Deck 13: The Costs of Production

Question 1

Average variable cost is equal to the quantity of output divided by the total variable cost.

Answer 1

False

Question 2

Accounting profit and economic profit are two ways to say the same thing.

Answer 2

False

Question 3

Implicit costs that do not require a money outlay are typically ignored by economists.

Answer 3

False

Question 4

When trying to understand the decision making process of different firms, economists assume that people think at the margin.

Question 5

Economists normally assume that the goal of a firm is to maximise revenue.

Question 6

The fact that many decisions are fixed in the short run, but variable in the long run has an impact on the firm's cost curves.

Question 7

The average total cost curve is unaffected by diminishing marginal product.

Question 8

The marginal cost curve bisects the average total cost curve at the minimum point of the average total cost curve.

Question 9

The cost of producing an additional unit of a good is not the same as the average cost of the good.

Question 10

Diminishing marginal product exists when the production function becomes flatter as inputs increase.

Question 11

Costs are a key determinate of a firm's production and pricing decisions.

Question 12

The shape of the total cost curve is unrelated to the shape of the production function.

Question 13

A second or third worker may have a higher marginal product than the first worker in certain circumstances.

Question 14

When economists speak of a firm's costs, they are usually excluding the opportunity costs.

Question 15

If the total cost curve becomes flatter as output increases, then this reveals diminishing marginal product.

Question 16

The short run is defined as the period of time in which all factors of production are fixed.

Question 17

The marginal cost curve can rise even if the average total cost is falling.

Question 18

Variable costs change as the firm alters the quantity of output produced.

Question 19

Even if a firm was to produce nothing, it still incurs some variable costs in the short-run.

Question 20

The cost of capital includes both any interest payments in loans as well as any forgone interest on savings used to finance the business.

Question 21

The amount of money that a firm pays to buy inputs is called:

A) variable cost
B) marginal cost
C) fixed cost
D) total cost

Question 22

Cost of capital can also be seen as implicit costs.

Question 23

Suppose a firm produced 200 units of output, but sold only 150 of the units it produced. The average cost of production for each unit of output produced was $80. Each of the 150 units were sold for a price of $50. The total revenue of this firm would be:

A) $12 000
B) $10 000
C) $7500
D) -$8500

Question 24

The amount of money that a firm receives from the sale of its output is called:

A) total revenue
B) total gross profit
C) total net profit
D) net revenue

Question 25

The marginal product of a firm's workers is revealed by the shape of the marginal cost curve.

Question 26

Opportunity costs are comprised of:

A) explicit costs
B) implicit costs
C) forgone income
D) all of the above

Question 27

In some cases, specialisation allows larger factories to produce goods at a lower average cost than smaller factories.

Question 28

The goal of most firms in the economy is to:

A) maximise output
B) maximise profit
C) obtain the highest price for their product
D) minimise costs

Question 29

Those things that must be forgone to acquire a good are called:

A) competitors
B) substitutes
C) opportunity costs
D) explicit costs

Question 30

Total revenue equals:

A) total output multiplied by the unit cost of output
B) total output multiplied by profit
C) total output multiplied by the unit price of output
D) total output divided by profit

Question 31

The marginal cost curve intersects the average variable cost curve at the minimum of the average variable cost curve.

Question 32

The firm's total cost can be used to determine both the firm's average total cost and its marginal cost.

Question 33

When average total cost rises if a producer either increases or decreases production, then the firm is said to be operating at efficient scale.

Question 34

The time it takes for a firm to reach the long run depends on the firm and the products it makes.

Question 35

Implicit costs are costs that do not require an outlay of cash by the firm.

Question 36

Average total cost reveals how much total cost will change as the firm alters its level of production.

Question 37

A firm's profit is equivalent to:

A) its total sales
B) average revenue minus average total cost
C) marginal revenue minus marginal cost
D) total revenue minus total cost

Question 38

Because of the greater flexibility that firms have in the long run, all short-run cost curves lie on or above the long-run curve.

Question 39

The relationship between the quantity of inputs and quantity of output is called the production function.

Question 40

Suppose that as a firm expands and notices that its long-run average total costs are declining. The most likely explanation for this is economies of scale.

Question 41

An important implicit cost of almost every business is the:

A) cost of accounting services
B) cost of compliance with government regulation
C) opportunity cost of financial capital that has been invested in the business
D) cost of debt

Question 42

The amount of money that an orchardist could have earned if he had planted orange trees, rather than apple trees, is termed:

A) explicit cost
B) accounting cost
C) implicit cost
D) total sales

Question 43

Jeremy, a small business owner, earns $50 an hour repairing boats. One afternoon he takes five hours off work to build a gazebo in his garden, spending $200 on materials. If the addition of a gazebo increases his home's value by $400, then his accounting profit will be:

A) -$200
B) -$400
C) $200
D) $400

Question 44

Accounting profit is equal to:

A) total revenue minus the explicit cost of producing goods and services
B) total revenue minus the opportunity cost of producing goods and services
C) average revenue minus the average cost of producing the last unit of a good or service
D) marginal revenue minus marginal cost

Question 45

Which of the following describes the marginal product of labour?

