Question 1

Which statement is true?&#10;A)Marginal cost intersects the maximum of AVC from below.&#10;B)Marginal cost intersects the minimum of AVC from below.&#10;C)Marginal cost intersects the minimum of AFC from below.&#10;D)The difference between AVC and ATC is AFC for every level of output.&#10;E)b and d are both true.

Accepted Answer

B is correct because the marginal cost curve intersects the average variable cost (AVC) curve at its lowest point from below. This is due to the law of diminishing returns, where initially, increasing production decreases the average cost, but after a certain point, it starts to increase. D is correct because the difference between the average total cost (ATC) and the average variable cost (AVC) is the average fixed cost (AFC), which remains true for every level of output since AFC is calculated as total fixed cost divided by the quantity of output, and this relationship does not change with the level of output.

Question 2

Which statement is FALSE?&#10;A)A firm cannot experience both economies of scale and diminishing marginal product.&#10;B)A firm's long-run average costs can be increasing, decreasing or remain unchanged as output increases.&#10;C)A firm has no fixed costs in the long run.&#10;D)Long-run average total costs are decreasing as output increases if a firm is experiencing economies of scale.

Accepted Answer

Economies of scale refer to the cost advantages that a firm can achieve due to its size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. Diminishing marginal product, on the other hand, occurs in the short run when one factor of production is fixed, leading to a point where adding more of a variable factor (like labor) leads to a decrease in the marginal output of that factor. These two concepts operate in different contexts (long run vs. short run) and are not mutually exclusive; a firm can experience economies of scale as it grows larger and also face diminishing marginal returns in the short run when it increases the use of variable inputs while some inputs are fixed.

Question 3

In the long run:&#10;A)A firm can vary all but one of its factors of production.&#10;B)A firm can vary all of its inputs in the production process.&#10;C)A firm cannot vary any inputs in the production process.&#10;D)All of the above.&#10;E)None of the above.

Accepted Answer

In the long run, a firm can vary all of its inputs in the production process, as there are no fixed factors of production. This allows for adjustments in all resources to achieve desired production levels.

Question 4

A short-run production function at some point becomes flatter due to:&#10;A)Decreasing returns to scale.&#10;B)Increasing returns to scale.&#10;C)The fact that a firm has to hire poorer quality workers as production increases.&#10;D)Diminishing marginal product.&#10;E)None of the above.

Accepted Answer

A production function becomes flatter at some point due to diminishing marginal product, which means that as more units of a variable input (like labor) are added to fixed inputs (like capital), the additional output produced from each new unit of input decreases.

Question 5

Which statement is true?&#10;A)Long-run average costs are the same or more than short-run average costs.&#10;B)Long-run average costs are increasing due to diminishing marginal product.&#10;C)Long-run average costs are the lower envelope of short-run average cost curves.&#10;D)Long-run average costs equal long-run marginal costs for every level of output.&#10;E)None of the above.

Accepted Answer

Long-run average costs are considered the lower envelope of short-run average cost curves because in the long run, all inputs are variable, allowing firms to choose the most cost-efficient combination of inputs for any level of output. This flexibility often results in lower costs compared to any specific short-run scenario where at least one input is fixed.

Question 6

A firm has a short-run cost function of TC(q) = 100 + 2q + 3q².What is the firm's fixed costs? A)3q². B)2q C)It depends on the level of q D)80 E)100

Accepted Answer

Fixed costs are those that do not change with the level of output produced. In the given short-run cost function TC(q) = 100 + 2q + 3q^2, the term that does not depend on q (the quantity of output) is 100, which represents the fixed costs.

Question 7

A firm's short-run MC curve:&#10;A)Is eventually upwards sloping due to diminishing marginal product.&#10;B)Is downward sloping due to increasing returns to scale.&#10;C)Is eventually upward sloping due to decreasing returns to scale.&#10;D)Is flat due to constant returns to scale.&#10;E)None of the above.

Accepted Answer

The short-run marginal cost (MC) curve is eventually upward sloping due to the law of diminishing marginal returns, which states that adding more of one factor of production, while holding all others constant, will at some point yield lower per-unit returns.

Question 8

In the short run:&#10;A)At least one factor of production cannot be varied.&#10;B)A firm has only one factor of production.&#10;C)A firm can vary all inputs in the production process.&#10;D)A firm cannot vary any input in the production process.&#10;E)None of the above.

Accepted Answer

In the short run, at least one factor of production, typically capital, is fixed and cannot be varied, while others, like labor, can be adjusted. This contrasts with the long run, where all factors can be varied.

Question 9

Which statement is true?&#10;A)Marginal cost always lies below ATC for every level of output.&#10;B)Marginal cost intersects the maximum of ATC from below&#10;C)Marginal cost intersects the minimum of AFC from below.&#10;D)Marginal cost intersects the minimum of ATC from below.&#10;E)None of the above.

Accepted Answer

Marginal cost intersects the average total cost (ATC) curve at its lowest point. This is because when marginal cost is below ATC, it pulls the ATC down, and when it is above, it pushes the ATC up. Therefore, the point where MC equals ATC is necessarily the minimum point of the ATC curve.

Question 10

A firm has a short-run cost function of TC(q) = 100 + 2q + 3q².What is the firm's MC? A)MC = 2 +6q B)MC = 2 C)MC = 3q D)MC = 6q E)None of the above.

Accepted Answer

The marginal cost (MC) is found by taking the first derivative of the total cost (TC) function with respect to quantity (q). The TC function is TC(q) = 100 + 2q + 3q^2. Differentiating this with respect to q gives MC = 2 + 6q.

Deck 7: Production and Costs