Deck 7: The Theory and Estimation of Cost Appendices 7A,7B,and 7C

Question 1

Which of the following is most likely a fixed cost?

A)expenditures for raw materials
B)wages for unskilled labor
C)fuel cost
D)property taxes

Answer 1

D

Question 2

The law of diminishing returns begins first to affect a firm's short-run cost structure when

A)average variable cost begins to increase.
B)marginal cost begins to increase.
C)average cost begins to increase.
D)average fixed cost begins to decrease.

Answer 2

B

Question 3

Which of the following is a relevant cost?

A)replacement cost
B)sunk cost
C)historical cost
D)fixed cost
E)All of the above are relevant.

Answer 3

A

Question 4

MC increases because

A)MC naturally increases as the firm nears capacity.
B)labor is paid overtime wages when volume increases.
C)in the short run,MC always increases.
D)the law of diminishing returns takes effect.

Question 5

When a firm increased its output by one unit,its AFC decreased.This is an indication that

A)the law of diminishing returns has taken effect.
B)MC < AFC.
C)AVC < AFC.
D)the firm is spreading out its total fixed cost.

Question 6

Which of the following distinctions does not help to explain the difference between relevant and irrelevant cost?

A)historical vs.replacement cost
B)sunk vs.incremental cost
C)variable vs.fixed cost
D)out-of-pocket vs.opportunity cost
E)All help to explain the difference.

Question 7

Average fixed cost is

A)AC minus AVC.
B)TC divided by Q.
C)AVC minus MC.
D)TC minus TVC.

Question 8

Costs of production that change with the rate of output are

A)sunk costs.
B)opportunity costs.
C)fixed costs.
D)variable costs.

Question 9

To an economist,total costs include

A)explicit,but not implicit costs.
B)implicit,but not explicit costs.
C)explicit and implicit costs.
D)neither explicit nor implicit costs.

Question 10

Which of the following distinctions helps to explain the difference between relevant and irrelevant cost?

A)accounting cost vs.direct cost
B)historical cost vs.replacement cost
C)sunk cost vs.fixed cost
D)variable cost vs.incremental cost

Question 11

Economic profit equals accounting profit minus

A)explicit costs.
B)implicit costs.
C)fixed costs.
D)variable costs.

Question 12

Average fixed cost

A)does not change as total output increases or decreases.
B)varies directly with total output.
C)falls continuously as total output expands.
D)rises as the output is expanded.

Question 13

Which of the following cost relationships is not true?

A)AFC = AC - MC
B)TVC = TC - TFC
C)The change in TVC/the change in Q = MC
D)The change in TC/ the change in Q = MC

Question 14

Economists consider which of the following costs to be irrelevant to a short-run business decision?

A)opportunity cost
B)out-of-pocket cost
C)historical cost
D)replacement cost

Question 15

When a firm's MC curve shifts to the right,it implies that

A)new firms are entering the market.
B)labor productivity is decreasing.
C)labor productivity is increasing.
D)the firm's overhead costs are decreasing.

Question 16

Changes in the short-run total costs result from changes in only

A)variable costs.
B)fixed costs.
C)zero.
D)total fixed costs.

Question 17

The relationship between MC and AC can best be described as

A)when AC increases,MC starts to increase.
B)when MC increases,AC starts to increase.
C)when MC decreases,AC decreases.
D)when MC exceeds AC,AC increases.

Question 18

Which of the following relationships is correct?

A)When marginal product starts to decrease,marginal cost starts to decrease.
B)When marginal cost starts to increase,average cost starts to increase.
C)When marginal cost starts to increase,average variable cost starts to increase.
D)When marginal product starts to decrease,marginal cost starts to increase.

Question 19

When a firm increased its output by one unit,its AC rose from $45 to $50.This implies that its MC is

A)$5.
B)between $45 and $50.
C)greater than $50.
D)Cannot be determined from the above information

Question 20

The distinction between sunk and incremental costs is most helpful in answering which question?

A)How many more people should be added to the production process?
B)What is the correct price to charge?
C)Should we begin to build a new factory?
D)Should we continue developing a new software application that we began last year?

