Deck 3: Firms in the Marketplace

Question 1

For a widget manufacturer, the quantity of steel that the company needs to purchase changes in proportion to the number of widgets produced. In other words, the price paid for steel is a(n) _____ cost for the widget ?rm.

A) implicit
B) variable
C) ?xed
D) marginal

Answer 1

variable

Question 2

A ?rm's output increases from 1760 units to 1890 units when labour employed increases from 147 to 148 workers. The marginal product of labour is _____ units.

A) 1890
B) 1130
C) 130
D) 189

Answer 2

130

Question 3

When the marginal product of a factor of production is falling, it follows that _____.

A) the marginal cost of the factor is rising
B) the average total cost is constant
C) the average ?xed cost is rising
D) the average variable cost is constant

Answer 3

the marginal cost of the factor is rising

Question 4

Which one of the following statements is correct?

A) Average total cost equals total ?xed cost divided by total output.
B) Average ?xed cost equals total cost divided by total output.
C) Average variable cost equals the cost incurred in producing an additional unit of output.
D) Average total cost equals total costs divided by total output.

Question 5

If the total output of the ?rm is increasing in the short run, this means that _____.

A) the marginal product of the variable inputs is positive
B) the marginal cost of the variable inputs is zero
C) the ?xed cost of production is equal to zero
D) the total revenue earned by the ?rm is falling

Question 6

As long as the average variable cost of production is falling, _____.

A) the marginal cost will also be falling
B) the average ?xed cost will be constant
C) marginal cost will be less than average variable cost
D) the average total cost will be equal to zero

Question 7

A small ?rm employs only 5 workers. 4 workers produce a total of 154 units of output. With the addition of the 5th worker, output increases by 50 units. What is the total output of the ?rm?

A) 50 units.
B) 204 units.
C) 104 units.
D) 100 units.

Question 8

A ?rm's marginal cost of production is _____.

A) the total cost of production divided by total output
B) the cost of producing one additional unit of output
C) the cost incurred by the ?rm even if no output is produced
D) constant at all levels of output

Question 9

A variable cost of production is one which _____.

A) does not vary with output and revenue
B) is ?xed in the short run
C) is ?xed in the long run
D) varies with output and revenue

Question 10

When the quantity of labor is increased substantially without increasing the amount of capital, the ?rm experiences _____.

A) economies of scope
B) constant returns
C) diminishing returns
D) economies of scale

Question 11

The marginal cost curve cuts the average cost curve at the point where the average cost is _____.

A) falling
B) rising
C) at its maximum
D) at its minimum

Question 12

The law of diminishing returns shows that, in the short run, _____.

A) productivity and costs change at the same rate
B) productivity changes in proportion to changes in ?xed costs
C) as the marginal product of labour falls, variable costs rise
D) changes in productivity do not affect changes in costs

Question 13

If a ?rm incurs a total cost of £874 when it produces 10 units of output and a total cost of £950 when it produces 11 units of output, its marginal cost of production is _____.

A) £182
B) £950
C) £54
D) £76

Question 14

In the short run, the ?xed costs of production _____.

A) increase as output increases
B) decrease as output increases
C) do not change with the output level
D) are equal to 0 when no output is produced

Question 15

Suppose that the amount of capital and plant size are ?xed for a ?rm. With 10 workers, it can produce 180 units of output and with 11 workers, the output produced is 190 units. Which of the following statements is true?

A) The average product of labour when 10 workers are hired is 10 units.
B) When the 11th worker is hired, average product of labour is greater than marginal product.
C) The additional unit of labour hired by the ?rm exhibits increasing returns.
D) The marginal product of the 11th worker is 18 units.

Question 16

Which of the following statements best describes a ?rm's costs at a zero level of output?

A) Total variable costs are zero but total ?xed costs are positive, so total costs are positive.
B) The ?rm's variable costs are zero but marginal cost is positive.
C) Total ?xed costs are zero but both marginal cost and average cost are increasing.
D) Both ?xed costs and variable costs are zero.

Question 17

If the marginal product of labour starts falling, this means that _____.

