total cost is constant.
E)total cost is constant.

Question 16

At its minimum point,the average-total-cost curve is intersected by the:

A)average-fixed-cost curve.
B)average-variable-cost curve.
C)total-fixed-cost curve.
D)total-variable-cost curve.
E)marginal-cost curve.

Question 17

When average total cost is minimum,it is:

A)equal to average variable cost.
B)greater than marginal cost.
C)equal to average fixed cost.
D)equal to marginal cost.
E)less than marginal cost.

Question 18

Suppose that the total fixed cost of producing five sailboats is $4,000,total variable cost is $4,000,and the total cost of producing six sailboats is $10,000.The marginal cost of the sixth sailboat is:

A)$2,000.
B)$4,000.
C)$8,000.
D)$10,000.
E)$6,000.

Question 19

If an average cost curve is U-shaped,then:

A)costs per unit are constant throughout the entire range of production.
B)costs per unit are declining throughout the entire range of production.
C)costs per unit are increasing throughout the entire range of production.
D)costs per unit first rise,then reach a maximum,and then begin to fall as output is increased.
E)costs per unit first fall,then reach a minimum,and then increase as output is increased.

Question 20

Average total cost is calculated by dividing:

A)the change in total cost by the change in the quantity of output.
B)total output by the number of people employed.
C)the change in total output by the change in the number of people employed.
D)total cost by total output.
E)total output by total cost.

Question 21

Assume that one laborer produces 6 units of output,two laborers produce 14 units,three produce 20 units,and four produce 24 units.If the cost is $20 per unit of labor and fixed costs are $100,what is the average total cost at 14 units of output?

A)$50
B)$20
C)$10
D)$100
E)$40

Question 22

The figure given below shows cost curves of a firm. Figure: 7.2 In the figure,
|: Marginal cost curve
||: Average total cost curve
|||: Average variable cost curve
Refer to Figure 7.2.At an output level of H,average total cost is:

A)0E.
B)BE.
C)area 0EMH.
D)0B.
E)area 0BNH.

Question 23

Suppose that for 20 bicycles,the total fixed cost is $100 and total variable cost is $300.Then the average fixed cost and average variable cost are:

A)$5 and $10 respectively.
B)$5 and $15 respectively.
C)$10 and $15 respectively.
D)$15 and $10 respectively.
E)$10 and $5 respectively.

Question 24

The following table shows the cost of producing different units of ball point pens by a firm. Table 7.1
According to Table 7.1,the average variable cost of producing five ball point pens is:

A)$3.5.
B)$2.
C)$4.
D)$2.5
E)$4.5

Question 25

The table below shows the total cost of producing different units of a commodity. Table 7.2
From Table 7.2,derive the value of total fixed costs.

A)$10
B)$100
C)$98
D)$50
E)$60

Question 26

The following table shows the cost of producing different units of ball point pens by a firm. Table 7.1
According to Table 7.1,the total fixed cost of the firm equals:

A)$18.
B)$10.
C)$2.
D)$12.
E)$8.

Question 27

The figure given below shows cost curves of a firm. Figure: 7.2 In the figure,
|: Marginal cost curve
||: Average total cost curve
|||: Average variable cost curve
Refer to Figure 7.2.At an output level of H,total fixed cost is:

A)SR.
B)LK.
C)BE.
D)area BEMN.
E)area 0EMH.

Question 28

The figure given below shows the average fixed cost (AFC) and the average variable cost (AVC) curves of a competive firm. Figure 7.1 Using Figure 7.1 determine the average total cost of producing the first unit of the output.

A)$10.
B)$20.
C)$30.
D)$40.
E)$50.

Question 29

The figure given below shows cost curves of a firm. Figure: 7.2 In the figure,
|: Marginal cost curve
||: Average total cost curve
|||: Average variable cost curve
Refer to Figure 7.2.At an output level of G:

A)both average total cost and average variable cost are falling.
B)average fixed cost is equal to the distance JK.
C)average variable cost exceeds marginal cost by the amount LJ.
D)average total cost exceeds marginal cost by the amount KJ.
E)total cost is equal to the area 0AJG.

Question 30

The figure given below shows the average fixed cost (AFC) and the average variable cost (AVC) curves of a competive firm. Figure 7.1 Refer to Figure 7.1.Compute the total cost of producing 4 units of the output.

A)$64.
B)$72.
C)$80.
D)$84.
E)$90.

Question 31

The following table shows the cost of producing different units of ball point pens by a firm. Table 7.1
Refer to Table 7.1.What will be the average fixed cost of producing five ball point pens?

A)$2
B)$5
C)$4
D)$3.33
E)$10

Question 32

Which of the following is not correct?

