Deck 13: The Costs of Production

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Several related measures of cost can be derived from a firm's total cost.

Question 5

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

Question 6

Accountants keep track of the money that flows into and out of firms.

Question 7

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

Question 8

Average variable cost and marginal cost are two ways for economists to say the same thing.

Question 9

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

Question 10

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 11

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 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

Costs that have already been incurred and are non-recoverable should be included in marginal cost calculations.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

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

Question 24

The average total cost curve reflects the shape of both the average fixed cost and average variable cost curves.

Question 25

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

Question 26

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

Question 27

The use of specialisation to achieve economies of scale is one reason modern societies are as prosperous as they are.

Question 28

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

Question 29

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

Question 30

If a firm incurs fixed costs the average variable cost curve will always lie below the average total cost curve.

Question 31

As a firm moves along its long-run average cost curve, it is adjusting the size of its factory to the quantity of production.

Question 32

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

Question 33

Adam Smith's example of the pin factory demonstrates that economies of scale result from specialisation.

Question 34

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 35

The adage 'Jack of all trades, master of none' helps explain why some firms experience economies of scale.

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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 41

Cost of capital can also be seen as implicit costs.

Question 42

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 43

Industrial organisation is the study of how:

A)industries organise for political advantage
B)firms' decisions regarding prices and quantities depend on the market conditions they face
C)labour unions organise workers in industries
D)profitable firms are in organised industries

Question 44

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)$7,500
D)-$8 500

Question 45

Economists normally assume that a firm would?
(i) sell a higher output if this would increase revenue
(ii) sell a lower output and collect less revenue, if this would increase profit
(iii) sell a higher output and incur more costs, if this would increase profit

A)(i) and (ii)
B)(i) and (iii)
C)(ii) and (iii)
D)none of the above

Question 46

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

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

Question 47

Which of the following is an implicit cost?
(i) a business owner forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm
(ii) interest on debt
(iii) uncollected revenue

A)(i) only
B)(i) and (ii)
C)(ii) and (iii)
D)(i), (ii) and (iii)

Question 48

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 49

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 50

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 51

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 52

Economists are primarily interested in:

A)the marginal cost of production in a firm
B)the accounting profits generated by a firm
C)how firms make production and pricing decisions
D)the value of a firm as manifest in stock price

Question 53

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 54

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 55

Opportunity costs are comprised of:

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

Question 56

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 57

Profit plus total costs equals:

A)total revenue
B)net profit
C)capital profit
D)operational profit

Question 58

Which of the following would be categorised as an opportunity cost?
(i) wages of workers
(ii) fixed costs already incurred
(iii) forgone investment opportunities

A)(i) and (iii)
B)(iii) only
C)(ii) and (iii)
D)(i), (ii) and (iii)

Question 59

The law of supply states that:

A)the supply curve slopes downward
B)the demand curve slopes upwards
C)firms are willing to produce a greater quantity of a good when the price of the good is higher
D)supply creates its own demand

Question 60

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

Question 61

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 62

Accounting profit is equal to which of the following?
(i) economic profit + implicit costs
(ii) total revenue - implicit costs
(iii) total revenue - opportunity costs

A)(iii) only
B)(i) and (ii)
C)(i) only
D)none of the above

Question 63

NARRBEGIN: 13-1
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 64

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 65

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 66

NARRBEGIN: 13-1
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 67

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 68

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 69

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 70

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 71

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 72

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 73

Mike just finished designing a new coffee cup for his manufacturing business and is considering if the new cup will be profitable to manufacture.When calculating total costs involved in manufacturing this new coffee cup, which of the following should not be considered?

A)employee wages
B)foregone rental income on the manufacturing equipment used
C)the cost of designing the new coffee cup
D)the cost of cardboard used to make the cups

Question 74

NARRBEGIN: 13-1
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 75

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

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

Question 76

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 77

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 78

Which of the following is an implicit cost of owning a business?
(i) forgone savings account interest when personal money is invested in the business
(ii) interest expense on existing business loans
(iii) foregone rental income when using an owner-occupied office

A)(i) only
B)(ii) only
C)(ii) and (iii)
D)(i) and (iii)

Question 79

Which of the following is equivalent to economic profit?
(i) total revenue less explicit costs and less implicit costs
(ii) total revenue less opportunity costs
(iii) accounting profit

A)(i) only
B)(i) and (ii)
C)(ii) and (iii)
D)(i), (ii) and (iii)

Question 80

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