Survey of Economics International Edition 8th Edition by Irvin B. Tucker - Test Bank

Survey of Economics International Edition 8th Edition by Irvin B. Tucker – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 6—Production Costs

 

MULTIPLE CHOICE

 

1. Which of the following is an explicit cost?

a.	The opportunity cost of an owner/entrepreneur’s time invested in the firm.
b.	The opportunity cost of the money the business owner/entrepreneur has invested in the firm.
c.	The wages paid to workers.
d.	None of the above.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Explicit cost

TYP:   SA

 

2. Explicit costs would include

a.	rent.
b.	the interest loss of the business owner on money withdrawn from his/her saving account and invested in the business.
c.	the loss of rent on a building the business owner owns and uses in his/her business.
d.	the opportunity costs of the business owner’s time.
e.	the use of tools owned by the business owner and dedicated to the business.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Explicit cost

TYP:   SA

 

3. Unlike implicit costs, explicit costs:

a.	reflect opportunity costs.
b.	include the value of the owner’s time.
c.	are not included in the accounting statement of the firm.
d.	are actual cash payments.
e.	do not change with the output rate of the firm.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Explicit cost

TYP:   RE

 

4. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What are his explicit costs?

a.	$26,000.
b.	$66,000.
c.	$78,000.
d.	$52,000.
e.	$72,000.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Explicit cost

TYP:   CA

 

5. Which of the following is not an explicit cost?

a.	Salaries.
b.	Sales taxes.
c.	Utilities, such as gas and electricity.
d.	Insurance.
e.	The firm owner’s time.

 

 

ANS:  E                    PTS:   1                    DIF:    E                    TOP:   Explicit cost

TYP:   SA

 

6. Cash payments to a steel mill for steel used in production would be an example of:

a.	sunk costs.
b.	fixed costs.
c.	explicit costs.
d.	implicit costs.
e.	entrepreneurial costs.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Explicit cost

TYP:   SA

 

7. Sam quits his job as an airline pilot and opens his own pilot training school. He was earning $40,000 as a pilot. He withdraws $10,000 from his savings where he was earning 6 percent interest and uses the money in his new business. He uses a building he owns as a hanger and could rent it out for $5,000 per year. He rents a computer for $1,200, buys office supplies for $500, rents an airplane for $6,000, pays $1,300 for fuel and maintenance, and hires one worker for $30,000. Sam’s total revenue from pilot training classes this year equaled $90,400. Sam’s explicit costs this year equals:

a.	$84,400.
b.	$39,000.
c.	$55,000.
d.	$45,600.
e.	$40,000.

 

 

ANS:  B                    PTS:   1                    DIF:    D                    TOP:   Explicit cost

TYP:   CA

 

8. Paul’s Plumbing is a small business that employs 12 people. Which of the following is the best example of an implicit cost incurred by this firm?

a.	The tax payments on property owned by the firm.
b.	The wages paid to the 12 employees.
c.	The half of the payroll taxes on the wages of the 12 employees paid by the employers, but not the half paid by the employees.
d.	The accounting services provided free of charge to the firm by Paul’s wife, who is an accountant.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Implicit cost

TYP:   SA

 

9. Which of the following would be considered an implicit cost?

a.	Health insurance of employees paid for by the firm
b.	The water bill of the firm
c.	The salaries paid to the managers of the firm
d.	Foregone rent on assets owned by the firm

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Implicit cost

TYP:   SA

 

10. The opportunity costs associated with the use of resources owned by a firm are:

a.	externalities.
b.	implicit costs.
c.	explicit costs.
d.	sunk costs.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Implicit cost

TYP:   RE

 

11. Payments to nonowners of a firm are called:

a.	implicit costs.
b.	accounting costs.
c.	explicit costs.
d.	economic costs.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Implicit cost

TYP:   RE

 

12. The amount of money that could have been made by renting a piece of land to be used for building an office building instead of using the land for employee parking is a(n):

a.	implicit cost.
b.	accounting cost.
c.	explicit cost.
d.	pure economic cost.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Implicit cost

TYP:   SA

 

13. Implicit costs are best thought of as:

a.	variable costs.
b.	marginal costs.
c.	accounting costs.
d.	opportunity costs.
e.	sunk costs.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Implicit cost

TYP:   SA

 

14. Which of the following is an implicit cost of going to college?

a.	Tuition.
b.	Books.
c.	Lost income.
d.	Future income.
e.	Room and board.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Implicit cost

TYP:   SA

 

15. Which of the following are implicit costs for a typical firm?

a.	Insurance costs.
b.	Electricity costs.
c.	Opportunity costs of capital owned and used by the firm.
d.	Cost of labor hired by the firm.
e.	The cost of raw materials.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Implicit cost

TYP:   SA

 

16. A firm’s opportunity cost of using resources provided by the firm’s owners is called:

a.	sunk costs.
b.	fixed costs.
c.	explicit costs.
d.	implicit costs.
e.	entrepreneurial costs.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Implicit cost

TYP:   RE

 

17. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000, for food and $2,000 for gas and electricity. What are his implicit costs?

a.	$26,000.
b.	$66,000.
c.	$78,000.
d.	$52,000.
e.	$72,000.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Implicit cost

TYP:   CA

 

18. Two friends, Diane and Sam, own and run a bar. Diane tends bar on Monday, Wednesday, and Friday and receives a wage in addition to tips. Sam tends bar on Tuesday, Thursday, and Saturday and receives only tips. Which of the following represents an implicit cost of operating the bar?

a.	Diane’s wage.
b.	Sam’s time.
c.	Diane’s tips.
d.	Sam’s tips.
e.	Both Diane’s and Sam’s tips.

 

 

ANS:  B                    PTS:   1                    DIF:    D                    TOP:   Implicit cost

TYP:   CA

 

19. Implicit costs are:

a.	the opportunity costs of using resources owned by the entrepreneur in his/her own business.
b.	payments the business owner must make on borrowed funds.
c.	costs which vary as the level of output varies.
d.	those payments the business owner makes in cash.
e.	the payments the business owner makes for public relations, such as donations to charity.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Implicit cost

TYP:   RE

 

20. Sam quits his job as an airline pilot and opens his own pilot training school. He was earning $40,000 as a pilot. He withdraws $10,000 from his savings where he was earning 6 percent interest and uses the money in his new business. He uses a building he owns as a hanger and could rent it out for $5,000 per year. He rents a computer for $1,200, buys office supplies for $500, rents an airplane for $6,000, pays $1,300 for fuel and maintenance, and hires one worker for $30,000. Sam’s total revenue from pilot training classes equaled $90,400. Sam’s implicit costs for this year are equal to:

a.	$84,400.
b.	$39,000.
c.	$55,000.
d.	$45,600.
e.	$40,000.

 

 

ANS:  B                    PTS:   1                    DIF:    D                    TOP:   Implicit cost

TYP:   CA

 

21. The sum of the explicit and implicit costs incurred in the production process is called

a.	fixed cost.
b.	sunk cost.
c.	marginal cost.
d.	total cost.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Explicit and implicit cost

TYP:   RE

 

22. Which of the following is most likely to be true of economic and accounting profits?

a.	Economic profits are less than accounting profits.
b.	Accounting profits are less than economic profits.
c.	Economic profits plus accounting profits equal zero.
d.	Accounting profits minus economic profits equal zero.

 

 

ANS:  A                    PTS:   1                    DIF:    D

TOP:   Economic and accounting profit       TYP:   SA

 

23. Suppose that a small business takes in monthly revenue of $100,000. Labor, rental, energy, and other purchased input costs are $70,000. The owner/entrepreneur could earn $5,000 per month in another job, and the owner/entrepreneur could get a return of $5,000 each month if she sold her business and invested the net proceeds in a financial asset, such as a treasury bond. Which of the following correctly describes her monthly economic profit?

a.	$100,000.
b.	$90,000.
c.	$70,000.
d.	$30,000.
e.	$20,000.

 

 

ANS:  E                    PTS:   1                    DIF:    M                   TOP:   Economic profit

TYP:   SA

 

24. Which of the following represents the key difference between the short run and the long run?

a.	In the long run, the firm makes commitments to a certain type of production technology which are represented as fixed costs in the long run. For example, they have signed a lease on a particular production facility. These fixed costs do not exist in the short run.
b.	In the short run, the firm makes commitments to a certain type of production technology, which are represented as fixed costs in the short run. For example, they have signed a lease on a particular production facility. These fixed costs do not exist in the long run.
c.	The short run refers to less than two years and the long run in over two years.
d.	None of the above are correct.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Short run

TYP:   RE

 

25. Economic profit is:

a.	total revenues minus variable costs.
b.	total revenues minus private costs.
c.	total revenues minus explicit costs.
d.	total revenues minus total costs.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Economic profit

TYP:   RE

 

26. The difference between a firm’s total revenues and total costs when all explicit and implicit costs are included is the firm’s:

a.	economic profit.
b.	accounting profit.
c.	opportunity cost of capital.
d.	long-run average total cost.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Economic profit

TYP:   RE

 

27. If a firm has total revenue of $200 million, explicit costs of $190 million, and implicit costs of $30 million, its economic profit is:

a.	$200 million.
b.	$70 million.
c.	$10 million.
d.	-$10 million.
e.	-$20 million.

