Deck 8: Cost

Question 1

Suppose a firm's current total cost of production is $50,000 per week,the wage rate is $1,000 per week and the cost of capital is $2,500.Which of the following gives the general equation for the firm's isocost lines for total cost C?

A) C = 20 - 0.5L
B) C = 2,500K - 0.5L
C) K = (C/2,500) - (C/1,000)
D) K = (C/2,500) - 0.4L

Answer 1

K = (C/2,500) - 0.4L

Question 2

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

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

Answer 2

A

Question 3

If Q represents a firm's level of output,W represents the wage paid to labor (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

Answer 3

C(Q) = FC + VC(Q)

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

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

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

Question 6

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 7

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 8

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 9

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 10

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 11

An input combination is an interior choice if and only 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 12

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

A) is minimizing the cost of producing its output.
B) could reduce costs by using fewer workers and more capital.
C) could reduce costs by using less capital and more workers.
D) could reduce the cost of producing the output by reducing workers and capital by the same proportion.

Question 13

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

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

Question 14

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 15

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.

Question 16

______ 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 17

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 18

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 19

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

A) cost function
B) isoquant
C) budget constraint
D) isocost line

Question 20

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 $2,000.Which of the following gives the equation for the firm's isocost line?

A) L = 20 - 0.5K
B) K = 40 - 2L
C) K = 2,000 + 1,000L
D) K = 20 - 0.5L

Question 21

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 22

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 23

Suppose a firm has a Cobb-Douglas weekly production function Q = F(L,K)= 25L^0.5K^0.5,where L is the number of workers and K is units of capital.The wage rate is $900 per week,and a unit of capital costs $400 per week.What is the least-cost input combination for producing 675 units of output?

A) L = 18; K = 40.5
B) L = 40.5; K = 18
C) L = 27; K = 60.75
D) L = 27; K = 27

Question 24

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 25

Suppose that MP_L = 200 and MP_K = 240.If R = 30,then at which of the following wages would the firm want to hire fewer workers and more capital?

A) W = 23
B) W = 24
C) W = 25
D) W = 26

Question 26

Suppose that labor 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 27

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

A) $9
B) $2,500
C) $8.62
D) $7.77

Question 28

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

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

Question 29

Whenever a firm uses input X but not input Y,then at the chosen input combination:

A) MRTS_XY ≥ P_X/P_Y.
B) MRTS_XY ≤ P_X/P_Y.
C) MRTS_XY = P_X/P_Y.
D) MRTS_XY = -P_X/P_Y.

Question 30

______ 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 31

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 32

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

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

Question 33

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 labor and less capital.
C) could reduce costs by employing more capital and less labor.
D) could minimize costs by employing more of both inputs.

Question 34

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 35

Suppose that MP_L = 100 and MP_K = 80.If W = 25 and R = 20,then a firm:

A) is producing its output at the lowest possible cost.
B) could reduce costs by employing more labor and less capital.
C) could reduce costs by employing more capital and less labor.
D) could minimize costs by employing more of both inputs.

Question 36

Suppose a firm has a Cobb-Douglas weekly production function Q = F(L,K)= 25L^0.5K^0.5,where L is the number of workers and K is units of capital.The wage rate is $900 per week,and a unit of capital costs $400 per week.Assuming no fixed costs,what is the firm's total cost of production if it uses least-cost input combination to produce 675 units of output?

A) $48,600
B) $43,650
C) $35,100
D) $32,400

Question 37

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 the 83^rd unit of output?

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

Question 38

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 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 variable cost of producing 45 units of output?

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

Question 40

Suppose that MP_L = 20 and MP_K = 21.If W = 10 and R = 11,then a firm:

A) is producing its output at the lowest possible cost.
B) could reduce costs by employing more labor and less capital.
C) could reduce costs by employing more capital and less labor.
D) could minimize costs by employing more of both inputs.

Question 41

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 42

If labor 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 clockwise, causing the firm to use less labor and more capital.
B) rotate counterclockwise, causing the firm to use less labor and more capital.
C) rotate clockwise, causing the firm to use less capital and more labor.
D) rotate counterclockwise, causing the firm to use less capital and more labor.

Question 43

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 44

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 45

Suppose a firm has a weekly cost function of C(Q)= 8Q + (Q²/100)and a marginal cost function of MC = 8 + (Q/50).Suppose the firm also has an avoidable fixed cost of $225.What is the efficient scale of production,and what is the minimum average cost?

A) Q^e = 0; AC = $8
B) Q^e = 106; AC = $10.95
C) Q^e = 150; AC = $10.83
D) Q^e = 22,500; AC = $9.25

Question 46

A firm that experiences economies of scale has a ______ average cost curve.

A) positively-sloped
B) negatively-sloped
C) U-shaped
D) flat

Question 47

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 average cost will usually be greater than short-run average cost because more output is produced over the long run.
D) Long-run average cost will always be less than or equal to short-run average cost.

Question 48

Refer to Figure 8.5.Suppose the firm increases output from 20 to 30 units.In the short run:

A) the firm will employ the same amounts of labor 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) the firm will produce the output at a lower cost than it can in the long run.

Question 49

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 50

Refer to Figure 8.5.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 51

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 52

Suppose a firm has a weekly cost function of C(Q)= 8Q + (Q²/100)and a marginal cost function of MC = 8 + (Q/50).What is the efficient scale of production,and what is the minimum average cost?

A) Q^e = 0; AC = $0
B) Q^e = 0; AC = $8
C) Q^e = 8; AC = $8
D) Q^e = 8; AC = $64.64

Question 53

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 54

As any firm with decreasing returns to scale increases its output:

A) its average cost of production must rise.
B) its average cost of production must fall.
C) its total cost of production must fall.
D) its marginal cost of production must rise.

Question 55

If a firm doubles the amount of labor it uses and triples the amount of capital it uses but its level of output less-than-triples as a result,what can be said about the firm's returns to scale?

A) This firm has increasing returns to scale.
B) This firm has decreasing returns to scale.
C) This firm has constant returns to scale.
D) Nothing can be determined about this firm's returns to scale based on the information given.

Question 56

Suppose a firm has a production function given by Q = 2(2L)^0.5K^0.5.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) = 2,500 + 7Q²
B) C(L) = 2,500 + 1,400L
C) C(Q) = 0.25 + 7Q²
D) C(L) = 0.25 + 1,400L

Question 57

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 an average cost of $90 per unit.Which of the following statements is true?

A) The firm could reduce its short-run average cost by producing more output.
B) The firm could reduce its short-run average cost by producing less output.
C) The firm is producing the level of output that minimizes short-run average cost.
D) The firm is producing its output at the lowest possible long-run average cost.

Question 58

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 59

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 60

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 61

Suppose a firm's technology is represented by the function Q = F(L,K)= 5L^0.25K^0.75.Does this firm experience economies of scale,diseconomies of scale or neither?

Question 62

Suppose a firm's production function is given by Q = F(L,K)= 5LK,where L is the amount of labor and K is the amount of capital.The wage rate is $100 per unit of labor and the rental rate of capital is $50 per unit of capital.
a.What is the least-cost combination of capital and labor 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?

Question 63

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 64

Suppose a firm's short-run production function is given by Q = 3√L,where L represents the number of hours of labor 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?

Question 65

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

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

Question 66

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 67

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 68

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 steel rises,while the average cost of producing electricity remains constant.This firm experiences:

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

Question 69

Use an isocost-isoquant diagram to explain how a firm determines the least cost combination of labor 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 labor? Why?

Question 70

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

Question 71

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 72

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.