Deck 8: Cost

Question 1

Refer to Figure 8.1.Which graph best represents a total cost function?

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

Answer 1

A

Question 2

Refer to Figure 8.1.Which graph best represents a variable cost function?

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

Answer 2

B

Question 3

Suppose a firm's short-run production function is given by Q = F(L)= 4L.If the wage rate is $12 and the firm has sunk costs of $300,then the firm's variable cost function is

A) VC(Q) = $12Q
B) VC(L) = $3L
C) VC(Q) = $3Q
D) VC(Q) = $300 + $12Q

Answer 3

VC(Q) = $3Q

Question 4

The slope of an isocost line is equal to

A) - (wage rate/rental rate of capital)
B) (wage rate/rental rate of capital)
C) - (rental rate of capital/wage rate)
D) (rental rate of capital/wage rate)

Question 5

If the least-cost input combination doesn't include all inputs,it's called

A) A boundary solution
B) An incomplete solution
C) An interior solution
D) An efficient solution

Question 6

Suppose a firm's total cost of production is $40,000 per week,the wage rate is $1,000 per week and the cost of capital is $2000.The firm's cost function would be written as

A) L = 40 -.5K
B) K = 40 - 2L
C) K = 2000 + 1000L
D) K = 40 -.5L

Question 7

Suppose the marginal rate of technical substitution for labour with capital is 5,the marginal product of labour is 8 and the marginal product of capital is 4.Assuming the law of diminishing marginal product applies to both labour and capital,this firm

A) Is minimizing the cost of producing its output
B) Could reduce costs by substituting workers with capital
C) Could reduce costs by substituting capital with workers
D) Could reduce the cost of producing the output by reducing workers and capital by the same proportion

Question 8

A firm's ______ connects all the input combinations with the same cost.

A) Cost function
B) Isoquant
C) Budget constraint
D) Isocost line

Question 9

If Q represents a firm's level of output,W represents the wage paid to labour (L)and R is the cost of capital (K),then which of the following represents the firm's isocost line?

A) C(Q) = FC + VC(Q)
B) C(Q) = FC(Q) + VC(Q)
C) C(Q) = WL + RK
D) C(Q) = (W + R)Q

Question 10

Suppose a firm's short-run production function is given by Q = F(L)= 4L.If the wage rate is $12 and the firm has sunk costs of $300,then the firm's cost function is

A) C(Q) = $12L
B) C(L) = $300 + $3L
C) C(Q) = $300 + $3Q
D) C(Q) = $300 + $12Q

Question 11

The cost associated with foregoing the opportunity to employ a resource in its best alternative use is called

A) An avoidable cost
B) A sunk cost
C) An opportunity cost
D) The user cost of capital

Question 12

The cost of using capital is equal to the market rental price as long as

A) A firm rents all of the capital used in its production process
B) A firm owns all of the capital used in its production process
C) The cost of capital is expensed in the year the capital is purchased
D) A well-functioning rental market for capital exists

Question 13

According to the No-Overlap Rule,

A) The area above the isoquant that runs through the firm's least-cost input combination does not overlap with the area below the isocost line
B) The area above the isoquant that runs through the firm's least-cost input combination does not overlap with the area above the isocost line
C) The area above the isoquant that runs through the firm's least-cost input combination should overlap with the area below the isocost line
D) The area above the isoquant that runs through any bundle other than the firm's least-cost input combination does not overlap with the area below the isocost line

Question 14

Isocost lines associated with ______ total cost lie ______ the origin.

A) Lower; farther from
B) Higher; farther from
C) Higher; closer to
D) Sunk; closer to

Question 15

A ______ cost is ______ if the firm incurs the cost even if it produces no output.

A) Fixed; sunk
B) Fixed; explicit
C) Variable; sunk
D) Fixed; avoidable

Question 16

An input combination is an interior choice if

A) It lies below the isocost line
B) Uses at least a little bit of every input
C) Lies on an isoquant
D) Satisfies the tangency condition

Question 17

A ______ cost is ______ if the firm doesn't incur the cost if it produces no output.

A) Fixed; sunk
B) Fixed; explicit
C) Variable; sunk
D) Fixed; avoidable

Question 18

If Q represents a firm's level of output,W represents the wage paid to labour (L)and R is the cost of capital (K),then which of the following represents the firm's cost function?

A) C(Q) = FC + VC(Q)
B) C(Q) = FC(Q) + VC(Q)
C) C(Q) = WL + RK
D) C(Q) = (W + R)Q

Question 19

The strategy whereby a firm makes most of its own inputs is called

A) Economies of scope
B) Horizontal integration
C) Economies of scale
D) Vertical integration

Question 20

______ is the cost of inputs whose use does not vary as the firm's output changes.

A) Sunk cost
B) Fixed cost
C) Total cost
D) Explicit cost

Question 21

A firm's ______ cost is equal to the sum of the ______ costs of the individual units it produces.