Question 21

The method of estimating long-run costs in which knowledgeable professionals familiar with production facilities and processes calculate optimal combination of inputs to produce given quantities and then estimate costs is known as

A)engineering cost estimating.
B)the survivorship method.
C)regression analysis.
D)None of the above

Question 22

The learning curve indicates that

A)economies of scale are taking effect.
B)repetition of various production tasks cause unit costs to decrease.
C)workers must learn new skills in order to improve.
D)it takes time to learn a new skill.

Question 23

A short-run total cost function,TC = 100 + 32Q - 4Q² + 0.4Q³,indicates the existence of

A)a linear total cost curve.
B)a constant average variable cost curve.
C)a U-shaped average variable cost curve.
D)a constant marginal cost curve.

Question 24

The marginal cost will intersect the average variable cost curve

A)when the average variable cost curve is rising.
B)where average variable cost curve equals price.
C)at the minimum point of the average variable cost curve.
D)The two will never intersect.

Question 25

The results of many empirical studies of short-run cost functions have shown that total costs conform to

A)a quadratic total cost function.
B)a power cost function.
C)a linear cost function.
D)a cubic cost function.

Question 26

When a firm increased its output by one unit,its AC decreased.This implies that

A)MC < AC.
B)MC = AC.
C)MC < AFC.
D)the law of diminishing returns has not yet taken effect.

Question 27

Which of the following relationships implies that a firm's short-run cost function is linear?

A)MC = AC
B)MC = AVC
C)AC = AFC + AVC
D)MC > AC

Question 28

When a firm experiences increasing returns to scale

A)its AFC will decrease.
B)its AFC will increase.
C)its AC will increase.
D)its AC will decrease.

Question 29

Which of the following actions has the best potential for experiencing economies of scope?

A)producing a product that has appeal to a wider segment of the market
B)producing computers and software
C)producing spaghetti and soft drinks
D)producing cars and trucks

Question 30

Which level indicates the point of maximum economic efficiency?

A)lowest point on AC curve
B)lowest point on AVC curve
C)lowest point on MC curve
D)None of the above

Question 31

The main factor that explains the difference between accounting cost and economic cost is

A)opportunity cost.
B)fixed cost.
C)variable cost.
D)All of the above help to explain the difference.

Question 32

Which of the following statements best represents a difference between short-run and long-run cost?

A)Less than one year is considered the short run; more than one year the long run.
B)There are no fixed costs in the long run.
C)In the short-run labor must always be considered the variable input and capital the fixed input.
D)All of the above are true.

Question 33

Among the problems encountered when time series analysis is used to estimate cost functions is

A)that technological changes may have occurred.
B)that accounting changes may have occurred during the period analyzed.
C)that some costs are recorded on the books of account at a time other than when they are incurred.
D)All of the above

Question 34

If a firm's rent increases,it will affect its cost structure in which of the following ways?

A)AVC will increase.
B)MC will increase.
C)TFC will increase.
D)All of the above will increase.

Question 35

When the survivorship method of cost estimating is used,an increase,over time,in the proportion of industry product produced by medium size firms indicates the existence of

A)continuing economies of scale.
B)continuing diseconomies of scale.
C)a U-shaped long-run average cost curve.
D)large technological changes.

Question 36

If total cost equals $2,000 and quantity produced is 100 units,then

A)fixed cost is $200 and average variable cost is $18.
B)fixed cost is $600 and average variable cost is $14.
C)fixed cost is $500 and marginal cost is $15.
D)Either A or B can be correct.

Question 37

The major advantage of using cross-sectional analysis for long-run costs studies includes

A)the inclusion in the sample of different plants of different sizes.
B)the avoidance of having to adjust for inflationary trends.
C)the avoidance of having to account for interregional cost differences.
D)All of the above
E)A and B above

Question 38

Which of the following cost functions will exhibit both decreasing and increasing marginal costs?

A)a cubic cost function
B)a quadratic cost function
C)a linear cost function
D)All of the above

Question 39

In the long run

A)fixed costs tend to be greater than variable costs.
B)variable costs tend to be greater than fixed costs.
C)all costs are fixed costs.
D)all costs are variable costs.

Question 40

The learning curve

A)is really no different from a marginal cost curve.
B)calculates average cost at a particular point in time.
C)shows the decrease in unit cost as more of the same product is produced over time.
D)None of the above

Question 41

How would each of the following affect the firm's marginal,average,and average variable cost curves?
a.An increase in wages
b.A decrease in material costs
c.The government imposes a fixed amount of tax.
d.The rent that the firm pays on the building that it leases decreases.