 

 

ANS:  E                    PTS:   1                    DIF:    E                    TOP:   Economic profit

TYP:   SA

 

28. A firm has $200 million in total revenue and explicit costs of $190 million. Suppose its owners have invested $100 million in the company at an opportunity cost of 10 percent interest rate per year. The firm’s economic profit is:

a.	$400 million.
b.	$100 million.
c.	$80 million.
d.	zero.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Economic profit

TYP:   SA

 

29. Economic profit is:

a.	always less than zero.
b.	never less than accounting profit.
c.	less than accounting profit if implicit costs are zero.
d.	less than accounting profit if implicit costs are greater than zero.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Economic profit

TYP:   SA

 

30. An economist left her $100,000-a-year teaching position to work full-time in her own consulting business. In the first year, she had total revenue of $200,000 and business expenses of $100,000. She made a(n):

a.	economic profit.
b.	economic loss.
c.	implicit profit.
d.	accounting loss but not an economic loss.
e.	zero economic profit.

 

 

ANS:  E                    PTS:   1                    DIF:    M                   TOP:   Economic profit

TYP:   SA

 

31. Economic profit equals accounting profit minus:

a.	explicit costs.
b.	implicit costs.
c.	fixed costs.
d.	variable costs.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Economic profit

TYP:   RE

 

32. An economist left his $100,000-a-year teaching position to work full-time in his own consulting business. In the first year, he had total revenue of $200,000 and business expenses of $150,000. She made a(n):

a.	implicit profit.
b.	economic loss.
c.	economic profit.
d.	accounting loss but not an economic loss.
e.	zero economic profit.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Economic profit

TYP:   SA

 

33. A firm has $200 million in total revenue and explicit costs of $190 million. If its owners have invested $100 million in the company at an opportunity cost of 10 percent interest per year, the firm’s accounting profit is:

a.	$400 million.
b.	$100 million.
c.	$80 million.
d.	$10 million.
e.	zero.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Economic profit

TYP:   SA

 

34. Suppose a firm has total revenue of $200 million, explicit costs of $190 million, and implicit costs of $20 million. This firm’s accounting profit is:

a.	$80 million.
b.	$70 million.
c.	$10 million.
d.	-$10 million.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Economic profit

TYP:   SA

 

35. When total revenue minus total cost is equal to zero, the firm is:

a.	earning above-average economic profit.
b.	earning a normal profit.
c.	losing too much money to stay in business.
d.	earning abnormally low profits.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Normal profit

TYP:   RE

 

36. Normal profit is a term for:

a.	explicit profit.
b.	the minimum profit to keep a firm in operation.
c.	the accounting profit forgone.
d.	pure economic profit.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Normal profit

TYP:   RE

 

37. Normal profit is defined as a(n):

a.	foregone percent rate of return.
b.	opportunity profit.
c.	implicit profit.
d.	minimum necessary to keep a firm in operation.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Normal profit

TYP:   RE

 

38. Economists say that a firm has a normal profit when:

a.	it earns a return of at least 10 percent.
b.	its accounting profit is positive.
c.	it can pay all its variable costs.
d.	its economic profit is zero.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Normal profit

TYP:   RE

 

39. Which of the following is an example of a fixed input?

a.	The acreage of a farmer’s land.
b.	Machinery.
c.	The size of a firm’s plant.
d.	All of the above.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Fixed input

TYP:   RE

 

40. Variable inputs are defined as any resource that:

a.	varies with the size of the firm’s plant.
b.	cannot be changed as output changes.
c.	can be changed as output changes.
d.	can be increased or decreased hourly.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Variable input

TYP:   RE

 

41. During the short-run period of the production process, a firm will be:

a.	unable to vary any of its factors of production.
b.	able to vary some of its factors of production.
c.	able to vary all of its factors of production.
d.	able to vary the size of its plant.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Short run

TYP:   RE

 

42. The short run is a time period such that:

a.	the existing firms in the market do not have sufficient time to change the amounts of any of the inputs that they employ.
b.	the existing firms in the market do not have sufficient time to either increase or decrease their current rate of output.
c.	the existing firms in the market do not have sufficient time to increase the size of their existing plant or build a new factory.
d.	new firms may build plants and enter the industry.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Short run

TYP:   RE

 

43. The short run is a period of time:

a.	in which a firm uses at least one fixed input.
b.	that is long enough to permit changes in the firm’s plant size.
c.	in which production occurs within one year.
d.	in which production occurs within six months.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Short run

TYP:   RE

 

44. During the course of a week, McDonald’s has enough time to hire or layoff workers, but it does not have enough time to expand its kitchen or add an additional seating area. In this situation, McDonald’s:

a.	has no fixed costs.
b.	is in the short run.
c.	suffers an economic loss.
d.	earns a large profit.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Short run

TYP:   RE

 

45. During the short run, a firm has enough time to adjust:

a.	its technology.
b.	its fixed inputs.
c.	its variable inputs.
d.	all of its inputs-both fixed and variable.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Short run

TYP:   RE

 

46. Which of the following factors of production is not variable in the long run?

a.	the size of the firm’s plant.
b.	property taxes on the assets of the firm.
c.	highly trained labor.
d.	All factors of production are variable in the long run.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Long run

TYP:   RE

 

47. The long run is a period of:

a.	at least one year.
b.	sufficient length to allow a firm to expand output by hiring additional workers.
c.	sufficient length to allow a firm to alter its plant size and capacity and all other factors of production.
d.	sufficient length to allow a firm to transform economic losses into economic profits by hiring better workers.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Long run

TYP:   RE

 

48. The long run is a period of time:

a.	that is too short to change the size of a firm’s plant.
b.	that is long enough to permit changes in all the firm’s inputs, both fixed and variable.
c.	in which production occurs beyond one year.
d.	in which production occurs beyond five years.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Long run

TYP:   RE

 

49. The long run is a planning period:

a.	during which the firm can vary all inputs including its plant size.
b.	less than six months.
c.	less than one year.
d.	less than five years.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Long run

TYP:   RE

 

50. In the long run, total fixed cost:

a.	falls.
b.	rises.
c.	is constant.
d.	does not exist.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Long run

TYP:   RE

 

51. Which of the following statements is true?

a.	Economic profit equals accounting profit minus implicit costs.
b.	The short run is any period of time in which there is at least one fixed input.
c.	A fixed input is any resource for which the quantity cannot change during the period under consideration.
d.	In the long run there are no fixed costs.
e.	All of the above.

 

 

ANS:  E                    PTS:   1                    DIF:    E                    TOP:   Long run

TYP:   RE

 

52. Which of the following best describes a production function?

a.	The relationship between consumer preferences and market demand.
b.	The relationship between the quantity of labor employed and total cost.
c.	The relationship between the maximum amounts of output a firm can produce and various quantities of inputs.
d.	The relationship between price and quantity supplied by sellers in a market.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   RE

 

53. The increase in total output that results from a unit increase in one unit of a variable input is equal to the input’s:

a.	total product.
b.	marginal product.
c.	average product.
d.	marginal cost.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   RE

 

54. If two workers can produce 22 units of output, and the addition of a third worker increases output to 30 units, the marginal product of the third worker is

a.	8 units.
b.	10 units.
c.	22 units.
d.	30 units.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   SA

 

55. A firm can produce 450 gallons of milk per day with 4 workers and 500 gallons per day with 5 workers. The marginal product of the fifth worker expressed in gallons per worker per day, is:

a.	35.
b.	50.
c.	70.
d.	350.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Marginal product

TYP:   SA

 

56. A farm is able to produce 9,000 pints of strawberries per season on 10 acres. It adds one more acre and is able to produce 12,000 pints per season. The marginal product of land for this farm is:

a.	900 pints per acre per year.
b.	1,000 pints per acre per year.
c.	3,000 pints per acre per year.
d.	12,000 pints per acre per year.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Marginal product

TYP:   CA

 

57. If the units of variable input in a production process are 1, 2, 3, 4, and 5, and the corresponding total outputs are 30, 34, 37, 39, and 40, respectively. The marginal product of the fourth unit is:

a.	2.
b.	1.
c.	37.
d.	39.