A) the increase in labour necessary to generate a one-unit increase in output
B) the increase in output obtained from a one-unit increase in labour
C) the additional profit created with a one-unit increase in labour
D) the additional cost created with a one-unit increase in labour

Question 46

Lettuce Eat, a vegetarian cafe, exhibits diminishing returns to labour. If the cost of each meal is constant and labour is the only other input, then the total cost-curve will:

A) become flatter as meal production increases
B) become steeper as meal production increases
C) will stay constant as meal production increases
D) we cannot tell without more information

Question 47

The marginal product of labour can be defined as (where $\Delta$ denotes 'change'):

A) $\Delta$ output/ $\Delta$ labour
B) $\Delta$ labour/ $\Delta$ 0output
C) $\Delta$ profit/ $\Delta$ labour
D) $\Delta$ labour/ $\Delta$ total cost

Question 48

Diminishing marginal product of labour means:

A) the addition of an extra worker will reduce total output
B) each new worker will output more than previous workers
C) removing a worker will increase total output
D) removing a worker will increase the marginal product of the remaining workers

Question 49

To an economist, the field of industrial organisation answers which of the following questions?

A) How does the difference in the number of firms affect prices and efficiency of market outcomes?
B) Why are consumers subject to the law of demand?
C) Why do firms experience falling marginal product of labour?
D) Why do firms consider production costs when determining product supply?

Question 50

Diminishing marginal product of labour is NOT likely to be observed when:

A) experienced workers in labour teams help train new staff
B) there is high demand for workers in the industry
C) more workers allows people to specialise in one task
D) new workers have to use the oldest technology in a plant

Question 51

Julia runs a home construction business and owns a variety of construction equipment. She normally uses her equipment to build and sell homes herself, however when times are tough she rents out the equipment to other builders. Which of the following should Julia not include when looking at the costs of building a new home:

A) the rental income from leasing her construction equipment
B) any wages she has to pay to her employees
C) the purchase price of her construction equipment
D) the salary she could earn working for another construction company

Question 52

Graph 13-1
This graph depicts a production function for a firm that produces cookies. Use the
graph to answer the following question(s).
Refer to Graph 13-1. The slope of the total product curve reveals information about the:

A) average product of workers
B) fixed product of workers
C) total product of workers
D) marginal product of workers

Question 53

If a business is profitable from an accountant's point of view, then:

A) it is always profitable from an economist's point of view
B) it is never profitable from an economist's point of view
C) economic profit will be higher than accounting profit
D) we cannot say without more information

Question 54

Graph 13-1
This graph depicts a production function for a firm that produces cookies. Use the
graph to answer the following question(s).
Refer to Graph 13-1. With regard to cookie production, the figure implies:

A) decreasing cost of cookie production
B) diminishing marginal product of workers
C) increasing marginal product of workers
D) diminishing marginal cost of cookie production

Question 55

From a firm's costs perspective, the long run is:

A) the period of time for all factors to become variable
B) the period of time needed to adjust the amount of labour input
C) the period of time needed to adjust the amount of capital used
D) greater than one year

Question 56

Economic profit is equal to:

A) total revenue minus the opportunity cost of producing goods and services
B) total revenue minus the accounting cost of producing goods and services
C) total revenue minus the explicit cost of producing goods and services
D) average revenue minus the average cost of producing the last unit of a good or service

Question 57

An economist measures profit as:

A) total revenue minus opportunity costs
B) total revenue minus explicit costs
C) total revenue minus fixed costs and explicit costs
D) total revenue minus fixed costs and wages

Question 58

Mosti, a materials engineer, has discovered a groundbreaking new way to make recycled plastic stronger. He is looking to exploit this discovery by starting up his own business at a cost of $500 000. Unfortunately Mosti has only $200 000 in savings and must borrow the other $300 000. If the interest rate is 10%, then what, according to an economist, is the opportunity cost of starting up the business?

A) $500 000 per annum
B) $50 000 per annum
C) $30 000 per annum
D) $20 000 per annum

Question 59

Graph 13-1
This graph depicts a production function for a firm that produces cookies. Use the
graph to answer the following question(s).
Refer to Graph 13-1. As the number of workers increases:

A) total output increases, but at a decreasing rate
B) marginal product increases but at a decreasing rate
C) marginal product increases
D) total output decreases

Question 60

During the summer Jeremy, a small business owner, can hire extra staff to help him repair boats. On his own Jeremy can repair 10 boats a day, adding a second staff member sees 15 boats a day repaired, and adding a third sees 18 boats a day repaired. The marginal product of the third worker is:

A) 18 boats/day
B) 15 boats/day
C) 5 boats/day
D) 3 boats/day

Question 61

Graph 13-2
This graph depicts a total cost function for a firm that produces cookies. Use the graph to answer the following question(s).
Refer to Graph 13-2. Which of the statements below is most consistent with the shape of the total cost curve?