A)If Average Variable Cost (AVC) are decreasing,Average Total Cost (ATC) must be decreasing.
B)AVC reaches minimum before ATC.
C)If ATC is increasing,AVC must be increasing.
D)If AVC is increasing,Marginal Cost (MC) is increasing.
E)If Average Fixed Cost (AFC) is decreasing,ATC must be decreasing.

Question 33

The figure given below shows cost curves of a firm. Figure: 7.2 In the figure,
|: Marginal cost curve
||: Average total cost curve
|||: Average variable cost curve
Refer to Figure 7.2.When Average Variable Cost (AVC) is at a minimum,which of the following is true?

A)AVC equals AB
B)Marginal cost (MC) equals 0G
C)Average total cost exceeds AVC by SR
D)MC equals HN
E)MC equals GJ

Question 34

The following table shows the cost of producing different units of ball point pens by a firm. Table 7.1
Refer to Table 7.1.What is the marginal cost of producing the fourth and the fifth unit?

A)$4
B)$6
C)$8
D)$2
E)$10

Question 35

If the average total cost of producing 2 pounds of cheese is $4 and the average total cost of producing 3 pounds of cheese is $4.2,then the marginal cost of producing third pound of cheese is equal to:

A)$4.2
B)$8
C)$4.5
D)$4.6
E)$4.1

Question 36

If the total cost of producing 6 units is $228 and the total cost of producing 7 units is $245,what is the marginal cost of producing the seventh unit?

A)$35
B)$245
C)$3
D)$38
E)$17

Question 37

The table below shows the total cost of producing different units of a commodity. Table 7.2
Refer to Table 7.2.If the production of 2 extra units (units 11 and 12) increases total cost by $162,then:

A)the marginal cost of the twelfth unit will be $162.
B)the total cost of producing 12 units will be $894.
C)the average variable cost of producing 11 units is $732.
D)the average total cost of producing 12 units is $61.
E)the thirteenth unit will have to go up in price.

Question 38

With expansion in the level of output,total fixed cost:

A)declines.
B)increases.
C)falls to zero.
D)remains constant.
E)becomes negative.

Question 39

For a steel manufacturing firm,overhead costs would include:

A)cost of iron ore.
B)cost incurred in buying blast furnaces.
C)insurance premiums of the firm.
D)wages of the laborers.
E)cost of electricity for running the machines in the factory.

Question 40

The table below shows the total cost of producing different units of a commodity. Table 7.2
According to Table 7.2,the average variable cost of producing two units of output is:

A)$48.
B)$50.
C)$62.
D)$55.
E)$60.

Question 41

The table given below shows the total cost of producing different units of the output by a competitive firm. Table 7.4
In Table 7.4,at 4 units of output,

A)AFC = $6.25 and AVC = $10
B)AFC = $6.25 and AVC = $40
C)AFC = $40 and AVC = $6.25
D)AFC = $25 and AVC = $40
E)AFC and AVC cannot be determined from the information provided.

Question 42

As the output produced by a firm increases,the average fixed cost:

A)continues to decline.
B)initially increases,and then declines.
C)quickly drops to zero.
D)becomes constant.
E)declines and finally becomes negative.

Question 43

The table given below shows the average total cost of production of a firm at different levels of the output. Table 7.5
Refer to Table 7.5.At what level of production will the average total cost curve intersect the marginal cost curve?

A)3 units
B)2 units
C)zero units
D)5 units
E)4 units

Question 44

According to economic theory,the difference between the long run and the short run is:

A)about two months.
B)about two years.
C)not relevant for executive decision makers.
D)strictly theoretical so that in practice there is no difference between the short run and the long run.
E)the ability for a firm to vary all resources.

Question 45

The table given below shows the average total cost of production of a firm at different levels of the output. Table 7.5
In Table 7.5,what is the total cost of producing 4 units?

A)$28
B)$10
C)$15
D)$20
E)$35

Question 46

The table given below shows the total fixed and variable costs of a firm. Table 7.3
If the firm described in Table 7.3 decides to produce nothing,which of the following would be true?

A)Total cost will become zero.
B)Total variable cost will become $30.
C)Total cost will equal $40.
D)Average total cost will equal zero.
E)Marginal cost will equal $10.

Question 47

The table given below shows the total fixed and variable costs of a firm. Table 7.3
Refer to Table 7.3.At what level of output does the average total cost starts increasing?

A)1
B)6
C)5
D)7
E)4

Question 48

The table given below shows the average total cost of production of a firm at different levels of the output. Table 7.5
In Table 7.5,if the total fixed cost is $3,what is the total variable cost of producing 5 units?

A)$38
B)$32
C)$3
D)$8
E)Cannot be determined from the information given.

Question 49

Why does the law of diminishing return not apply in the long run?