A) the ?rm is operating at optimal capacity
B) the ?rm's variable costs are too high
C) task specialization is no longer economically viable
D) total output is increasing at an increasing rate

Question 18

For a football club, the bulk of a professional footballer's wages is not linked directly to the creation of output, namely, football games. Even if revenues drop, clubs still have to honour their contractual obligations with their players. This means that, for the club, the footballers' salary is a(n) _____ cost.

A) variable
B) ?xed
C) historical
D) deferred

Question 19

Which one of the following costs will remain unchanged as more output is produced by a ?rm?

A) The interest paid on money borrowed by the ?rm.
B) The total amount of wages paid for labour.
C) The electricity used to operate the ?rm's machines.
D) The freight charges for procurement of raw materials.

Question 20

An example of a ?xed cost of producing a good is the _____.

A) cost of transporting the ?nished goods
B) rent paid for the o?ce building
C) cost of raw materials
D) wage paid to part-time workers

Question 21

If supply is perfectly elastic, the value of the price elasticity of supply will be equal to _____.

A) 1
B) ?
C) 0
D) 0.5

Question 22

The shape of the long-run average total cost curve be best explained by _____.

A) the marginal cost of production
B) the relationship between ?xed and variable inputs
C) economies of scale
D) diminishing returns

Question 23

For a ?rm that faces diminishing returns, the short-run marginal cost curve is _____.

A) horizontal
B) U-shaped
C) vertical
D) downward sloping at all levels of output

Question 24

What is meant by minimum e?cient scale?

A) The minimum e?cient scale is the size of operation with the lowest average cost.
B) The minimum e?cient scale is the minimum quantity that the ?rm can produce given the
C) The minimum e?cient scale is the scale of operation of the smallest ?rm in the industry.
D) The minimum e?cient scale identi?es the method by which a ?rm can produce a given

Question 25

Suppose that wood is the primary variable input in the production of furniture. If the price of wood increases, which of the following is likely to happen?

A) The marginal cost curve will shift upward but the average total cost curve will not shift.
B) The average ?xed cost curve will shift upward but the marginal cost curve will not shift.
C) The marginal and average ?xed cost curves will shift upward, but the average total cost curve will not shift.
D) The average total cost curve will shift upward, but the average ?xed cost curve will not

Question 26

Assume that a ?rm is currently operating at minimum e?cient scale and expands its scale of operations and workforce substantially. Which of the following is most likely to happen?

A) The ?rm's average total cost is likely to remain unchanged.
B) The ?rm may experience diseconomies of scale.
C) The ?rm may become the cost leader in the market.
D) The ?rm is likely to experience productivity gains.

Question 27

In the short run, the supply of land cannot be increased even if the price of land increases substantially. In other words, the price elasticity of supply for land is equal to _____ in the short run.

A) 0
B) ?
C) 1
D) -1

Question 28

A ?rm is said to be cost e?cient if it produces output at the level where _____.

A) it makes the maximum pro?ts
B) it maximizes sales and revenues
C) its short-run average total cost is minimum
D) its marginal cost of production is minimized

Question 29

The shape of the short-run average cost curve shows that the average cost _____.

A) rises ?rst and then falls as output expands
B) is constant over all levels of output
C) falls ?rst and then rises as output expands
D) is increasing over all levels of output

Question 30

A ?rm that experiences constant returns to scale in the long run over all levels of output will face a _____ long-run average cost curve.

A) horizontal
B) U-shaped
C) vertical
D) downward sloping

Question 31

When is a ?rm's short-run average total cost curve likely to shift up to the right?

A) The acquisition of new machines increases the productivity of labour.
B) Due to a higher attrition rate, the cost of hiring and training labour increases.
C) The ?rm is able to source its raw materials from a cheaper supplier.
D) The ?rm moved production to a new factory building and now pays a higher rent.

Question 32

Which of the following is true of the average ?xed cost for a ?rm?

A) The average ?xed cost initially rises but then falls as output expands.
B) The average ?xed cost is equal to total ?xed cost divided by total output.
C) The average ?xed cost remains constant as output expands.
D) The average ?xed cost is the same as the variable cost when no output is produced.

