Deck 10: Costs

Question 1

The following is true about point A:

A)The firm is minimizing the costs of production.
B)Capital is relatively more expensive than labor.
C)Labor is relatively more productive than capital.
D)All of the choices are true

Answer 1

A

Question 2

Suppose labor and capital are both used to produce output.In the long run, if the wage rate rises while the rental rate on capital remains unchanged,

A)The process will become more labor intensive
B)The process will become more capital intensive
C)Market forces will come into play to bring the prices back to their earlier relationship
D)The marginal product of capital will rise and the marginal product of labor will fall

Answer 2

B

Question 3

The vertical distance between the total variable cost and total cost curves

A)Is everywhere equal to zero
B)Is everywhere equal to marginal cost
C)Is everywhere equal to total fixed cost
D)Increases at a decreasing rate

Answer 3

C

Question 4

For a given firm, whenever the ratio of marginal product to input price differs across inputs,

A)The market will adjust the price of the higher priced input
B)It will always be possible to make a cost-saving substitution in favor of the input with the lower MP/P ratio (except in the case of corner solutions)
C)It will always be possible to make a cost-saving substitution in favor of the input with the higher MP/P ratio
D)The market will adjust the price of the lower priced input

Question 5

The variable costs of producing an output, Q, of 200 would be equal to:

A)$70
B)$50
C)$100
D)$1,000

Question 6

Whenever the ratio of marginal products to input prices differs across inputs,

A)The marginal products of inputs will adjust as input combinations change to correct for the inefficiency
B)No change will necessarily follow because the process could still be at peak efficiency
C)A firm's costs could be reduced by shifting input usage toward the input with the lower marginal product to price ratio
D)Cost could be reduced by shifting input usage toward the input with the lower marginal product to price ratio

Question 7

When costs are at a minimum,

A)The ratio of the MP_L/MP_K < Price L/Price K
B)MP_L= MP_K
C)The extra output we get from the last dollar spent on an input must be the same for all inputs
D)Price L = Price K

Question 8

Given input prices and the usual strategy of a profit maximizing firm, efficient production occurs at

A)The highest isoquant Q for a given isocost C
B)The lowest isoquant Q for a given isocost C
C)The highest isocost C for a given isoquant Q
D)The lowest isocost C for a given isoquant Q

Question 9

A firm that is trying to produce a given level of output Q₀ at the lowest possible cost will

A)Select the input combination at which an isocost line is tangent to the Q₀ isoquant
B)Select the input combination at which an isocost line is above the Q₀ isoquant
C)Select the input combination at which an isocost line is below the Q₀ isoquant
D)Choose to produce at a level where variable costs are less than or equal to fixed costs

Question 10

Once we enter the region of diminishing returns,

A)Variable cost increases at a decreasing rate
B)Variable cost increases at an increasing rate
C)Variable cost decreases at a decreasing rate
D)Variable cost decreases at an increasing rate

Question 11

Total cost is broken down into two components:

A)Average cost and marginal cost
B)Average cost and fixed cost
C)Variable cost and marginal cost
D)Variable cost and fixed cost

Question 12

Output for a simple production process is given by Q = 2KL, where K denotes capital, and L denotes labor.The price of capital is $25 per unit and capital is fixed at 8 units in the short run.The price of labor is $5 per unit.What is the total cost of producing 80 units of output?

A)$525
B)$200
C)$233
D)$225

Question 13

The short run total cost of zero output is equal to

A)Variable cost
B)Fixed cost
C)Zero
D)Variable cost plus fixed cost

Question 14

Gravel is made by hand in Nepal, but by machine in the U.S.because

A)The marginal product of labor is higher in Nepal than in the U.S.A
B)Capital is much cheaper in the U.S.than in Nepal
C)Of consumer preferences
D)The relative prices of labor and capital differ so dramatically in the two countries

Question 15

The average fixed costs of producing an output, Q, of 200 would equal to:

A)$1
B)$20
C)$0.5
D)$200

Question 16

The total fixed cost curve

A)Varies with the level of output
B)Is negatively sloped
C)Is simply a horizontal line
D)Is simply a vertical line

Question 17

Say initially this firm is at point
A) The following would be a reason for a movement to point B:

A)Labor becomes more expensive.
B)Capital becomes more expensive.
C)Output increases
D)Output decreases

Question 18

The vertical distance between the average variable cost and average total cost curves

A)Is everywhere equal to total fixed costs
B)Is everywhere equal to marginal cost
C)Increases at a decreasing rate
D)Decreases as quantity increases