A) producing additional cookies is equally costly, regardless of how many cookies are already being produced
B) producing additional cookies becomes increasingly costly only when the number of cookies already being produced is large
C) producing an additional cookie is always more costly than producing the previous cookie
D) total production of cookies decreases with additional units of input

Question 62

Dave is majoring in computer information development at University of Environmental Sustainability. While he has been attending university, Dave has started a computer consulting business to help local residents set up a local skill-sharing network. Dave charges $25 per hour for his consulting services. Dave also works five hours a week for the Arts Faculty to maintain its departmental web page. The Arts Faculty pays Dave $20 per hour. From this information we can conclude that:

A) Dave should increase the number of hours he works for the Arts Faculty to make his income from it comparable to his consulting business income
B) Dave is obviously not maximising his wellbeing if he continues to work for the Arts Faculty
C) if Dave chooses one hour at the beach with his friends rather than spending one more hour with a consulting client, the forgone income of $20 is considered a cost of the choice to go to the beach
D) if Dave chooses one hour at the beach with his friends rather than spending one more hour with a consulting client, the forgone income of $25 is considered a cost of the choice to go to the beach

Question 63

As the quantity produced increases:

A) average fixed cost decreases
B) fixed cost increases
C) variable cost always decreases
D) none of the above are true

Question 64

Diminishing marginal product causes the average variable cost curve to:

A) rise
B) fall
C) rise until it equals the total cost curve
D) level out

Question 65

Diminishing marginal product suggests that:

A) marginal cost is downward-sloping
B) additional units of output are more expensive
C) the firm is at full capacity
D) all of the above are true

Question 66

Suppose a firm increases output by one unit. Which of the following statements is true?

A) total cost will increase by an amount equal to average variable cost
B) total cost will increase by an amount equal to the marginal cost
C) variable cost will increase by an amount equal to marginal cost
D) average fixed cost will stay constant

Question 67

John is a self-employed bricklayer. Examples of his variable costs include:

A) the cost of materials for each job
B) the cost of owning a work vehicle
C) the cost of hiring a graphic designer to design his business card
D) all of the above

Question 68

Diminishing marginal product suggests that the marginal:

A) product of an extra worker is less than the previous worker's marginal product
B) cost of an extra worker is less than the previous worker's marginal cost
C) product of an extra worker is greater than the previous worker's marginal product
D) cost of an extra worker is unchanged

Question 69

If a firm mothballs a factory so that its output is zero, which of the following costs will also be zero?

A) variable cost
B) total cost
C) average cost
D) all of the above

Question 70

Graph 13-2
This graph depicts a total cost function for a firm that produces cookies. Use the graph to answer the following question(s).
Refer to Graph 13-2. The changing slope of the total cost curve reflects:

A) decreasing average cost
B) increasing marginal product
C) decreasing marginal product
D) increasing fixed cost

Question 71

One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximising firm is that, in the short run:

A) output is not variable
B) the size of the factory is fixed
C) the number of workers used to produce the firm's product is fixed
D) there are no fixed costs

Question 72

Marginal cost tells us the:

A) amount total cost rises when price rises by one unit
B) amount fixed cost rises when price rises by one unit
C) amount total cost rises when output rises by one unit
D) amount fixed cost rises when output rises by one unit

Question 73

Average total cost is equal to:

A) average variable cost plus marginal cost
B) total cost less total output
C) average fixed cost plus average variable cost
D) average variable cost divided by total output

Question 74

Average total cost tells us the:

A) cost of the last unit of output if total cost does not include a fixed cost component
B) cost of a typical unit of output if total cost is divided evenly over all the units produced
C) variable cost of a firm that is producing at least one unit of output
D) total cost of the first unit of output if total cost is divided evenly over all the units produced

Question 75

The marginal cost curve will intersect:

A) average variable cost at its minimum
B) average fixed cost at its minimum
C) average total cost at its minimum
D) both the average variable cost and the average total costs at their minimums

Question 76

Marginal cost equals:

A) total cost divided by total quantity
B) the slope of the total cost curve
C) total output divided by the change in total cost
D) none of the above

Question 77

Average total cost equals:

A) change in total costs / change in quantity produced
B) (fixed costs + variable costs) / change in quantity produced
C) change in total costs / quantity produced
D) (fixed costs + variable costs) / quantity produced

Question 78

The efficient scale of the firm is the quantity of output that:

A) maximises marginal product
B) maximises average fixed cost
C) minimises average total cost
D) minimises average variable cost

Question 79

Graph 13-2
This graph depicts a total cost function for a firm that produces cookies. Use the graph to answer the following question(s).
Refer to Graph 13-2. Which of the statements below best captures information about the underlying production function?

A) output increases at a decreasing rate with additional units of input
B) output increases at an increasing rate with additional units of input
C) output decreases at a decreasing rate with additional units of input
D) output decreases at an increasing rate with additional units of input

Question 80

At low output levels a firm's average total cost tends to be high because:

A) marginal costs are increasing
B) variable costs are spread over only a few units of output
C) average fixed cost is large
D) there is a shortage of experienced workers