Question 33

When a ?rm experiences decreasing returns to scale, _____.

A) its long-run average cost curve rises as output expands
B) it should expand its scale of operations to increase production e?ciency
C) an increase in all inputs will increase output proportionately
D) it is on the downward-sloping portion of the long-run average total cost curve

Question 34

The average ?xed cost curve is _____.

A) upward sloping
B) downward sloping
C) horizontal
D) U-shaped

Question 35

The degree to which a ?rm's output is responsive to a change in price is measured by the _____.

A) elasticity of supply
B) marginal cost curve
C) pro?t earned by a ?rm
D) income elasticity of demand

Question 36

If the price of steel, a primary input used in manufacturing automobiles, rises, the supply curve for the automobile industry will _____.

A) shift to the right
B) become vertical
C) become horizontal
D) shift to the left

Question 37

A ?rm should shut down in the short run if the market price of its product doesn't cover its _____ of production.

A) total ?xed cost
B) average total cost
C) average variable cost
D) average ?xed cost

Question 38

When a ?rm's productivity increases, its short-run average total cost curve _____.

A) will not change
B) shifts down to the right
C) becomes steeper
D) becomes parallel to the horizontal axis

Question 39

The ?rm's supply curve is that part of the marginal cost curve which is _____.

A) below the average variable cost curve
B) above the average variable cost curve
C) horizontal at the market price
D) parallel to the average variable cost curve

Question 40

The long-run average cost curve shows _____.

A) the additional cost of producing an extra unit of output
B) the summation of the short-run average total cost curves
C) that the law of diminishing returns operates in the long run
D) the returns to scale at different levels of output

Question 41

What kind of data is used to model an industry's cost curves?

A) The ?scal policy of the government.
B) The ?nancial accounts of the ?rms in the industry.
C) Stock market movements.
D) Currency movements in the foreign exchange market.

Question 42

Compared to budget airlines, premium airlines have higher variable costs because premium airlines _____.

A) allow passengers to book tickets in advance
B) provide extra services like late checking
C) are mostly scheduled airlines
D) cover over more sectors than budget airlines

Question 43

The wages paid to a temporary worker is an example of a _____ cost.

A) ?xed
B) variable
C) capital
D) sunk

Question 44

In the long run, _____ is determined by labour productivity and the output of a ?rm.

A) the average income level of the consumer
B) demand elasticity
C) the consumer's willingness to pay
D) returns to scale

Question 45

Suppose that, for country X, the labour cost per hour has remained the same while unit labour costs have increased over the past ?ve years. Which of the following can be correctly inferred from this information?

A) Country X has a cost advantage compared to other countries.
B) Wages in country X are likely to have been increasing in the past 5 years.
C) Most of the ?rms in country X are operating at constant returns to scale.
D) The quantity of output produced per hour has been falling in the past 5 years.

Question 46

If a ?rm wants to gain a cost advantage in the global marketplace, it must establish its business in a country _____.

A) that has trade restrictions on imports
B) where the minimum wage is relatively high
C) where productivity of labour is high
D) where the population is very low

Question 47

Over the last two decades, the average annualized growth rate of labour productivity in the US has been increasing. This means that _____.

A) the output per employee in the US is increasing
B) the total cost per employee in the US is increasing
C) the cost per hour in the manufacturing sector is increasing
D) the agricultural sector in the US is performing well

Question 48

The heavy discounts offered by budget airlines for tickets that are booked much in advance result in _____.

A) reducing the airline's load factor
B) increasing the airline's ?xed costs
C) reducing revenue yields
D) lower demand for the airline's ?ights

Question 49

Premier football clubs 'sweat their assets' to reduce _____.

A) the risk of injury to their players
B) their ?xed cost per player
C) the number of games played
D) the salaries paid to the best football players

Question 50

The lowest point on the long-run average cost curve represents _____.

A) increasing returns to scale
B) decreasing returns to scale
C) minimum e?cient scale
D) supply elasticity

Question 51

A budget airline can maximize load factor by _____.

A) using popular airports for landing
B) offering gourmet food and drinks onboard
C) issuing electronic tickets
D) providing extras such as late checking and assistance if passengers miss ?ights

Question 52

In the U.S., national and international data on labour costs and productivity is provided by the _____.