 

 

ANS:  A                    PTS:   1                    DIF:    D                    TOP:   Marginal product

TYP:   CA

 

58. A farm is able to produce 5,000 bushels of peaches per season on 100 acres. Assume it adds one more acre and is able to produce 6,000 bushels per season. The marginal product of the additional acre of land for this farm is:

a.	6,000 bushels per acre per year.
b.	5,000 bushels per acre per year.
c.	1,000 bushels per acre per year.
d.	11,000 bushels per acre per year.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   SA

 

59. A farm is able to produce 10,000 bushels of peanuts per season on 10 acres. Assume it adds one more acre and is able to produce 12,000 bushels per season. The marginal product of the additional acre of land for this farm is:

a.	10,000 bushels per acre per year.
b.	1,200 bushels per acre per year.
c.	2,000 bushels per acre per year.
d.	12,000 bushels per acre per year.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   SA

 

60. A farm can produce 10,000 bushels of wheat per year with 5 workers and 13,000 bushels with 6 workers. The marginal product of the sixth worker for this farm is:

a.	10,000 bushels.
b.	3,000 bushels.
c.	500 bushels.
d.	23,000 bushels.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   SA

 

61. Suppose when a car wash has 2 washing stations and 5 workers and is able to wash 100 cars per day. When it adds a third station, but no more workers, it is able to wash 150 cars per day. The marginal product of the third washing station appears is:

a.	100 cars per day.
b.	150 cars per day.
c.	5 cars per day.
d.	50 cars per day.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Marginal product

TYP:   SA

 

62. Marginal product measures the change in:

a.	total cost brought about by changing production by one unit.
b.	product price brought about by changing production by one unit.
c.	a firm’s revenue brought about by changing production by one unit.
d.	the firm’s output brought about by employing one additional unit of input.
e.	the firm’s profit brought about by employing one more input.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   RE

 

63. When a total output curve is falling, its corresponding marginal product curve is:

a.	vertical.
b.	horizontal.
c.	rising.
d.	falling.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   CA

 

Exhibit 6-1  Production of pizza data

 

Workers	Pizzas
0	0
1	4
2	10
3	15
4	18
5	19

 

 

64. Exhibit 6-1 shows the change in the production of pizzas as more workers are hired. The marginal product of the second employee equals:

a.	4.
b.	10.
c.	14.
d.	6.
e.	15.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   SA

 

65. Exhibit 6-1 shows the change in the production of pizzas as more workers are hired. The marginal product of the fifth employee equals:

a.	4.
b.	18.
c.	19.
d.	3.
e.	1.

 

 

ANS:  E                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   SA

 

66. Exhibit 6-1 shows the change in the production of pizzas as more workers are hired. The total output of pizzas after hiring 4 workers is:

a.	4.
b.	15.
c.	18.
d.	3.
e.	1.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Marginal product

TYP:   CA

 

67. Exhibit 6-1 shows the change in the production of pizzas as more workers are hired. The marginal product of the labor input begins to fall with the employment of the ____ worker.

a.	first
b.	second
c.	third
d.	fourth
e.	fifth

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Marginal product

TYP:   CA

 

68. Exhibit 6-1 shows the change in the short run production of pizzas as more workers are hired. The table shows marginal product increasing between the 0 to 2 hired workers. A possible reason for this increased marginal product is:

a.	increased wages.
b.	increases in plant size.
c.	decreases in fixed cost.
d.	increased division of labor as additional workers are hired.
e.	increased product price.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Marginal product

TYP:   CA

 

69. Exhibit 6-1 shows the change in the short-run production of pizzas as more workers are hired. The table shows the marginal product of the labor input is decreasing with the hiring of the third worker. A possible reason for this diminishing marginal product is:

a.	decreased wages.
b.	increases in plant size.
c.	decreases in fixed cost.
d.	increased division of labor as additional workers are hired.
e.	decreases in labor productivity.

 

 

ANS:  E                    PTS:   1                    DIF:    D                    TOP:   Law of diminishing returns

TYP:   CA

 

Exhibit 6-2  Cost schedule for pizza production

 

Pizzas	Labor Cost	Energy Cost	Materials Cost
0	$10	$  0	$  0
1	10	12	4
2	24	22	8
3	40	30	12
4	60	36	16
5	90	40	20

 

 

70. Exhibit 6-2 shows the labor, energy, and materials cost of making various quantities of pizzas. The table shows that the labor cost of making pizzas will:

a.	increase at a decreasing rate.
b.	decrease at a decreasing rate.
c.	decrease at an increasing rate.
d.	increase at an increasing rate.
e.	increase at a constant rate.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   CA

 

71. Exhibit 6-2 shows the labor, energy, and materials cost of making various quantities of pizzas. The table shows that the energy cost of making pizzas will:

a.	increase at a decreasing rate.
b.	decrease at a decreasing rate.
c.	decrease at an increasing rate.
d.	increase at an increasing rate.
e.	increase at a constant rate.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   CA

 

72. Exhibit 6-2 shows the labor, energy, and materials cost of making various quantities of pizzas. The table shows that the materials cost of making pizzas will:

a.	increase at a decreasing rate.
b.	decrease at a decreasing rate.
c.	decrease at an increasing rate.
d.	increase at an increasing rate.
e.	increase at a constant rate.

 

 

ANS:  E                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   CA

 

73. Which of the following best describes the law of diminishing returns?

a.	The principle that beyond some point the marginal product decreases as additional units of a variable factor (ex: labor) are added to a fixed factor (ex: a restaurant kitchen).
b.	The concept that as a person consumes more and more of a good, such as pizza slices, that the marginal utility from each additional slice will decline.
c.	The empirical fact that the profitability of firms declines in the long run due to increasing competition.
d.	None of the above.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Law of diminishing returns

TYP:   RE

 

74. In the short run, a firm will eventually experience rising per-unit costs because of:

a.	economies of scale.
b.	diseconomies of scale.
c.	the law of supply.
d.	the law of diminishing returns.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Law of diminishing returns

TYP:   CA

 

75. Which of the following is an implication of the law of diminishing returns?

a.	Total output will decline as more workers are hired.
b.	In the long run, average total cost will eventually decline as output is expanded.
c.	In the short run, expansion of output will eventually lead to increases in marginal cost and average total cost.
d.	A doubling of all inputs will lead to more than a doubling of output.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Law of diminishing returns

TYP:   CA

 

76. Bill lives in Montana and likes to grow zucchini. He applies fertilizer to his crops twice during the growing season and notices that the second layer of fertilizer increases his crop, but not as much as the first layer. What economic concept best explains this observation?

a.	The law of diminishing marginal utility.
b.	The law of diminishing returns.
c.	Return equalization principle.
d.	The principal-agent problem.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Law of diminishing returns

TYP:   SA

 

77. The law of diminishing marginal returns implies that, in the short run:

a.	output must fall beyond a certain point.
b.	price must fall beyond a certain point.
c.	the marginal product of the variable input must eventually decrease.
d.	wages of workers must eventually increase.
e.	total cost must fall beyond a certain point.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Law of diminishing returns

TYP:   CA

 

78. In order for the law of diminishing returns to be present, we must have:

a.	at least one factor of production to be fixed.
b.	output decreasing as more laborers are hired.
c.	the price of labor increasing as more workers are hired.
d.	simultaneous changes in labor and capital.
e.	double the output when labor input is doubled.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Law of diminishing returns

TYP:   RE

 

79. Applying a price of labor to the law of diminishing returns generates:

a.	the law of increasing costs.
b.	less output as more labor is hired.
c.	differences in the quality of labor.
d.	a negatively-sloped labor supply curve.
e.	specialization and the division of labor.

 

 

ANS:  A                    PTS:   1                    DIF:    D                    TOP:   Law of diminishing returns

TYP:   CA

 

80. As a fishing firm hires its first, second, and third workers, it could find that marginal product actually rises. The reason for this is:

a.	diminishing returns have set in.
b.	the division of labor creates greater productivity.
c.	the firm has hired another boat.
d.	all tasks are shared by all workers.
e.	less qualified workers are becoming available.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Law of diminishing returns

TYP:   SA

 

81. The law of diminishing returns applies to which of the following segments of the marginal product of labor curve?

a.	The entire curve.
b.	The downward-sloping segment only.
c.	The upward sloping segment only.
d.	The point where labor input is zero.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Law of diminishing returns

TYP:   SA

 

82. The situation in which the marginal product of labor is greater than zero and declining as more labor is hired is called the law of:

a.	negative response.
b.	inverse return to labor.
c.	diminishing returns.
d.	demand.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Law of diminishing returns

TYP:   SA

 

83. If a firm’s use of labor obeys the law of diminishing returns, then:

a.	it does not have enough time to hire or fire workers.
b.	doubling the number of workers causes the firm’s output to also double.
c.	its marginal costs must be falling.
d.	hiring additional workers adds less and less additional output.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Law of diminishing returns

TYP:   RE

 

84. The ____ is the situation in which the marginal product of labor is greater than zero and declining as more labor is hired.

a.	law of demand
b.	law of diminishing supply
c.	law of diminishing returns
d.	law of returns to scale

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Law of diminishing returns

TYP:   RE

 

Exhibit 6-3  A marginal product curve

 

 

85. As shown in Exhibit 6-3, the law of diminishing returns applies where there are:

a.	more than 5 workers per day.
b.	more than 4 workers per day.
c.	more than 3 workers per day.
d.	between 0 and 5 workers per day.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Law of diminishing returns

TYP:   SA

 

86. As shown in Exhibit 6-3, the marginal product of labor for the last worker hired when 2 workers are employed per day is:

a.	50.
b.	100.
c.	150.
d.	175.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Law of diminishing returns

TYP:   SA

 

87. As shown in Exhibit 6-3, the marginal product of labor for the last worker hired when 5 workers are employed per day is:

a.	50.
b.	100.
c.	150.
d.	175.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Law of diminishing returns

TYP:   SA

 

Exhibit 6-4  A marginal product curve

 

 

88. As shown in Exhibit 6-4, the law of diminishing returns applies in the range of:

a.	over 10 workers per day.
b.	over 5 workers per day.
c.	over 2 workers per day.
d.	between 0 and 5 workers per day.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Law of diminishing returns

TYP:   SA

 

89. As shown in Exhibit 6-4, which of the following conclusions can you draw about the firm’s total output curve?

a.	It slopes downward throughout the range of 0-10 units of input.
b.	It reaches a maximum at 5 units of output.
c.	It has an inflection point at 5 units of input.
d.	It has zero slope at 5 units of input.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Law of diminishing returns