Question 19

The total cost curve

A)Is a horizontal line
B)Increases at a decreasing rate due to diminishing returns
C)Is parallel to the total fixed cost curve
D)Is parallel to and above the total variable cost curve

Question 20

The variable cost of zero units of output is equal to

A)Total cost
B)Total fixed cost
C)Zero
D)One

Question 21

Markets characterized by declining long-run average costs are often referred to as

A)Perfect competition
B)Diseconomies of scale
C)Natural monopolies
D)Nonprofit organizations

Question 22

Producing an additional unit whose marginal cost exceeds the average total cost incurred thus far has the effect of pulling the

A)Fixed cost up
B)Average cost up
C)Average cost down
D)Total cost down

Question 23

When marginal cost is less than average total cost ______ as output increases.

A)Average total cost must be increasing
B)Average variable cost must be decreasing
C)Average fixed cost must be increasing
D)Average total cost must be decreasing

Question 24

The vertical distance between the average total cost and the average variable cost curves at any level of output will always be

A)Variable cost
B)Average fixed cost
C)Fixed cost less variable cost
D)Total cost less fixed cost

Question 25

Geometrically, marginal cost at any level of output may be interpreted as the slope of

A)A ray to the total cost curve at that level of output
B)The average variable cost curve at that level of output
C)The total cost curve at that level of output
D)The isoquant at that level of output

Question 26

Output for a simple production process is given by Q = 2KL, where K denotes capital, and L denotes labor.The price of capital is $25 per unit and capital is fixed at 8 units in the short run.The price of labor is $5 per unit.What is the total fixed cost of producing 80 units of output?

A)$200
B)$33
C)$25
D)$85

Question 27

The long-run total cost of zero output is equal to

A)Variable cost
B)Fixed cost
C)Zero
D)The marginal revenue product of labor

Question 28

The total fixed cost function

A)Is horizontal
B)Is U-shaped
C)Is an upward sloping line
D)Is a downward sloping line

Question 29

Marginal cost is defined as

A)The rate at which average cost changes with output
B)The rate at which total variable cost changes with output
C)The rate at which fixed cost changes with output
D)Total cost minus variable cost

Question 30

The MC curve slopes upward due to

A)Increasing returns to scale
B)Decreasing returns to scale
C)Diminishing returns
D)Constant returns to scale

Question 31

ATC equals

A)AVC - AFC
B)FC/Q
C)(TFC + TVC)/Q
D)MC + AFC

Question 32

Average variable cost is

A)The ratio of total variable cost to the quantity of output produced
B)The ratio of variable cost to total cost
C)The ratio of variable cost to fixed cost
D)The difference between variable and fixed cost

Question 33

MC equals

A) $\frac { \Delta T C } { \Delta Q }$
B) $\frac { \Delta \mathrm { VC } } { \mathrm { SQ } }$
C)FC/Q
D)VC/Q

Question 34

In order to divide a given production quota between two production processes in such a way as to produce the quota at the lowest possible cost, one should produce the output where

A)Average costs are equal for both processes
B)Average cost is equal to marginal cost for both processes
C)Marginal costs are equal in both processes
D)Marginal costs are at least equal to ATC in each process

Question 35

Average fixed cost

A)Is a horizontal line
B)Increases steadily as output increases
C)Decreases steadily as output increases
D)Exhibits diminishing returns

Question 36

Say at the current output level marginal costs = $20 and the average total cost = $10. From this information we know that:

A)the marginal costs are increasing
B)the average total costs are increasing
C)the average total costs are decreasing
D)the marginal costs are decreasing

Question 37

When marginal cost is greater than average total cost,

A)Average total cost must be increasing with output
B)Average variable cost must be decreasing with output
C)Average fixed cost must be increasing with output
D)Marginal cost must be increasing with output

Question 38

The slope of a ray from the origin to a point on the total cost curve is

A)The average fixed cost of producing the corresponding level of output
B)The average total cost of producing the corresponding level of output
C)The marginal cost of producing the corresponding level of output
D)The variable cost of producing the corresponding level of output

Question 39

Output for a simple production process is given by Q = 2KL, where K denotes capital, and L denotes labor.The price of capital is $25 per unit and capital is fixed at 8 units in the short run.The price of labor is $5 per unit.What is the variable cost of producing 80 units of output?