A)All the factors of production are fixed
B)There are no fixed factors of production
C)There are some fixed and some variable factors
D)The producer is required to produce a fixed level of output
E)The producer can change the level of output only by changing the variable factors,fixed factors remaining unchanged

Question 50

The table given below shows the total fixed and variable costs of a firm. Table 7.3
Using the information in Table 7.3 we can conclude that the marginal-cost curve intersects the average-variable-cost curve at ____ unit(s) of output.

A)1
B)2
C)5
D)4
E)6

Question 51

In the long run,total variable cost:

A)is equal to total fixed cost.
B)is equal to total cost.
C)is equal to average fixed cost.
D)is more than total fixed cost.
E)is less than total cost.

Question 52

The table below shows the total cost of producing different units of a commodity. Table 7.2
Refer to Table 7.2.The average fixed cost of the first unit of output is:

A)$46.
B)$98.
C)$100.
D)$50.
E)$140.

Question 53

If a firm doubles its resources and generates an output level which is more than double,it is said to be experiencing:

A)economic fluctuations.
B)recession.
C)diseconomies of scale.
D)increasing marginal returns to a factor.
E)economies of scale.

Question 54

In the long run,

A)some resources are variable and some resources are fixed.
B)all the resources can be varied.
C)all resources are fixed.
D)at least one resource is fixed.
E)there are no explicit costs.

Question 55

The table given below shows the total cost of producing different units of the output by a competitive firm. Table 7.4
In Table 7.4,at 4 units of output marginal cost is:

A)$10.
B)$15.
C)$20.
D)$25
E)$30.

Question 56

In the short run when output is zero,total cost is:

A)equal to total variable cost.
B)greater than total fixed cost.
C)equal to total fixed cost.
D)less than total fixed cost.
E)less than total variable cost.

Question 57

The table given below shows the total cost of producing different units of the output by a competitive firm. Table 7.4
Which of the following is correct if the firm described in Table 7.4 decides to produce nothing?

A)Total cost will be zero.
B)Total fixed cost will be zero.
C)Total variable cost will be zero.
D)Average cost will be zero.
E)It is impossible for the firm to produce nothing in the short run.

Question 58

The table given below shows the average total cost of production of a firm at different levels of the output. Table 7.5
In Table 7.5,the marginal cost of producing the third unit of output is:

A)$7.
B)$8.
C)$5.
D)$4.
E)$6.

Question 59

The table given below shows the total fixed and variable costs of a firm. Table 7.3
In Table 7.3,marginal cost is equal to average total cost at a quantity of:

A)1 unit.
B)3 units.
C)4 units.
D)5 units.
E)8 units.

Question 60

The table given below shows the total fixed and variable costs of a firm. Table 7.3
In Table 7.3,the average fixed cost of the first unit of output is ____ while the average fixed cost of producing 8 units of output is ____.

A)$30; $40
B)$40; $5
C)$40; $40
D)$40; $280
E)$40; $320

Question 61

The figure given below shows three Short Run Average Total Cost (SRATC) curves and the Long Run Average Total Cost (LRATC) curve of a firm. Figure 7.3 Refer to the Figure 7.3.In the long run,an increase in production from Q₁ to Q₃ would:

A)increase average cost by C₄ - C₁.
B)increase average cost by C₃ - C₁.
C)increase average cost by C₃ - C₂.
D)decrease average cost by C₃ - C₁.
E)decrease average cost by C₃ - C₂.

Question 62

If long-run costs are plotted on the vertical axis and quantity of output plotted on the horizontal axis,a line that is perfectly horizontal implies:

A)constant returns to scale.
B)economies of scale.
C)diseconomies of scale.
D)inefficient use of capital.
E)inefficient use of labor.

Question 63

If a firm experiences economies of scale,

A)it moves up along the long run average total cost curve.
B)expansion of output becomes more expensive for the firm.
C)the firm can reduce its per unit cost by producing less.
D)the firm must shut down in the long run.
E)the firm can reduce its per unit cost by expanding production.

Question 64

Which of the following may lead to diseconomies of scale?

A)Specialization on the basis of comparative advantage
B)Lack of coordination among the division heads
C)Using larger and more efficient machineries
D)Division of labor on the basis of capability
E)Specialization of marketing,pricing,and research

Question 65

The term minimum efficient scale means:

A)the output corresponding to the minimum point of the short run average total cost curve.
B)the total of all efficient points along the long-run average-cost curve.
C)diseconomies of scale.
D)the minimum point of the long-run average-cost curve,or the output level at which the cost per unit of output is the lowest.
E)the maximum point of the long-run average-cost curve,or the output level at which the cost per unit of output is the highest.

Question 66

A positively sloped long run average cost implies:

A)economies of scale.
B)constant returns to scale.
C)diseconomies of scale.
D)diminishing marginal returns to a factor.
E)increasing returns to scale.