Question 42

Carefully explain the difference between diseconomies of scale and diminishing returns.

Question 43

Economies of scale are indicated by

A)declining long-run AVC.
B)declining long-run AFC.
C)declining long-run AC.
D)declining long-run TC.

Question 44

Short-run cost functions are estimated using

A)time-series regression analysis.
B)cross-sectional regression analysis.
C)nominal cost data.
D)present value cost data.

Question 46

In estimating short-run cost functions,one must adjust for

A)price level changes.
B)accounting procedure changes.
C)product heterogeneity.
D)All of the above

Question 47

Which of the following is a reason for economies of scale?

A)Fixed costs are spread out as volume increases.
B)The law of diminishing returns does not take effect.
C)Input productivity increases as a result of greater specialization.
D)There is greater savings in transportation costs.

Question 48

A firm experiences increasing returns to scale; that is,doubling all its inputs more than doubles its output.What can be inferred about the firm's short-run costs?

Question 49

Fred's Widget Company has purchased $500,000 in equipment,which can be sold for a salvage value of $300,000 at any time.The best interest rate on alternative investments is 5%.What is the cost of using this machinery for one year? How would your answer be different if the machinery had not yet been purchased?

Question 50

For each of the following cost functions,find MC,AC,and AVC.
a.TC = 20,000 + 10 Q
b.TC = 18,000 + Q + 0.2 Q²

Question 51

You have opened your own word-processing service.You bought a personal computer,and paid $5,000 for it.However,due to the cost changes in the computer industry,the current price of an equivalent machine is $2,500.You could sell any used machine for $1,000.If you were not word processing,you could earn $20,000 per year at an alternative job.Assume that the interest rate is 10%.You can also hire an assistant who can do everything that you can do for $20,000 per year (you would still continue to do word processing).
One person using one computer can produce 11,000 typed pages per year,and the price per page for your service is $2.
You are considering three options: (1)expand your business by hiring an assistant; (2)leave your business the way it is; (3)shut down.Based on the costs and revenues above,which should you do? Explain and show any relevant calculations.

Question 52

The following table shows the relationship between output and number of workers in the short run.If the wage is $50/day,find marginal cost of production.

Question 53

As a firm attempts to increase its production,its long-run average costs eventually rise because of

A)the law of diminishing returns.
B)diseconomies of scale.
C)fixed capital.
D)insufficient demand.

Question 54

For each of the following cost functions,if possible,find minimum AC and minimum AVC.
a.TC = 20,000 + 10 Q
b.TC = 18,000 + Q + 0.2 Q²

Question 55

Which of the following is the best example of economies of scope?

A)Coca-Cola expands its global operations to sub-Sahara Africa.
B)Alcohol for car fuel is produced from corn.
C)Amazon.com decides to rent out its Web site to independent e-commerce companies.
D)A company reduces its cost by getting bigger discounts for bulk purchases.

Question 56

Economies of scale are created by greater efficiency of capital and by

A)longer chains of command in management.
B)better wages for labor.
C)smaller plant sizes.
D)increased specialization of labor.

Question 57

Diseconomies of scale can be caused by

A)the law of diminishing returns.
B)bureaucratic inefficiencies.
C)increasing advertising and promotional costs.
D)All of the above

Question 58

Assuming the existence of economies of scale,if a firm finds that it can reduce its unit cost by decreasing its scale of production,it means that

A)it has too much production capacity relative to its demand.
B)it should try to produce less.
C)the law of diminishing returns has not taken effect.
D)it has too much fixed overhead relative to its variable cost.

Question 59

Consider a firm that has just built a plant,which cost $1,000.Each worker costs $5.00 per hour.Based on this information,fill in the table below.

Question 60

Long-run cost functions are estimated using

A)time-series regression analysis.
B)cross-sectional regression analysis.
C)cost accounting data.
D)None of the above

Question 61

Given the production function Q = 21X + 9X² - X³,where Q = Output,and X = Input
a.At what value of X does Stage II of the production function begin?
b.At what value of X does Stage III of the production function begin?
c.At what value of X does diminishing returns set in?

Question 62

Given the total cost function TC = 100 + 40Q - 15Q² + 5Q³,calculate the
a.average fixed cost function (AFC)
b.average variable cost function (AVC)
c.marginal cost function (MC)