A)$200
B)$33
C)$25
D)$85

Question 40

The AFC curve

A)Always slopes downward
B)Is U-shaped
C)Is a horizontal line
D)Is the same as the total fixed cost curve

Question 41

With constant returns to scale and factor prices invariant with the amount of factors used, the long-run output expansion path is

A)Horizontal
B)A straight line
C)U-shaped
D)Zero

Question 42

Suppose you have the following values for a short-run production process: Q = 20, VC = 100, FC = 600 and MC = 40.Given this, we know that the:

A)Average cost curve must be increasing
B)Average cost curve must be decreasing
C)Marginal cost curve must be increasing
D)Marginal cost curve must be decreasing

Question 43

Average total cost is $100 for a given output, total fixed cost is 120 and average variable cost is 70.What is the quantity being produced?

Question 44

Let the TC curve be given by the equation TC(Q) = 20 + 5Q.The variable cost curve can be expressed as

A)20 + 5Q
B)20
C)5Q
D)5

Question 45

Let TC(Q) = 10 + Q; MC equals

A)10
B)1
C)11
D)It cannot be determined from the information given

Question 46

If the total cost function is TC = 10Q³ - 50Q² + 1000Q + 500, what is the equation for MC

Question 47

If at the current level of production the marginal product of labor is 4 while the marginal product of capital is 2 then in order to minimize your costs of production you should use:

A)More capital and less labor
B)More labor and less capital
C)More of both inputs
D)The same amount of both inputs

Question 48

If the total cost function is TC = 10Q³ - 50Q² + 1000Q + 500, what is the equation for AFC

Question 49

If the total cost function is TC = 10Q³ - 50Q² + 1000Q + 500, what is the equation for ATC

Question 50

If the total cost function is TC = 10Q³ - 50Q² + 1000Q + 500, what is the equation for AVC

Question 51

At one unit of output AVC is

A)Zero
B)Infinite
C)Equal to marginal cost
D)Less than marginal cost

Question 52

Suppose at the current level of production the firm is minimizing costs and the marginal product of labor is 10.Given this you know that the marginal product of capital must be:

A)5
B)2
C)10
D)It is impossible to say with the information given

Question 53

Let the TC curve be given by the equation TC(Q) = 10 + 5Q.The average variable cost can be expressed as

A)10
B)(10/Q) + 5
C)10 + (5/Q)
D)It can not be determined

Question 54

The short-run output expansion path is __________ in the relevant area.

A)A ray
B)Horizontal
C)U-shaped
D)Upward sloping

Question 55

Let the TC curve be given by the equation TC(Q)=5 + Q.The ATC curve can be expressed as

A)(1/Q) + 5
B)(5/Q) + 1
C)5
D)Q

Question 56

Suppose output for a simple production process is given by Q = K + L, where K denotes capital, and L denotes labor.The price of labor is $2 per unit and the price of capital is $4 per unit.What would be the minimum costs of producing 10 units of output?

A)$40
B)$20
C)$10
D)It is impossible to say with the information given

Question 57

If the total variable cost curve is a straight line then

A)The total cost curve will also be a straight line
B)The total cost curve may or may not be a straight line
C)The marginal cost function is downward sloping
D)The marginal cost function is upward sloping

Question 58

Let the TC curve be given by the equation TC(Q) = 6Q.The FC curve can be expressed as

A)6
B)6Q
C)0
D)It can not be determined with the information given

Question 59

If the variable cost curve is a straight line then

A)The marginal cost curve will be U-shaped
B)The marginal cost curve may be U-shaped
C)The marginal cost curve will be horizontal
D)The marginal cost curve is upward sloping

Question 60

The minimum efficient scale of production is the level of production required for the

A)Long run average curve to reach its minimum
B)Variable cost curve to reach its minimum
C)Marginal cost curve to reach its minimum
D)Average cost curve to reach its minimum

Question 61

The total cost function is 10Q³ - 5Q² + 1000 Q = 500.When does diminishing returns to production set in?

Question 62

If the total cost function is 10Q³ - 5Q² + 1000 Q = 500 at approximately what output does ATC reach its minimum?

Question 63

During the last 30 years computers have changed most production processes. Use an Isocost-Isoquant diagram to show the effect the spread of computers have had on labor during the last 30 years.

Question 64

If the total cost function is 10Q³ - 5Q² + 1000 Q = 500 at what output is the AVC = MC?

Question 65

Why does the AVC reach its minimum before the ATC reaches its minimum?

Question 66

Sketch a long run average total cost curve and a short run average total cost curve of a plant that is too small to produce at the minimum long run cost.Put the two curves on the same graph and include the marginal cost curves for both average cost functions.