Question 67

The figure given below shows three Short Run Average Total Cost (SRATC) curves and the Long Run Average Total Cost (LRATC) curve of a firm. Figure 7.3 Which of the following would account for the shape of the long-run average-total-cost curve in Figure 7.3?

A)Low worker morale
B)Low productivity
C)Administration overhead
D)Specialization of labor
E)Managerial problems

Question 68

The long-run average-total-cost curve is U-shaped because:

A)a firm initially experiences economies of scale and then diseconomies of scale.
B)the law of diminishing returns to a factor sets in beyond a certain level of output.
C)a firm initially experiences diseconomies of scale and then economies of scale.
D)division of labor keeps labor productivity constant irrespective of expansion or contraction in production.
E)efficiency of capital increases over a period of time.

Question 69

The long run is referred to as a planning horizon because:

A)the firm has committed to a fixed quantity of at least one resource and the other resources are variable.
B)the manager has selected the size of the firm that appears to be the least profitable and does not have the option of selecting any other plant size.
C)the firm has not committed to a fixed quantity of any resource and has all options available to it.
D)the manager has selected a scale of production.
E)the firm is operating along a specific average-cost curve.

Question 70

When a firm is experiencing economies of scale,it will:

A)under use a larger plant size than is indicated by short-run efficiency concerns.
B)under use a smaller plant than is indicated by short-run efficiency concerns.
C)overuse a larger plant size than is indicated by short-run efficiency concerns.
D)overuse a smaller plant size than is indicated by short-run efficiency concerns.
E)produce at the minimum short-run and long-run average costs.

Question 71

A firm gets less efficient as it gets bigger,if it is experiencing:

A)economies of scale.
B)constant returns to scale.
C)increasing returns to factors.
D)diseconomies of scale.
E)a period of post war recovery.

Question 72

Which of the following statements is true?

A)When long-run average total costs are increasing,the firm enjoys economies of scale.
B)Most industries exhibit long-run average costs that are shaped like an upside-down U.
C)Constant returns to scale occur when the short-run average-total-cost curve is horizontal.
D)When long-run average total costs are increasing,the firm has diseconomies of scale.
E)Constant returns to scale are never present in the real world.

Question 73

In the electricity generation industry,the cost per kilowatt hour of electricity declines as the capacity to generate output increases.This situation represents:

A)a poor opportunity for investors.
B)constant returns to scale.
C)diseconomies of scale.
D)economies of scale.
E)decreasing returns to scale.

Question 74

As the confectionary,Mrs.Fields' Cookies,gained popularity in California and decided to expand its operations to Utah,it was able to achieve economies of scale.This means that:

A)property taxes were lower in its new location in Utah.
B)transport and communication systems were more developed in Utah.
C)wages were higher in Utah compared to California.
D)expansion of output and firm size led to specialization among the workers.
E)government policies were more favorable in Utah.

Question 75

Diseconomies of scale:

A)occur only in the short run.
B)occur when at least one resource is fixed and unit costs decrease as the quantity of production increases.
C)occur when at least one resource is fixed and unit costs increase as the quantity of production increases.
D)are represented by the upward-sloping portion of the short-run average-total-cost curve.
E)occur when all resources are variable and unit costs increase as the quantity of production increases.

Question 76

If a firm experiences constant returns to scale throughout:

A)the long run average total cost curve is a negatively sloped curve.
B)the short run average total cost curves are tangential to the long run average total cost curve at a point on their positively sloped portion.
C)the short run average total cost curves are tangential to the long run average total cost curve at their minimum points.
D)the short run average total cost curves are tangential to the long run average total cost curve at a point on their negatively sloped portion.
E)the long run average total cost falls to zero.

Question 77

The long-run average-total- cost curve represents:

A)the maximum cost of producing any level of output when all the factors are fixed.
B)the lowest cost of producing any level of output when all the factors are variable.
C)the maximum cost of producing any level of output when all the factors are variable.
D)the lowest cost of producing any level of output when all the factors are fixed.
E)he lowest cost of producing any level of output when at least one factor fixed.

Question 78

If a company is producing at a level of output at which the long-run average-total-cost curve reaches a minimum,the company:

A)is experiencing economies of scale.
B)is at minimum efficient scale.
C)is experiencing increasing returns to scale.
D)will shut down.
E)is experiencing diseconomies of scale.

Question 79

Which of the following is not a reason for economies of scale?

A)Division of labor helps in specialization
B)Merger of two firms
C)Hiring larger machines which are more efficient than the smaller ones
D)Increase in overhead expenses
E)Research and development

Question 80

If long-run costs are plotted on the vertical axis and quantity of output plotted on the horizontal axis,a positively sloped line implies _____.

A)constant returns to scale.
B)economies of scale.
C)diseconomies of scale.
D)an increase in capital-labor ratio.
E)a decrease in cost-output ratio.