Deck 9: Costs of Production

Question 1

Assume that a firm already owns a machine that has a total life of 20 years. The cost of using the machine for one year to produce good A is

A) the maximum the machine could have earned for the firm in some alternative use during the year in question.
B) the value of one year's output of good A.
C) a twentieth of what the firm paid for the machine in the first place.
D) the scrap value of the machine at the end of its life.

Answer 1

the maximum the machine could have earned for the firm in some alternative use during the year in question.

Question 2

What has to be given up to produce a good or service is referred to as its

A) implicit cost.
B) explicit cost.
C) marginal cost.
D) opportunity cost.

Answer 2

opportunity cost.

Question 3

If a firm decides to produce more of a product, its opportunity cost is

A) its marginal cost.
B) what it costs its suppliers to produce the necessary inputs.
C) its explicit plus its implicit costs.
D) what it costs society as a whole to produce the good or service.

Answer 3

its marginal cost.

Question 4

If a firm does not include the cost of previously unused resources when calculating the cost of a good or service, it is said to have ignored

A) opportunity costs.
B) marginal costs.
C) implicit costs.
D) explicit costs.

Question 5

When counting the cost of a product to the firm making it, we should value inputs at their

A) implicit costs.
B) accounting costs.
C) historic costs.
D) replacement costs.

Question 6

A production function shows

A) the effect of diminishing marginal utility.
B) the marginal products of each input.
C) the effect of diminishing returns.
D) how output will be affected by changes in inputs.
E) the minimum efficient scale.

Question 7

An equation showing the output that will result from a combination of inputs is

A) an isocost function.
B) a production function.
C) an isoquant.
D) an indifference curve.
E) a consumption function.

Question 8

The short run, as economists use the phrase, is characterised by

A) all inputs being variable.
B) no variable inputs, that is, all of the factors of production are fixed.
C) a period where the law of diminishing returns does not hold.
D) at least one fixed factor of production and firms neither leaving nor entering the industry.

Question 9

Which of the following is a correct statement about the relationship between average product (AP) and marginal product (MP)?

A) If MP is declining then AP is negative.
B) If AP is at a maximum, then MP is also.
C) If AP exceeds MP, then AP is falling.
D) If AP = MP, then total product is at a maximum.

Question 10

The following table provides information about the relationship between a firm's output and its factors of production in the short run:
Which one of the following statements describes the situation in this firm?

A) There are constant returns to scale.
B) There are increasing returns to scale.
C) There are diminishing returns to scale.
D) There are increasing marginal returns.
E) There are diminishing marginal returns.

Question 11

With L representing the quantity of labour, which of the following is the formula for the marginal physical productivity of labour?

A) TPP/L
B) Change in L/Change in TPP
C) L/TPP
D) Change in TPP/Change in L
E) Change in TPP/L

Question 12

Which of these statements is false?

A) Fixed costs do not depend on the firm's level of output.
B) There are no fixed costs in the long run.
C) Fixed costs are the difference between total costs and total variable costs.
D) Fixed costs are zero if the firm is producing nothing.

Question 13

We can define total costs as

A) TFC + 3MC
B) TFC + TVC
C) ATC × Q
D) all of the above

Question 14

The formula for AVC is

A) TVC/q
B) Oq/O3TVC
C) q/TVC
D) OTVC/Oq

Question 15

Which of the following is true?

A) MC does not affect AC.
B) AC controls MC.
C) MC controls AC.
D) MC is always equal to AC.

Question 16

The following diagram shows a firm's short- run cost curves.
It indicates that diminishing returns set in at point

A) x
B) somewhere between points x and y
C) z
D) y

Question 17

The sum of marginal costs at any level of output is equal to

A) total costs.
B) average costs.
C) total variable costs.
D) total fixed costs.

Question 18

Which of the following is a fixed cost for a chocolate factory over the course of a month?

A) Depreciation of machines due simply to their age
B) The cost of electricity (paid quarterly) for running the mixing machines
C) Overtime pay
D) The cost of cocoa

Question 19

If marginal cost is above average cost, then

A) AVC is constant.
B) AVC is decreasing.
C) AC is increasing.
D) AC is decreasing.

Question 20

Which of the following represents the point at which diminishing returns will set in?

A) When AC begins to rise
B) When MC begins to rise
C) When MC is falling
D) When AC = MC
E) When AC is falling

Question 21

Adam Smith used the term 'division of labour' to explain why

A) workers would be exploited by employers.
B) trade unions would be difficult to organise.
C) workers would be de- skilled.
D) workers would become specialised.

Question 22

Which of the following is not a plant economy?

A) Multi- stage production
B) By- products
C) Greater efficiency of larger machines
D) Financial economies

Question 23

Which of the following defines organisational economies?

A) With larger firms, more expenditure becomes profitable, such as R&D.
B) With larger firms, individual plants can specialise in particular functions.
C) The bigger the firm, the more products it becomes profitable to produce.
D) Large firms are able to organise finance more easily.

Question 24

The ability of a firm to diversify into other markets is an example of which type of economy of scale?