TYP:   SA

 

Exhibit 6-5  Workers and output data

 

Laborers	Total Product
0	0
1	8
2	20
3	25
4	28
5	29

 

 

90. In Exhibit 6-5, diminishing returns set in when the ____ worker is hired.

a.	first
b.	second
c.	third
d.	fourth
e.	fifth

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Law of diminishing returns

TYP:   SA

 

91. In Exhibit 6-5, the marginal product of the second worker is:

a.	0.
b.	8.
c.	10.
d.	12.
e.	20.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   SA

 

92. Paul’s Plumbing is a small business that employs 12 people. Which of the following is most likely to be a fixed cost for Paul’s Plumbing?

a.	The tax and insurance payments on the property owned by the firm.
b.	The wages paid to the 12 employees.
c.	The payroll taxes on the wages of the 12 employees.
d.	The salary paid to Paul, who is the manager of the firm.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Total fixed cost

TYP:   SA

 

93. Fixed costs are best defined as:

a.	costs that do not vary with output.
b.	costs that are at a minimum when output approaches the firm’s capacity.
c.	the amount that one more unit of output adds to total costs.
d.	costs that decline as output increases.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Total fixed cost

TYP:   RE

 

94. Which of the following is most likely to be a fixed cost for a business?

a.	expenditures on low-skill labor.
b.	shipping charges for the delivery of products.
c.	managerial salaries.
d.	property taxes on the firm’s buildings.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Total fixed cost

TYP:   SA

 

95. In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be:

a.	$25.
b.	$2,500.
c.	$5,000.
d.	$7,500.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Total fixed cost

TYP:   SA

 

96. The total fixed cost remains constant as which of the following varies?

a.	Cost of resources.
b.	Time.
c.	Output in a given period of time.
d.	Profit.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Total fixed cost

TYP:   SA

 

97. The total fixed cost curve:

a.	varies with the quantity of inputs used.
b.	decreases with output.
c.	increases with output.
d.	remains constant regardless of output.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Total fixed cost

TYP:   RE

 

98. Total fixed costs are costs that are fixed with respect to:

a.	the rate of output.
b.	time.
c.	technology.
d.	the minimum wage or price supports.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Total fixed cost

TYP:   RE

 

99. Bill is an accountant for a small machine shop. His boss has asked him to calculate the shop’s total fixed cost. Which method will get Bill the correct answer?

a.	c and d.
b.	Calculating the product of average total cost and quantity
c.	Determining what the shop would pay for if they produced zero output
d.	Subtracting the total variable costs from the total costs
e.	Subtracting total variable costs from total revenue

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Total fixed cost

TYP:   SA

 

100. Which of the following statements is true?

a.	TC = TFC – TVC.
b.	AVC = TC/Q.
c.	TFC = TC – TVC.
d.	MC equals the change in ATC divided by the change in Q.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Total fixed cost

TYP:   RE

 

101. Which of the following is considered to be a fixed cost of operating an automobile?

a.	Gasoline.
b.	Tires.
c.	Oil change.
d.	Maintenance.
e.	Registration fees.

 

 

ANS:  E                    PTS:   1                    DIF:    M                   TOP:   Total fixed cost

TYP:   SA

 

102. Which of the following is an example of a fixed cost for a fishing company?

a.	The cost of hiring a fishing crew.
b.	The fuel costs of running the boat.
c.	The monthly loan payment on the boat.
d.	The supply of nets, hooks, and fishing lines.
e.	Bait.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Total fixed cost

TYP:   SA

 

103. Suppose that when output is 20, marginal cost is $20, and average total cost is $30. Then which of the following is most likely to be true.

a.	Average total cost is declining.
b.	Average total cost is constant.
c.	Average total cost is rising.
d.	Average total cost is less than average fixed cost.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Total variable cost

TYP:   RE

 

104. Which of the following best describes average variable cost?

a.	The change in total cost when one additional unit of output is produced.
b.	Total cost divided by the quantity of output produced.
c.	Total variable cost divided by the quantity of output produced.
d.	Total fixed cost divided by the quantity of output produced.
e.	Costs that do not vary as output varies.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Total variable cost

TYP:   RE

 

105. If average fixed costs equal $60 and average total costs equal $120 when output is 100, the total variable cost must be:

a.	$40.
b.	$60.
c.	$6,000.
d.	$8,000.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Total variable cost

TYP:   CA

 

106. Which of the following is true if the total variable cost curve is rising?

a.	Average fixed cost is increasing.
b.	Marginal cost is decreasing.
c.	Marginal cost is increasing.
d.	Average fixed cost is constant.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Total variable cost

TYP:   CA

 

107. If the total variable cost curve for a firm is S-shaped, what is the shape of the total cost curve for that firm?

a.	U-shaped
b.	Flat.
c.	Hill-shaped.
d.	S-shaped.
e.	There is not enough information.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Total variable cost

TYP:   CA

 

108. Barbara owns a small shop where dresses are made. At the end of a given month, she has 250 dresses. Her expenses for the month are $1,000 for rent, $6,000 for wages, $1,500 for fabric and thread, and $500 for electricity. Her total variable costs for the month are:

a.	c and e.
b.	$4,000.
c.	$32 per dress.
d.	$7,500.
e.	$8,000.

 

 

ANS:  E                    PTS:   1                    DIF:    M                   TOP:   Total variable cost

TYP:   SA

 

109. Suppose a firm has an output of 10,000 cans and a total fixed cost of $2,000. At an output of 5,000 the difference between the total cost and the total variable cost is:

a.	b and c.
b.	$0.40.
c.	the average fixed cost.
d.	$2,000.
e.	$0.20.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Total variable cost

TYP:   CA

 

110. Which statement about the total variable cost curve is true?

a.	It begins at the origin and increases before decreasing again.
b.	The total variable cost curve is the same at all levels of output.
c.	The total variable cost curve is increasing but at a decreasing rate.
d.	It begins at the origin and is always increasing.
e.	There is no such thing as a total variable cost curve.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Total variable cost

TYP:   RE

 

111. Suppose a publisher faces the following costs of producing 10,000 newspapers each month: $5,500 cost of labor; $2,200 monthly mortgage payment; $250 cost of electricity to run the printing presses; $800 for ink and paper; and $200 in city property taxes (based on the value of the building and land). Its total variable costs are:

a.	$8,950.
b.	$8,750.
c.	$6,550.
d.	$6,300.
e.	$5,500.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Total variable cost

TYP:   CA

 

112. The total cost curve is the sum of the:

a.	total fixed and total variable cost curves.
b.	total fixed and marginal cost curves.
c.	marginal cost and total variable cost curves.
d.	none of the above.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Total cost

TYP:   RE

 

113. Which of the following is true if the total cost curve is rising?

a.	Total fixed cost is decreasing.
b.	Total fixed cost is increasing.
c.	Marginal cost is decreasing.
d.	Marginal cost is increasing.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Total cost

TYP:   CA

 

114. What is the shape of the average fixed cost curve for a firm in the short run?

a.	U-shaped.
b.	A curve that constantly increases as output expands and eventually approaches infinity at high rates of output.
c.	A vertical line.
d.	A curve that declines as output expands and approaches the horizontal-axis when output is large.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Average fixed cost

TYP:   RE

 

115. Which of the following will become smaller and smaller as the firm expands output?

a.	average total cost.
b.	average fixed cost .
c.	marginal cost.
d.	total fixed cost .

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Average fixed cost

TYP:   SA

 

116. The average fixed cost of a firm equal:

a.	implicit costs divided by output.
b.	explicit costs divided by output.
c.	total cost minus variable cost.
d.	total cost minus total variable cost divided by output.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Average fixed cost

TYP:   CA

 

117. When costs that vary with the level of output are divided by the output, you have calculated:

a.	total changing cost.
b.	total fixed cost.
c.	average fixed cost.
d.	average variable cost.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Average variable cost

TYP:   SA

 

118. If fixed cost is $200,000 and variable cost is $30 per unit over the relevant range of output, when 10,000 units are produced, the average total cost will be:

a.	$20.
b.	$30.
c.	$50.
d.	$70.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Average total cost

TYP:   CA

 

119. Use the table below to answer the following question.

 

Units of Output	Total Fixed Cost (dollars)	Total Variable Cost (dollars)
1	1,000	1,200
2	1,000	2,400
3	1,000	3,600
4	1,000	5,000
5	1,000	6,600

 

What is the average total cost at an output level of four units?

a.	$1,200.
b.	$1,400.
c.	$1,500.
d.	$2,000.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Average total cost

TYP:   CA

 

120. What is the shape of the average total cost curve for a firm in the short run?

a.	U-shaped.
b.	A horizontal line.
c.	A vertical line.
d.	A curve that slopes upward to the right.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Average total cost

TYP:   RE

 

121. If total cost is $1,000 when output is zero, and total cost is $1,200 when output is one, and total cost is $1,500 when output is two, then which of the following is true?

a.	Total fixed cost is $1,500.
b.	The marginal cost of producing the first unit of output is $1,200.
c.	The marginal cost of producing the second unit of output is $300.
d.	The average fixed cost is $750 when two units of output are produced.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Marginal cost

TYP:   CA

 

122. Which of the following best describes marginal cost?

a.	The change in total cost when one additional unit of output is produced.
b.	Total cost divided by the quantity of output produced.
c.	Total variable cost divided by the quantity of output produced.
d.	Total fixed cost divided by the quantity of output produced.
e.	Costs that do not vary as output varies, and that must be paid even if output is zero.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Marginal cost

TYP:   RE

 

123. Which of the following explains most accurately why the firm’s short-run marginal cost curve will eventually rise?

a.	As more of the variable factor is used, its price will rise.
b.	When diminishing marginal returns set in, it will take ever-larger quantities of the variable resources to produce an additional unit of output.
c.	As the variable factor is used more intensely, its marginal product will rise, causing an increase in marginal costs.
d.	As the size of the firm increases, the operational efficiency of the firm declines, causing an increase in marginal costs.