A) Total; average
B) Variable; average
C) Total; marginal
D) Variable; marginal

Question 22

Suppose that MP_L = 50 and MP_K = 30.If W = 25 and R = 10,then a firm

A) Is producing its output at the lowest possible cost
B) Could reduce costs by employing more labour and less capital
C) Could reduce costs by employing more capital and less labour
D) Could minimize costs by employing more of both inputs

Question 23

If labour is measured along the horizontal axis and capital is measured along the vertical axis,an increase in the wage rate will cause the isocost line to

A) Rotate to the left along the labour axis, causing the firm to use less labour and more capital
B) Rotate to the right along the labour axis, causing the firm to use less labour and more capital
C) Rotate to the left along the labour axis, causing the firm to use less capital and more labour
D) Rotate to the right along the labour axis, causing the firm to use less capital and more labour

Question 24

Refer to Table 8.1.Assume the wage rate is $10 and the firm has $1,000 in unavoidable fixed cost.What is the average cost of producing 65 units of output?

A) $40
B) $15.38
C) $0.50
D) $16

Question 25

Refer to Figure 8.3.What is the average cost of producing 290 units of output?

A) $9
B) $2500
C) $8.62
D) $7.77

Question 26

Refer to Table 8.1.Assume the wage rate is $10 and the firm has $1,000 in unavoidable fixed cost.What is the marginal cost of producing 83 units of output?

A) $0.50
B) $0.56
C) $1.00
D) $1.43

Question 27

Refer to Figure 8.3.What is marginal cost when output is 200 units?

A) $9
B) $2500
C) $8.62
D) $7.77

Question 28

______ refers to the output level at which average cost is lowest.

A) Interior solution
B) Economies of scope
C) Economies of scale
D) Efficient scale of production

Question 29

Refer to Figure 8.2.Which graph illustrates an output expansion path with an increasing capital-labour ratio?

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

Question 30

A firm's ______ shows the least-cost input combinations at all possible levels of output for fixed input prices.

A) Cost function
B) Output expansion path
C) Isocost line
D) Efficient production frontier

Question 31

Refer to Figure 8.2.Which graph illustrates an output expansion path with a constant capital-labour ratio?

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

Question 32

The marginal cost curve

A) Intersects the average cost curve from above at the efficient scale of production
B) Lies below the average cost curve
C) Intersects the average cost curve from below at the highest point on the average cost curve
D) Intersects the average cost curve from below at the efficient scale of production

Question 33

If marginal cost is ______ average cost,then average cost will _____.

A) Equal to; decrease
B) Less than; increase
C) Greater than; decrease
D) Greater than; increase

Question 34

Whenever a firm uses input X but not input Y,then

A) MRTS_XY >= P_X/P_Y at the chosen input combination
B) MRTS_XY <= P_X/P_Y at the chosen input combination
C) MRTS_XY = P_X/P_Y at the chosen input combination
D) MRTS_XY = -P_X/P_Y at the input combination

Question 35

Refer to Table 8.1.Assume the wage rate is $10 and the firm has $1,000 in unavoidable fixed cost.What is the average fixed cost of producing 93 units of output?

A) $11.40
B) $10.75
C) $0.65
D) $10.00

Question 36

Refer to Figure 8.4.What is the average fixed cost of producing 80 units of output?

A) $100
B) $280
C) $4.75
D) $380

Question 37

Refer to Figure 8.4.What is the marginal cost of producing 100 units of output?

A) $125
B) $210
C) $85
D) $2.10

Question 38

Suppose that labour is measured on the horizontal axis and capital is measured on the vertical axis.At an interior solution

A) MRTS_LK = P_L/P_K
B) MRTS_LK = - P_L/P_K
C) MRST_LK = P_K/P_L
D) MRTA_LK = - P_K/P_L

Question 39

Refer to Table 8.1.Assume the wage rate is $10 and the firm has $1,000 in unavoidable fixed cost.What is the average variable cost of producing 22 units of output?

A) $0.91
B) $45.45
C) $0.45
D) $0.83

Question 40

Refer to Table 8.1.Assume the wage rate is $10 and the firm has $1,000 in unavoidable fixed cost.What is the variable cost of producing 45 units of output?

A) $30
B) $10
C) $450
D) $22.22

Question 41

Which of the following statements is true?