A) Risks being spread.
B) Inputs can be obtained at a lower price.
C) The firm can obtain finance at a lower cost.
D) The firm can overcome the problem of indivisibilities.
E) The firm can benefit from the division of labour.

Question 25

The services that supply an industry are called its

A) input structure.
B) infrastructure.
C) exostructure.
D) industrial structure.

Question 26

The following table provides information about the relationship between a firm's output and its factors of production in the short run:
Which one of the following statements describes the situation in this firm?

A) There are constant returns to scale.
B) There are diminishing marginal returns.
C) There are increasing returns to scale.
D) There are diminishing returns to scale.
E) There are increasing marginal returns.

Question 27

By 'diseconomies of scale' economists mean

A) bureaucracy.
B) diminishing returns.
C) when costs increase as the scale of output increases.
D) indivisibilities.

Question 28

As firms get larger, specialisation of labour may occur whereby workers must undertake boring and repetitive jobs. Owing to this, the diseconomy of scale of _________may occur.

A) efficiency
B) rationalisation
C) communication
D) alienation

Question 29

The rate at which a firm can substitute capital for labour and hold output constant is the

A) marginal rate of substitution.
B) marginal cost of production.
C) rate of diminishing marginal returns.
D) marginal cost of substitution.

Question 30

Assuming that a firm uses three factors A, B and C (whose prices are respectively Pa, Pb and Pc), which of the following represents the least- cost combination of these factors?

A) Pa = Pb = Pc
B) MPPa/MPPb = MPPb/MPPc = MPPc/MPPa
C) MPPa × Pa = MPPb × Pb = MPPc × Pc
D) MPPa/Pa = MPPb/Pb = MPPc/Pc
E) Pa × Pb × Pc = MPPa × MPPb × MPPc

Question 31

Which of the following assumptions do we make when constructing long- run cost curves?

A) Factor prices are given.
B) There are no fixed factors or production.
C) The state of technology is given.
D) All of the above

Question 32

The 'minimum efficient scale' of operations refers to a scale of output at which

A) diseconomies of scale are at the lowest point.
B) economies of scale are just exhausted.
C) managerial diseconomies are just offset by technical economies of scale.
D) none of the above occurs

Question 33

The minimum efficient scale is the point where

A) LRMC cuts LRAC.
B) total costs are maximised.
C) LRAC levels off.
D) LRAC is minimised.
E) natural monopoly occurs.

Question 34

Which of the following is not an assumption made when constructing long- run cost curves?

A) All factors are variable.
B) Firms will choose the least- cost factor combination.
C) The state of technology is constant.
D) The MPP/P ratios for all factors are equal.
E) The firm experiences economies of scale.

Question 35

Implicit costs are payments that have already been made, and so do not need to be taken into account when deciding on price in the short run.

Question 36

Explicit costs are payments to outside suppliers of inputs.

Question 37

The total physical product for any given amount of the variable factor is the sum of all the marginal physical products up to that point.

Question 38

In the case of factors not owned by the firm, the opportunity cost is the explicit cost of purchasing or hiring them, i.e. it is the price paid for them.

Question 39

If the total product of two workers is 80 and the total product of three workers is 90, the marginal product of the third worker is 30.

Question 40

In the short run, by definition, at least one factor is fixed in supply. The total cost to the firm of these factors is thus fixed with respect to time.

Question 41

If a firm's AVC is falling, then its MC curve must also be falling.

Question 42

If marginal cost is above average cost, then average cost is increasing.

Question 43

All marginal costs are variable.

Question 44

A firm's average fixed cost must always be positive.

Question 45

If a doubling of inputs leads to a doubling of output, the firm is said to experience decreasing returns to scale.

Question 46

Economies of scale explain the falling part of a firm's SRATC curve.

Question 47

If firm X benefits from research and development conducted by other firms in the industry, then this is an example of an external economy of scale for firm X.

Question 48

In the long run a producer should increase the scale of output until there are diseconomies of scale.

Question 49

By 'diseconomies of scale' economists mean bureaucracy.

Question 50

The minimum efficient scale of operations refers to a scale of plant at which economies of scale are just exhausted.

Question 51

LRATC curves are always downward- sloping.

Question 52

With the quantity of factor A measured on the vertical axis and the quantity of factor B measured on the horizontal axis, the slope of an isocost gives MPPb/MPPa.

Question 53

How are the ideas of implicit cost and opportunity cost connected?

Question 54

Why does the marginal product curve pass through the top of the average physical product curve?

Question 55

Using a product of your choosing, identify the main fixed and variable costs of production.

Question 56

Does rationalisation always reduce overhead costs?

Question 57

Explain some of the causes of positive economies of scale.

Question 58

Why must LRAC = SRAC = LRMC = SRMC if a firm is achieving maximum economies of scale?

Question 59

Explain the relationship between short- run and long- run average cost curves.

Question 60

Which of the following assumptions do we make when constructing long-run cost curves? Answer
(i) Factors prices are given.
(ii) The firm experiences economies of scale.
(iii) The state of technology is given.
(iv) The MPP/P ratios for all factors are equal.
(v) All factors are variable.
(vi) Firms will choose the least-cost factor combination.
(vii) There are no fixed factors of production.