A) Executive O?ce of the President
B) Bureau of Labor Statistics
C) New York Stock Exchange
D) Federal Trade Commission

Question 53

Suppose that it costs £10 000 to ?y a jet from London to Amsterdam and the plane contains 100 passengers. If the number of passengers increases to 125, which of the following is likely to be true?

A) The airline's variable cost will fall.
B) The revenue earned by the airline will fall from £1 000 to £1 250.
C) The average ?xed cost per passenger will fall from £100 to £80.
D) The airline's load factor will reduce.

Question 54

Higher output is usually linked to increased overtime payments and greater use of temporary staff. Senior management pay is more likely to stay constant. In other words, _____ can be considered a ?xed component of the total wages paid.

A) the salaries of senior management
B) the number of temporary workers
C) the overtime paid to workers
D) the wages paid to temporary staff

Question 55

What is meant by a product differentiation strategy?

A) A ?rm sells its product at a price below the current market price, even if it makes a loss.
B) A ?rm merges with another company in the same line of business.
C) A ?rm reduces its costs of production by using new production technology
D) A ?rm introduces a new product feature that other products in the market do not have.

Question 56

Airlines face very high ?xed costs. They can lower their per unit costs by _____.

A) using popular airports with higher landing fees
B) pushing for higher volumes
C) providing frills like gyms and bars on the plane
D) ?ying shorter routes

Question 57

_____ are considered variable costs for a scheduled airline.

A) Fuel costs
B) Airport fees
C) Staff salaries
D) Onboard refreshments

Question 58

When a ?rm experiences economies of scale, _____.

A) its marginal cost of production increases with every additional unit of output that is produced
B) its long run average costs decrease as output increases
C) its ?xed cost curve becomes horizontal
D) its output increases at a slower rate than the increase in inputs

Question 59

A ?rm follows a cost leadership strategy by _____.

A) reducing average costs of production
B) increasing the product's visibility in retail outlets
C) targeting a niche market
D) pricing its product at a price above the market price

Question 60

Premier football clubs recover their high ?xed costs by _____.

A) selling television rights to their games at zero price
B) imposing ?nes on players when they do not score goals
C) playing games only in their home stadium
D) increasing the volume of games played

Question 61

The fixed costs of production remain constant in the short run and long run.

Question 62

The long-run average cost curve represents a series of short-run average cost curves.

Question 63

The introduction of a new cost-saving production technology will shift the firm's short-run average cost curve downward at each level of output.

Question 64

In the short run, a profit-maximizing firm will stop production if it cannot recover its average fixed costs.

Question 65

The supply curve depicts a positive relationship between a firm's willingness to supply a product and the price of the product.

Question 66

In task specialization, each worker specializes in one particular task in the production process, becoming an expert in the task and raising overall productivity.

Question 67

The short-run average fixed cost, average variable cost and average total cost curves are U-shaped.

Question 68

A firm experiences diminishing returns to a factor because all factors cannot be increased in the short run.

Question 69

The marginal cost of production is inversely related to the marginal product.

Question 70

The short-run total fixed cost curve is downward sloping.

Question 71

If profits in the textile industry fall, the market supply curve of textiles will move out to the right.

Question 72

The marginal product of labour is the change in the total output produced by hiring an additional unit of labour.

Question 73

For a firm to earn profits in the short run, price must be greater than both the marginal cost and average variable cost.

Question 74

In the short run, all the factors of production are variable.

Question 75

The steeper a firm's supply curve, the greater is its ability to adjust output to changes in prices.

Question 76

As a firm expands its output in the short run, average fixed costs fall at first, but they will eventually rise.

Question 77

In the short run, the marginal cost curve cuts the average variable cost curve at a point where average variable cost is rising.

Question 78

As a firm increases its output in the short run, the vertical distance between average total cost and average variable cost will decrease.

Question 79

A firm that that has significant cost inefficiencies in production will operate at the lowest point on its long-run average total cost curve.

Question 80

The horizontal portion of the long-run average cost curve represents constant returns to scale.