 

 

ANS:  B                    PTS:   1                    DIF:    D                    TOP:   Marginal cost

TYP:   CA

 

124. Marginal cost is best defined as:

a.	a cost that does not vary with the rate of output.
b.	the difference between fixed and variable cost at any level of output.
c.	the amount added to total cost when one more unit of output is produced.
d.	the difference between price and average total cost at the profit-maximizing level of output.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   RE

 

125. The change in total cost that results from the production of one additional unit is called:

a.	marginal revenue.
b.	average variable cost.
c.	marginal cost.
d.	average total cost.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Marginal cost

TYP:   RE

 

126. Marginal cost is defined as the increase in total cost resulting from an increase in:

a.	one unit of output.
b.	output of 100 units.
c.	a firm’s plant size.
d.	one unit of labor.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Marginal cost

TYP:   RE

 

127. The minimum point on the marginal cost curve corresponds to the:

a.	maximum point on the total cost curve.
b.	minimum point on the total cost curve.
c.	inflection point on the total variable cost curve.
d.	midpoint of the total cost curve.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   RE

 

128. If both the marginal cost and the average variable cost curves are U-shaped. At the minimum point on the average variable cost curve, the marginal cost must be:

a.	greater than the average variable cost.
b.	less than the average variable cost.
c.	equal to the average variable cost.
d.	at its minimum.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   CA

 

129. Which of the following is true at the point where diminishing returns set in?

a.	Both marginal product and marginal cost are at a maximum.
b.	Both marginal product and marginal cost are at a minimum.
c.	Marginal product is at a maximum and marginal cost is at a minimum.
d.	Marginal product is at a minimum and marginal cost is at a maximum.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Marginal cost

TYP:   CA

 

130. Suppose the fixed cost of building a nuclear power plant is $1 billion. Suppose also that the only variable cost is the labor of Homer Simpson, and he earns $10 per hour. If the plant generates 1,000 kilowatts each hour, and has already generated 1 billion kilowatts, what can you say about the marginal cost of the next kilowatt?

a.	b and e.
b.	The marginal cost is equal to $.01.
c.	The marginal cost is equal to $1.01.
d.	The marginal cost is rising.
e.	The marginal cost is falling.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   CA

 

131. The marginal cost is the:

a.	b and c.
b.	change in total cost as the quantity changes by one unit.
c.	change in total variable cost as the quantity changes by one unit.
d.	change in total fixed cost as the quantity changes by one unit.
e.	same as the fixed cost when average fixed cost is at a minimum.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Marginal cost

TYP:   RE

 

132. American Airlines makes numerous nonstop flights from Chicago’s O’Hare Airport to the airport at Dallas-Fort Worth. The distance between those two cities is 1,000 miles. The only variable cost, fuel, costs $.06 for each passenger-mile it flies. Bob, on his way to an emergency business meeting, buys a ticket in coach class for $1,300 at the very last minute. The marginal cost of flying Bob from Chicago to Dallas-Fort Worth is:

a.	b and e.
b.	higher than the average cost of previous passengers.
c.	$600.
d.	$160.
e.	$60.

 

 

ANS:  E                    PTS:   1                    DIF:    D                    TOP:   Marginal cost

TYP:   CA

 

133. When the cost curves have U-shapes, at the point where marginal cost equals average total cost:

a.	b and c.
b.	marginal cost is rising.
c.	average total cost is at its minimum.
d.	average variable cost is falling.
e.	the fixed cost has been fully depreciated.

 

 

ANS:  A                    PTS:   1                    DIF:    D                    TOP:   Marginal cost

TYP:   CA

 

134. At the point where marginal cost equals average variable cost,

a.	b and c.
b.	marginal cost is rising.
c.	average total cost is at its minimum.
d.	average variable cost is falling.
e.	there is no total cost.

 

 

ANS:  A                    PTS:   1                    DIF:    D                    TOP:   Marginal cost

TYP:   CA

 

135. When marginal cost is below average total cost:

a.	total cost is falling.
b.	total cost is rising.
c.	average total cost is falling.
d.	average fixed cost is rising.
e.	total variable cost is falling.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Marginal cost

TYP:   CA

 

136. A bus is mostly filled with passengers and ready to travel from Los Angeles to San Francisco. At the last minute, a person comes running up to the bus and takes a seat. The change in the bus company’s total cost as a result of transporting one more passenger on this trip is called:

a.	marginal cost.
b.	average total cost.
c.	variable cost.
d.	fixed cost.
e.	opportunity cost.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   SA

 

137. A firm estimates that when output is 10, its total costs are $900. It also finds that when output is 11, its total costs are $920. The marginal cost of the eleventh unit of output is:

a.	$1.
b.	$20.
c.	$90.
d.	$900.
e.	$920.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Marginal cost

TYP:   SA

 

Exhibit 6-6  Total cost curves

 

 

138. In Exhibit 6-6, the total fixed cost is:

a.	0.
b.	1,000.
c.	3,000.
d.	5,000.
e.	6,000.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Total fixed cost

TYP:   SA

 

139. In Exhibit 6-6, the total cost of producing 6,000 units of output is:

a.	1,000.
b.	3,000.
c.	5,000.
d.	6,000.
e.	8,000.

 

 

ANS:  E                    PTS:   1                    DIF:    E                    TOP:   Total cost

TYP:   RE

 

Exhibit 6-7  Cost schedule for a firm

 

Quantity	Total Cost	Marginal Cost
0	$   200
1	900
2		$900
3	3,000

 

 

140. In Exhibit 6-7, by filling in the blanks it can be determined that the fixed costs are

a.	0.
b.	200.
c.	900.
d.	1,000.
e.	3,000.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Total fixed cost

TYP:   SA

 

141. In Exhibit 6-7, by filling in the blanks it can be determined that the marginal cost of the first unit of output is:

a.	200.
b.	700.
c.	900.
d.	1,000.
e.	3,000.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   SA

 

142. In Exhibit 6-7, by filling in the blanks it can be determined that the total cost of the second unit of output is:

a.	0.
b.	700.
c.	1,000.
d.	1,200.
e.	1,800.

 

 

ANS:  E                    PTS:   1                    DIF:    M                   TOP:   Total cost

TYP:   SA

 

143. In Exhibit 6-7, by filling in the blanks, it can be determined that the marginal cost of the third unit of output is:

a.	0.
b.	200.
c.	700.
d.	1,200.
e.	2,000.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   SA

 

Exhibit 6-8  Costs schedules for producing pizza

 

Pizzas	Fixed Cost	Variable Cost	Total Cost	Marginal Cost
0	$	$	$	$
1		5
2		13
3				10
4	100		140
5				20
6		85
7			215

 

 

144. By filling in the blanks in Exhibit 6-8, the total cost of producing zero pizzas is shown to be equal to:

a.	zero.
b.	$100.
c.	$5.
d.	$105.
e.	$95.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Total cost

TYP:   SA

 

145. By filling in the blanks in Exhibit 6-8, the total cost of producing 3 pizzas is shown to be equal to:

a.	$100.
b.	$105.
c.	$113.
d.	$123.
e.	$23.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Total cost

TYP:   SA

 

146. By filling in the blanks in Exhibit 6-8, the total cost of producing 5 pizzas is shown to be equal to:

a.	$100.
b.	$105.
c.	$113.
d.	$123.
e.	$160.