A) Competitive firms will respond less to changes in output prices over the long run than they will over the short run because short-run marginal cost is lower than long-run marginal cost
B) Competitive firms will respond more to changes in output prices over the long run than they will over the short run because long-run marginal cost is lower than short-run marginal cost
C) Competitive firms will respond less to changes in output prices over the long run than they will over the short run because long-run marginal cost is lower than short-run marginal cost
D) Competitive firms will respond more to changes in output prices over the long run than they will over the short run because short-run marginal cost is lower than long-run marginal cost

Question 42

______ occurs when a single firm can produce two or more products more cheaply than two separate firms.

A) Economies of scale
B) Economies of scope
C) Diseconomies of scale
D) Increasing returns to scale

Question 43

Suppose that a firm produces both bottled water and carbonated soft drinks.It is cheaper for this firm to produce both goods than it would be if they were produced by two separate firms.Further,as this firm increases its production levels,the average costs of producing both bottled water and carbonated soft drinks fall.This firm experiences

A) Economies of scope and diseconomies of scale
B) Both economies of scope and economies of scale
C) Both diseconomies of scope and diseconomies of scale
D) Diseconomies of scope and economies of scale

Question 44

Refer to Figure 8.6,which shows just three of a firm's various possible short-run average cost curves.Suppose the firm increases its output from 130 units to 160 units.Which of the following statements is true?

A) The average cost of producing the 160 units would be $90 if the firm expected the increase in production to be permanent
B) The average cost of producing the 160 units would be $80 if the firm expected the increase in production to be permanent
C) The average cost of producing the 160 units would be $175 if the firm expected the increase in production to be temporary
D) The average cost of producing the 160 units would be $80 if the firm expected the increase in production to be temporary

Question 45

When the price of an input ______,a firm's least-cost production method never uses ______ of that input and usually employs ______.

A) Increases; less; the same amount
B) Increases; less; more
C) Decreases; more; less
D) Decreases; less; more

Question 46

A firm that is experiencing economies of scale has ______ returns to scale technology and a ______ average cost curve.

A) Increasing; positively-sloped
B) Increasing; negatively-sloped
C) Decreasing; positively-sloped
D) Decreasing; negatively-sloped

Question 47

Refer to Figure 8.6,which shows just three of a firm's various possible short-run average cost curves.Suppose the firm is currently producing 160 units at and average cost of $90 per unit.Which of the following statements is true?

A) The firm could reduce its average cost by employing more capital
B) The firm could reduce its average cost by employing less capital
C) The firm is producing its output at the lowest possible long-run average cost
D) The firm would increase its average cost if it used more capital

Question 48

Refer to Figure 8.3.Suppose the firm increases output from 20 to 30 units.In the short run,

A) The firm will employ the same amounts of labour and capital as it would in the long run
B) The firm will employ 5 more workers and 2 less units of capital than it would in the long run
C) The firm will employ 5 fewer workers and 2 more units of capital than it would in the long run
D) Then firm will produce the output at a lower cost than it can in the long run

Question 49

When a firm's input prices do not vary much with the amount of output it produces,it experiences ______ of scale if its technology has ______ returns to scale.

A) Diseconomies; increasing
B) Economies; decreasing
C) Diseconomies; constant
D) Diseconomies; decreasing

Question 50

Suppose a firm has a production function given by Q = 2Ö2LÖK.If the rental rate of capital is $100 per unit,the wage rate is $1,400 per week and the firm initially has 25 units of capital,what is the firm's short-run cost function?

A) C(Q) = 2500 + 7Q²
B) C(L) = 2500 + 1400L
C) C(Q) = 0.25 + 7Q²
D) C(L) = 0.25 + 1400L

Question 51

Refer to Figure 8.3.If the wage rate is $5 and the rental rate of capital is $10,what is the lowest cost of producing 30 units of output?

A) $350
B) $345
C) $250
D) $300

Question 52

The long-run average cost curve is the ______ of all of the firm's ______.

A) Lower envelope; isocost lines
B) Level curve; short-run average cost curves
C) Sum; marginal cost curves
D) Lower envelope; short-run average cost curves

Question 53

Refer to Figure 8.7.Which graph illustrates a firm that experiences economies of scale?

A) A
B) B
C) C
D) Both graphs A and C

Question 54

Refer to Figure 8.7.Which of the following statements is true?

A) The technology represented in graph A will cause the firm to experience diseconomies of scale
B) The technology represented in graph B will cause the firm to experience diseconomies of scale
C) The technology represented in graph B will cause the firm to experience economies of scale
D) The technology represented in graph C will cause the firm to experience diseconomies of scale

Question 55

Diseconomies of scope occur when

A) A firm's input prices rise as it increases output
B) A firm's average cost of production rises as it increases production
C) Producing two products in a single firm is more expensive than producing them in separate firms
D) A firm's average cost of production falls as it increases production

Question 56

Refer to Figure 8.6,which shows just three of a firm's various possible short-run average cost curves.Which of the following statements is true?