 

 

ANS:  E                    PTS:   1                    DIF:    D                    TOP:   Total cost

TYP:   CA

 

147. By filling in the blanks in Exhibit 6-8, the variable cost of producing 4 pizzas is shown to be equal to:

a.	$100.
b.	$40.
c.	$60.
d.	$85.
e.	$185.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Total variable cost

TYP:   CA

 

148. Which of the following is true about average fixed cost?

a.	Average fixed cost has a U-shape, and marginal cost crosses average fixed cost at its minimum point.
b.	Average fixed cost does not vary as output increases.
c.	Average fixed cost is the difference between marginal cost and average total cost.
d.	Average fixed cost is total fixed cost divided by the quantity of output produced, and it declines steadily as output increases.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Total fixed cost

TYP:   CA

 

149. By filling in the blanks in Exhibit 6-8, the fixed cost of producing 6 pizzas is shown to be equal to:

a.	$100.
b.	$150.
c.	$200.
d.	$185.
e.	$85.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Total fixed cost

TYP:   SA

 

150. By filling in the blanks in Exhibit 6-8, the average variable cost of producing 4 pizzas is shown to be equal to:

a.	$10.
b.	$15.
c.	$20.
d.	$40.
e.	$85.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Average variable cost

TYP:   SA

 

151. By filling in the blanks in Exhibit 6-8, the average total cost of producing 5 pizzas is shown to be equal to:

a.	$12.
b.	$15.
c.	$32.
d.	$85.
e.	$160.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Average total cost

TYP:   CA

 

152. By filling in the blanks in Exhibit 6-8, the marginal cost of the fourth pizza is shown to be equal to:

a.	$10.
b.	$15.
c.	$17.
d.	$23.
e.	$40.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Marginal cost

TYP:   CA

 

153. By filling in the blanks in Exhibit 6-8, the marginal cost of the sixth pizza is shown to be equal to:

a.	$10.
b.	$15.
c.	$20.
d.	$25.
e.	$85.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Marginal cost

TYP:   CA

 

Exhibit 6-9  Cost schedule for firm X

 

Output Quantity	Total Fixed Cost	Total Variable Cost
0	$100	$    0
1	100	50
2	100	84
3	100	108
4	100	127
5	100	150

 

 

154. As shown in Exhibit 6-9, the total cost of producing 4 units is:

a.	zero.
b.	$227.
c.	$250.
d.	$100.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Total cost

TYP:   SA

 

155. As shown in Exhibit 6-9, the total cost of producing 5 units is:

a.	zero.
b.	$227.
c.	$250.
d.	$100.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Total cost

TYP:   SA

 

156. As shown in Exhibit 6-9, the marginal cost of producing the third unit is:

a.	$50.
b.	$16.
c.	$24.
d.	$23.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Marginal cost

TYP:   SA

 

Exhibit 6-10  Short-run cost schedule for book publisher’s hourly production

 

Total Output	Total Variable Cost	Total Cost
0 cases of books	$    0	$200
1	100	300
2	150	350
3	250	450
4	450	650

 

 

157. In Exhibit 6-10, the publisher’s fixed cost is equal to:

a.	$50.
b.	$100.
c.	$200.
d.	$300.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Total fixed cost

TYP:   SA

 

158. In Exhibit 6-10, the average variable cost of producing 2 cases of books is:

a.	$50 per case.
b.	$75 per case.
c.	$100 per case.
d.	$150 per case.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Average variable cost

TYP:   SA

 

159. In Exhibit 6-10, the marginal cost of increasing production from 2 to 3 cases of books is:

a.	$100.
b.	$150.
c.	$450.
d.	$800.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   SA

 

Exhibit 6-11  Short-run cost curves schedule for pizzeria’s hourly production

 

Total Product	Total Variable Cost	Total Cost
0 pizzas	$    0	$  20
10	50	70
20	80	100
30	130	150
40	230	250

 

 

160. In Exhibit 6-11, the pizzeria’s fixed cost is equal to:

a.	$20.
b.	$30.
c.	$50.
d.	$70.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Total fixed cost

TYP:   SA

 

161. In Exhibit 6-11, the average total cost or producing 40 pizzas per hour is equal to:

a.	$5 per pizza.
b.	$5.75 per pizza.
c.	$6.25 per pizza.
d.	$10 per pizza.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Average total cost

TYP:   SA

 

162. In Exhibit 6-11, what is the marginal cost of increasing production from 10 to 20 pizzas per hour?

a.	$2 per pizza.
b.	$3 per pizza.
c.	$4 per pizza.
d.	$5 per pizza.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   SA

 

Exhibit 6-12  Cost schedule for producing pizza

 

Pizzas	Fixed Cost	Variable Cost	Total Cost
0	$	$	$
1			48
2		17
3		27
4			78
5	40
6		64
7		80

 

 

163. By filling in the blanks in Exhibit 6-12, the AFC of 4 pizzas is shown to be equal to:

a.	$10.
b.	$9.50.
c.	$19.50.
d.	$40.
e.	$78.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Average fixed cost

TYP:   SA

 

164. By filling in the blanks in Exhibit 6-12, the AFC of 3 pizzas is shown to be equal to:

a.	$10.
b.	$13.33.
c.	$9.
d.	$22.33.
e.	$40.

 

 

ANS:  B                    PTS:   1                    DIF:    D                    TOP:   Average fixed cost

TYP:   CA

 

165. By filling in the blanks in Exhibit 6-12, the AVC of 4 pizzas is shown to be equal to:

a.	$10.
b.	$9.50.
c.	$19.50.
d.	$40.
e.	$78.

 

 

ANS:  B                    PTS:   1                    DIF:    D                    TOP:   Average variable cost

TYP:   CA

 

166. By filling in the blanks in Exhibit 6-12, the AVC of 3 pizzas is shown to be equal to:

a.	$10.
b.	$13.33.
c.	$9.
d.	$22.33.
e.	$40.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Average variable cost

TYP:   CA

 

167. By filling in the blanks in Exhibit 6-12, the ATC of 3 pizzas is shown to be equal to:

a.	$10.
b.	$13.33.
c.	$9.
d.	$22.33.
e.	$40.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Average total cost

TYP:   CA

 

168. By filling in the blanks in Exhibit 6-12, the ATC of 4 pizzas is shown to be equal to:

a.	$10.
b.	$9.50.
c.	$19.50.
d.	$40.
e.	$78.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Average total cost

TYP:   SA

 

169. By filling in the blanks in Exhibit 6-12, the marginal cost of the fourth pizza is shown to be equal to:

a.	$10.
b.	$11.
c.	$12.
d.	$13.
e.	$14.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   SA

 

170. By filling in the blanks in Exhibit 6-12, the marginal cost of the third pizza is shown to be equal to:

a.	$10.
b.	$11.
c.	$12.
d.	$13.
e.	$14.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   SA

 

Exhibit 6-13  Cost curves

 

 

171. In Exhibit 6-13, AFC is shown by the graph labeled:

a.	I.
b.	II.
c.	III.
d.	IV.
e.	V.

 

 

ANS:  A                    PTS:   1                    DIF:    D                    TOP:   Average fixed cost

TYP:   CA

 

172. In Exhibit 13, TFC is shown by the graph labeled:

a.	I.
b.	II.
c.	III.
d.	IV.
e.	V.

 

 

ANS:  B                    PTS:   1                    DIF:    D                    TOP:   Total fixed cost

TYP:   CA

 

173. In Exhibit 6-13, ATC is shown by the graph labeled:

a.	I.
b.	II.
c.	III.
d.	IV.
e.	V.

 

 

ANS:  E                    PTS:   1                    DIF:    M                   TOP:   Average total cost

TYP:   SA

 

174. Which of the following statements is true?

a.	The law of diminishing returns states that beyond some point the marginal product of a variable resource continues to rise.
b.	The marginal product is the change in total output by adding one additional unit of a fixed input.
c.	Fixed costs are costs which vary with the output level.
d.	When marginal productivity of a variable input is falling then marginal costs of production must be rising.
e.	When marginal cost is below average cost, average cost rises; when marginal cost is above average cost, average cost falls.

 

 

ANS:  D                    PTS:   1                    DIF:    D

TOP:   Marginal product-marginal cost       TYP:   CA

 

175. Which of the following is true at the point where diminishing returns set in?

a.	Both marginal product and marginal cost are at a maximum.
b.	Both marginal product and marginal cost are at a minimum.
c.	Marginal product is at a maximum and marginal cost at a minimum.
d.	Marginal product is at a minimum and marginal cost at a maximum.

 

 

ANS:  C                    PTS:   1                    DIF:    D

TOP:   Marginal product-marginal cost       TYP:   CA

 

176. In the long run, total fixed cost will:

a.	remain constant.
b.	increase.
c.	decrease.
d.	not exist by definition.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Long-run average cost curve

TYP:   RE

 

177. For a typical firm, the long-run average total cost curve:

a.	is tangent to the minimum point of each possible short-run average total cost curves.
b.	is tangent to each possible short-run average total cost curve at one point.
c.	intersects each possible short-run average total cost curve at two points.
d.	passes through the minimum points of all possible short-run average total cost curves.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Long-run average cost curve

TYP:   RE

 

178. Each potential short-run average total cost curve is tangent to the long-run average cost curve at:

a.	the level of output that minimizes short-run average total cost.
b.	the minimum point of the average total cost curve.
c.	the minimum point of the long-run average cost curve.
d.	a single point on the short-run average total cost curve.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Long-run average cost curve

TYP:   CA

 

179. When the curve that envelops the series of possible short-run average total cost curves is horizontal, this means that there are:

a.	economies of scale.
b.	diseconomies of scale.
c.	constant returns to scale.
d.	diminishing returns.
e.	some fixed factors of production.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Long-run average cost curve

TYP:   SA

 

180. If the minimum points of all the possible short-run average total cost curves become successively lower as quantity of output increases, then:

a.	the firm should try to produce less output.
b.	total fixed costs are constant along the LRAC curve.
c.	there are economies of scale.
d.	the firm is probably having significant management problems.
e.	when output is doubled, total costs are doubled.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Long-run average cost curve

TYP:   CA

 

181. A downward-sloping portion of a long-run average total cost curve is the result of:

a.	economies of scale.
b.	diseconomies of scale.
c.	diminishing returns.
d.	the existence of fixed resources.

 

 

ANS:  A                    PTS:   1                    DIF:    D                    TOP:   Economies of scale

TYP:   CA

 

182. In the long run, firms in many industries often experience a falling average total cost curve as a result of:

a.	gains through trade.
b.	increasing marginal returns.
c.	economies of scale.
d.	lower fixed costs.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Economies of scale

TYP:   SA

 

183. A large aircraft manufacturer, like Boeing, may have a cost advantage over a new smaller manufacturer because of:

a.	diseconomies of scale.
b.	economies of scale.
c.	diminishing returns to a fixed factor of production.
d.	the principal agent problem is generally less severe for larger firms.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Economies of scale

TYP:   SA

 

184. Long-run economies of scale exist when the long-run average cost curve:

a.	rises.
b.	remains constant.
c.	falls.
d.	does not exist.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Economies of scale

TYP:   RE

 

185. Long-run economies of scale exist over the range of output for which the long-run average cost curve is:

a.	constant.
b.	falling.
c.	rising.
d.	does not exist.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Economies of scale

TYP:   RE

 

186. 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.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Economies of scale

TYP:   RE

 

187. Economies of scale imply that within some range one can increase the size of operation and:

a.	total cost will decrease.
b.	fixed cost will decrease.
c.	average total cost will decrease.
d.	average total cost will increase.
e.	average variable cost will decrease.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Economies of scale

TYP:   SA

 

188. The decreasing portion of a firm’s long run average cost curve is attributable to:

a.	diminishing returns to scale.
b.	increasing marginal cost.
c.	economies of scale.
d.	diseconomies of scale.
e.	constant returns to scale.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Economies of scale

TYP:   CA

 

189. Economies of scale can be caused by all of the following except:

a.	price discounts for large scale purchases.
b.	labor specialization.
c.	use of more productive equipment.
d.	increases in the firm’s average total cost.
e.	more cost-efficient methods of marketing.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Economies of scale

TYP:   CA

 

190. Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys their goods in large quantities and therefore at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices and free parking. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that:

a.	consumers are boycotting local retailers.
b.	Wal-Mart engages in illegal acts of monopolization.
c.	there are diseconomies of scale in retail sales.
d.	there are economies of scale in retail sales.
e.	Wal-Mart is managed by ruthless business people.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Economies of scale

TYP:   CA

 

191. Which of the following is not a source of economies of scale?

a.	Division and specialization of labor.
b.	Increase in output.
c.	More efficient use of capital.
d.	All of the above.
e.	Centralized marketing.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Economies of scale

TYP:   RE

 

192. A car leasing company that expands its size by buying its competitors may run the risk of increasing production cost per unit due to:

a.	diseconomies of scale.
b.	economies of scale.
c.	diminishing returns.
d.	greater use of large-volume purchases.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Diseconomies of scale

TYP:   SA

 

193. In the long run, a firm might experience rising per-unit cost due to:

a.	economies of scale.
b.	diseconomies of scale.
c.	the law of supply.
d.	the law of diminishing marginal returns.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Diseconomies of scale

TYP:   RE

 

194. Diseconomies of scale exist over the range of output for which the long-run average cost curve is:

a.	constant.
b.	falling.
c.	rising.
d.	subject to diminishing returns.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Diseconomies of scale

TYP:   CA

 

195. Diseconomies of scale exist over the range of output for which the long-run average cost curve is:

a.	constant.
b.	falling.
c.	rising.
d.	none of the above.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Diseconomies of scale

TYP:   RE

 

196. If a firm enlarges its factory size and realizes higher average (per unit) costs of production then:

a.	it has experienced economies of scale.
b.	it has experienced diseconomies of scale.
c.	it has experienced constant returns to scale.
d.	the long-run average cost curve slopes downward.
e.	the long-run average cost curve shifts upward.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Diseconomies of scale

TYP:   RE

 

197. The primary source of scale diseconomies appears to be:

a.	a firm’s inability to acquire quality resources.
b.	too little demand for the firm’s product.
c.	consumers who resist dealing with large firms.
d.	division of labor.
e.	the organizational difficulties of managing an ever larger enterprise.

 

 

ANS:  E                    PTS:   1                    DIF:    M                   TOP:   Diseconomies of scale

TYP:   RE

 

198. Diseconomies of scale exist for all of the following reasons except:

a.	bureaucratic inefficiencies.
b.	management problems.
c.	failures in information flows.
d.	firm size is too small.
e.	organizational problems.

 

 

ANS:  D                    PTS:   1                    DIF:    M                   TOP:   Diseconomies of scale

TYP:   RE

 

199. Suppose there is a technology to produce Grendels such that there are diseconomies of scale after the first unit is produced. There are both fixed (a physical plant called a lair) and variable (food that grows in lairs) costs of production. Which statement is true?

a.	b and d.
b.	Producing multiple units increases the average fixed cost.
c.	There will be no more than one firm in this industry.
d.	It is cheaper to make five Grendels by buying five lairs and producing one Grendel in each lair than it is to produce five Grendels in one lair.
e.	This is an impossible situation.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Diseconomies of scale

TYP:   CA

 

200. If a firm’s long-run average cost curve is rising, it is experiencing:

a.	a constant return to scale.
b.	economies of scale.
c.	diseconomies of scale.
d.	none of the above.

 

 

ANS:  C                    PTS:   1                    DIF:    D                    TOP:   Diseconomies of scale

TYP:   RE

 

201. Constant returns to scale exist over the range of output for which the long-run average cost is:

a.	neither rising or falling.
b.	falling.
c.	rising.
d.	none of the above.

 

 

ANS:  D                    PTS:   1                    DIF:    E                    TOP:   Constant returns to scale

TYP:   RE

 

202. Constant returns to scale cause the long-run average cost curve to be:

a.	horizontal.
b.	vertical.
c.	upward-sloping.
d.	downward-sloping.

 

 

ANS:  A                    PTS:   1                    DIF:    E                    TOP:   Constant returns to scale

TYP:   RE

 

Exhibit 6-14  Cost curves

 

 

203. In Exhibit 6-14, economies of scale only exist for output levels up to:

a.	1,000.
b.	2,000.
c.	3,000.
d.	4,000.
e.	greater than 4,000.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Economies of scale

TYP:   SA

 

204. In Exhibit 6-14, constant returns to scale only exist for output levels between:

a.	0 and 1,000.
b.	1,000 and 2,000.
c.	2,000 and 3,000.
d.	3,000 and 4,000.
e.	4,000 and infinity.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Constant returns to scale

TYP:   SA

 

205. In Exhibit 6-14, a firm finds that it is experiencing numerous managerial and information problems. The position of its short- and long-run average total cost curves suggest that it is operating at a production level:

a.	between 0 and 1,000.
b.	between 1,000 and 2,000.
c.	between 2,000 and 3,000.
d.	between 3,000 and 4,000.
e.	where it should shut down immediately.

 

 

ANS:  D                    PTS:   1                    DIF:    D                    TOP:   Diseconomies of scale

TYP:   CA

 

206. In Exhibit 6-14, the U-shaped LRAC curve indicates which of the following as quantity increases from 0 to 4,000?

a.	Diseconomies of scale; constant returns to scale; economies of scale.
b.	Constant returns to scale; economies of scale; diseconomies of scale.
c.	Economies of scale; constant returns to scale; diseconomies of scale.
d.	Diseconomies of scale; economies of scale; constant returns to scale.
e.	Economies of scale; diseconomies of scale; constant returns to scale.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Diseconomies of scale

TYP:   SA

 

Exhibit 6-15  Long-run average cost

 

 

207. In Exhibit 6-15, short-run average total cost, short-run marginal cost, and long-run average cost are all equal at which level of output per week?

a.	500 units.
b.	1,000 units.
c.	1,500 units.
d.	2,000 units.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Long-run average cost

TYP:   SA

 

208. If the firm represented in Exhibit 6-15 is operating with a plant whose size corresponds to short-run average total cost curve A, the level of output that would minimize its short-run average total cost is:

a.	500 units per week.
b.	1,000 units per week.
c.	1,500 units per week.
d.	2,000 units per week.

 

 

ANS:  A                    PTS:   1                    DIF:    D                    TOP:   Long-run average cost

TYP:   SA

 

209. Given the short-run average total cost curves in Exhibit 6-15, what level of output per week minimizes average total cost?

a.	500 units.
b.	1,000 units.
c.	1,500 units.
d.	2,000 units.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Economies of scale

TYP:   SA

 

210. In Exhibit 6-15, economies of scale exist up to:

a.	500 units of output per week.
b.	1,000 units of output per week.
c.	1,500 units of output.
d.	2,000 units of output.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Economies of scale

TYP:   SA

 

211. In Exhibit 6-15, diseconomies of scale are shown in the range of:

a.	0 to 500 units per week.
b.	500 to 1,000 units per week.
c.	1,000 to 2,000 units per week.
d.	zero per week.