A) The firm experiences increasing returns to scale at production levels above 130 units of output
B) The firm experiences constant returns to scale
C) The firm experiences increasing returns to scale up to a production level of 130 units of output
D) The firm experiences decreasing returns to scale up to a production level of 130 units of output

Question 57

Refer to Figure 8.6,which shows a firm's short-run average cost curves for three different levels of capital.Which of the following statements about short-run and long-run marginal cost is true?

A) Long-run marginal cost equals short-run marginal cost at 50 units of output
B) Long-run marginal cost equals short-run marginal cost at 130 units of output
C) Long-run marginal cost equals short-run marginal cost at 160 units of output
D) Long-run marginal cost and short-run marginal cost are never equal

Question 58

As a firm with decreasing returns to scale technology increases its output,

A) It will experience diseconomies of scale and its average cost of production will rise
B) It will experience diseconomies of scale and its average cost of production will fall
C) It will experience economies of scale and its average cost of production will rise
D) It will experience economies of scale and its average cost of production will fall

Question 59

Which of the following statements is true for a given level of output?

A) Long-run average cost will always be greater than or equal to short-run average cost
B) Long-run average cost and short-run average cost will be equal because the firm will use different input combinations in each period
C) Long-run cost will usually be greater than short-run cost
D) Long-run average cost will always be less than or equal to short-run average cost

Question 60

Suppose that a firm produces both steel and electricity.It is cheaper for this firm to produce both goods than it would be if they were produced by two separate firms.Further,as this firm increases its production levels of both products,the average cost of producing steal rises,while the average cost of producing electricity remains constant.This firm experiences

A) Economies of scope, diseconomies of scale in the production of steal and constant returns to scale in the production of electricity
B) Economies of scope, economies of scale in the production of steal and constant returns to scale in the production of electricity
C) Diseconomies of scope, economies of scale in the production of steal and constant returns to scale in the production of electricity
D) Diseconomies of scope, diseconomies of scale in the production of steal and increasing returns to scale in the production of electricity

Question 61

Suppose a firm's short-run production function is given by Q = 3ÖL,where L represents the number of hours of labour employed.The firm has a sunk cost of $500 and the wage rate is $18 per hour.What is the firm's short-run cost function? Solve the production function for L:

Question 62

Use an isocost-isoquant diagram to explain how a firm determines the least cost combination of labour and capital to produce a given level of output.What is true of the marginal product per dollar at the least cost combination of capital and labour? Why?
B. In fact, point B is on the lowest isocost line. Since the isocost line and isoquant are tangent at point B, their slopes are equal at that point. The slope of the isocost line is - (wage rate/rental rate of capital) and the slope of the isoquant is equal to MP_L/MP_K. Thus, at point B
MP_L/MP_K = wage rate/rental rate of capital
MP_L/wage rate = MP_K/rental rate of capital
This last equation implies that, at the least-cost combination of capital and labour, the marginal product per dollar spent on labour must equal the marginal product per dollar spent on capital.
C. Since combinations A and C are on a higher isocost line, they would cost more than the combination represented by point

Question 63

Suppose a firm produces its output in two different plants.Production costs at plant 1 are given by C₁ = 4(Q₁)²,where Q₁ is the amount of production at plant 1.The production costs at plant 2 are given by C₂ = 2(Q₂)²,where Q₂ is the amount of production at plant 2.The corresponding marginal costs at each plant are MC₁ = 8Q₁ and MC₂ = 4Q₂.If the firm produces a total of 24 units of output,how much output should it produce at each plant?

Question 64

Suppose a firm's technology is represented by the function Q = F(L,K)= 5L^.25K^.75.Does this firm experience economies of scale,diseconomies of scale or neither?

Question 65

Suppose a firm's technology is represented by the Cobb-Douglas production function F(L,K)= 5LK.The wage rate is $50 and the rental rate of capital is $10.What is the least-cost combination to produce 100 units of output?

Question 66

Using a graph,explain the relationship between average cost and marginal cost.

Question 67

Suppose a firm's production function is given by Q = F(L,K)= 5LK,where L is the amount of labour and K is the amount of capital.The wage rate is $100 per unit of labour and the rental rate of capital is $50 per unit of capital.
a)What is the least-cost combination of capital and labour if the firm produces 1000 units of output?
b)What is the firm's long run cost function?
c)If the firm currently uses 10 units of capital,what is its short-run cost function?