 

 

ANS:  C                    PTS:   1                    DIF:    E                    TOP:   Diseconomies of scale

TYP:   SA

 

Exhibit 6-16  Long-run average cost curves

 

 

212. In Exhibit 6-16, which firm’s long-run average cost curve experiences constant returns to scale?

a.	Firm A.
b.	Firm B.
c.	Firm C.
d.	Firms A and C.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Economies of scale

TYP:   SA

 

213. Which firm in Exhibit 6-16 displays a long-run average cost curve with diseconomies beginning at 2,000 units of output per week?

a.	Firm A.
b.	Firm B.
c.	Firm C.
d.	Firms A and C.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Diseconomies of scale

TYP:   SA

 

214. Which firm in Exhibit 6-16 displays a long-run average cost curve with economies of scale throughout the range of output shown?

a.	Firm A.
b.	Firm B.
c.	Firm C.
d.	Firms A and B.

 

 

ANS:  C                    PTS:   1                    DIF:    M                   TOP:   Constant returns to scale

TYP:   SA

 

Exhibit 6-17  Long-run average cost curve

 

 

215. In Exhibit 6-17, short-run average total cost, short-run marginal cost, and long-run average cost are all equal at which level of output per week?

a.	Q1 units.
b.	Q2 units.
c.	Q3 units.
d.	Q4 units.

 

 

ANS:  B                    PTS:   1                    DIF:    D                    TOP:   Long-run average cost

TYP:   CA

 

216. If the firm represented in Exhibit 6-17 is operating with a plant whose size corresponds to short-run average total cost curve A, the level of output that would minimize its short-run average total cost is:

a.	Q1 units per week.
b.	Q2 units per week.
c.	Q3 units per week.
d.	Q4 units per week.

 

 

ANS:  A                    PTS:   1                    DIF:    M                   TOP:   Long-run average cost

TYP:   CA

 

217. Given the short-run average total cost curves in Exhibit 6-17, what level of output per week minimizes average total cost?

a.	Q1 units.
b.	Q2 units.
c.	Q3 units.
d.	Q4 units.

 

 

ANS:  B                    PTS:   1                    DIF:    M                   TOP:   Economies of scale

TYP:   SA

 

218. In Exhibit 6-17, economies of scale exist up to:

a.	Q1 units of output per week.
b.	Q2 units of output per week.
c.	Q3 units of output.
d.	Q4 units of output.

 

 

ANS:  B                    PTS:   1                    DIF:    E                    TOP:   Economies of scale

TYP:   SA

 

TRUE/FALSE

 

1. Economic profit equals accounting profit minus implicit costs.

 

ANS:  T                    PTS:   1                    DIF:    E                    TOP:   Economic profit

TYP:   RE

 

2. If economic profit is zero, then a normal profit is earned.

 

ANS:  T                    PTS:   1                    DIF:    E                    TOP:   Economic profit

TYP:   RE

 

3. Suppose a firm earns an accounting profit. This means the firm also earns a positive economic profit.

 

ANS:  F                    PTS:   1                    DIF:    E                    TOP:   Economic profit

TYP:   RE

 

4. Economic profit equals accounting profit minus implicit costs.

 

ANS:  T                    PTS:   1                    DIF:    E                    TOP:   Economic profit

TYP:   RE

 

5. Suppose Joe Rich owns his own company and does not pay himself a salary. This means the salary he could have earned in alternative employment is considered an implicit cost for the firm.

 

ANS:  T                    PTS:   1                    DIF:    E                    TOP:   Economic profit

TYP:   RE

 

6. If marginal product is at a maximum, then marginal cost is at a minimum.

 

ANS:  T                    PTS:   1                    DIF:    D                    TOP:   Variable input

TYP:   CA

 

7. In the short-run, total fixed costs always exceed total variable costs.

 

ANS:  F                    PTS:   1                    DIF:    D                    TOP:   Short run

TYP:   CA

 

8. In the long run, all costs are fixed costs.

 

ANS:  F                    PTS:   1                    DIF:    E                    TOP:   Long run

TYP:   RE

 

9. All of a firm’s inputs are considered to be variable in the long run.

 

ANS:  T                    PTS:   1                    DIF:    E                    TOP:   Long run

TYP:   RE

 

10. In the long run, all costs are considered variable.

 

ANS:  T                    PTS:   1                    DIF:    E                    TOP:   Long run

TYP:   RE

 

11. A firm’s marginal product curve slopes downward throughout its length.

 

ANS:  F                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   RE

 

12. The marginal product curve rises when the marginal cost curve rises.

 

ANS:  F                    PTS:   1                    DIF:    M                   TOP:   Marginal product

TYP:   RE

 

13. For most firms, the costs of energy and raw materials will be total fixed costs.

 

ANS:  F                    PTS:   1                    DIF:    E                    TOP:   Total fixed cost

TYP:   RE

 

14. A firm’s average fixed cost curve can never be U-shaped, even if its other average cost curves are U-shaped.

 

ANS:  T                    PTS:   1                    DIF:    D                    TOP:   Average fixed cost

TYP:   CA

 

15. The vertical distance between the average total cost curve and the average variable cost curve at any given output level equals average fixed cost at that particular output level.

 

ANS:  T                    PTS:   1                    DIF:    M                   TOP:   Average fixed cost

TYP:   SA

 

16. If a firm’s average variable cost curve is rising, its marginal cost must exceed its average variable cost.

 

ANS:  T                    PTS:   1                    DIF:    D                    TOP:   Average variable cost

TYP:   CA

 

17. Marginal cost is calculated by dividing the change in total cost by the change in total output.

 

ANS:  T                    PTS:   1                    DIF:    E                    TOP:   Marginal cost

TYP:   RE

 

18. If the total variable cost of producing 5 units of output is $10 and the total variable cost of producing 6 units is $15, the marginal cost of producing a sixth unit is $5.

 

ANS:  T                    PTS:   1                    DIF:    M                   TOP:   Marginal cost

TYP:   CA

 

19. The marginal product curve rises when the marginal cost curve rises.

 

ANS:  F                    PTS:   1                    DIF:    D

TOP:   Marginal product-marginal cost       TYP:   CA

 

20. The law of diminishing returns causes a firm’s short-run marginal cost curve to be s-shaped.

 

ANS:  F                    PTS:   1                    DIF:    D

TOP:   Marginal product-marginal cost       TYP:   CA

 

21. If a firm’s marginal cost exceeds its average cost, then its average cost must be rising.

 

ANS:  T                    PTS:   1                    DIF:    M

TOP:   Marginal product-marginal cost       TYP:   SA

 

22. Each short-run average total cost curve is tangent at its lowest point to the long-run average cost curve.

 

ANS:  F                    PTS:   1                    DIF:    D                    TOP:   Long-run average cost curve

TYP:   CA

 

23. Economies of scale exist over all ranges of output for which short-run average total cost exceeds long-run average cost.

 

ANS:  F                    PTS:   1                    DIF:    M                   TOP:   Economies of scale

TYP:   CA

 

24. If a firm increases output and its average total cost rises, then the firm is experiencing economies of scale.

 

ANS:  F                    PTS:   1                    DIF:    D                    TOP:   Economies of scale

TYP:   CA

 

25. The primary cause of diseconomies of scale is scarcity of machinery and capital.

 

ANS:  F                    PTS:   1                    DIF:    M                   TOP:   Diseconomies of scale

TYP:   RE

 

26. Diseconomies of scale cause the short-run marginal cost curve to slope upwards.

 

ANS:  F                    PTS:   1                    DIF:    D                    TOP:   Diseconomies of scale

TYP:   CA

 

27. Diseconomies of scale occur when high levels of output are produced in a short period of time.

 

ANS:  F                    PTS:   1                    DIF:    D                    TOP:   Diseconomies of scale

TYP:   CA

 

ESSAY

 

1. What is the difference between economic and accounting profit? Why is a distinction between them important?

 

ANS:

An economic profit includes implicit costs and accounting profit does not. A distinction between them is important because an accounting profit is a relative amount of money. Some amount of accounting profit may or may not be a sufficient amount of profit to keep an entrepreneur in his/her present line of business. Whereas an economic profit, if it is earned, is always good news because it is an amount of profit above the entrepreneur’s opportunity cost.

 

PTS:   1

 

2. Distinguish the short run form the long run. Generally, what causes costs of production to vary with output in the short run? What generally causes costs of production to vary in the long run?

 

ANS:

The short run is any amount of time in which at least one resource is fixed. In the short run there are some fixed costs. In the long run, nothing is fixed. There are no fixed costs in the long run. Costs of production vary with output in the short run because of increasing and diminishing returns. Costs of production vary with output in the long run because of economies and diseconomies of scale.

 

PTS:   1

 

3. What are the seven short run cost calculations? How are they related?

 

ANS:

The seven short run cost calculations are: TC, TFC, TVC, MC, ATC, AFC, and AVC. Note that TC = TFC + TVC; ATC = AFC + AVC. MC = (Change in TC)/(Change in Q) = (Change in TVC)/(Change in Q); ATC = TC/Q; AVC = TVC/Q; AFC = TFC/Q.

 

PTS:   1

 

4. Distinguish economies and diseconomies of scale. How can the extent to which economies and diseconomies of scale explain the size and number of real world firms in an industry?

 

ANS:

Economies of scale exist when a firm increases its scale of operations and lower per unit costs of production are experienced. Diseconomies of scale exist when a firm increases its scale of operations and higher per unit costs of production are experienced. If economies of scale are extensive we would expect to find a small number of very large firms operating within the industry. Conversely, if diseconomies of scale set in relatively early, we would expect to find a large number of relatively small firms operating within the industry.

 

PTS:   1