Deck 6: Cost Theory and Estimation

Question 1

Which of the following short-run cost curves declines continuously?

A) Average total cost
B) Marginal cost
C) Average fixed cost
D) Average variable cost

Answer 1

Average fixed cost

Question 2

The entrepreneur's opportunity cost is an implicit cost.

Answer 2

True

Question 3

Accounting costs and explicit costs are the same.

Answer 3

True

Question 4

In the short run, total cost is equal to zero when output is equal to zero.

Question 5

Economic cost curves define the minimum economic costs of producing various levels of output.

Question 6

The average fixed cost curve is U-shaped.

Question 7

Average total cost is equal to marginal cost where marginal cost is at a minimum.

Question 8

The point of inflection of the short-run total variable cost function corresponds to the level of output where marginal cost is at a minimum.

Question 9

The vertical distance between the short-run average total and average variable cost curves is equal to marginal cost.

Question 10

The slope of a ray drawn from the origin to any point on a total cost curve is equal to average total cost at that point.

Question 11

If a ray that is drawn from the origin to a point on a total cost curve is tangent to the total cost curve, then its slope is equal to the minimum average total cost of production.

Question 12

The point at which the marginal product of a variable input is at a maximum corresponds to the point at which marginal cost is at a maximum.

Question 13

The level of output at which the average product of a variable input is at a maximum corresponds to the level of output where short-run average total cost is at a minimum.

Question 14

The long-run total cost curve is derived from the firm's expansion path.

Question 15

Long-run marginal cost is equal to short-run marginal cost at the level of output where the corresponding short-run average total cost curve is tangent to the long-run average cost curve.

Question 16

Industries in which small and large firms coexist successfully have long-run average cost curves that are nearly horizontal.

Question 17

Learning curves slope upward.

Question 18

If a learning curve is represented by C=aQ^b, then b>0.

Question 19

Cost-volume-profit analysis is used to determine the profit-maximizing level of output.

Question 20

Breakeven output is equal to total fixed cost divided by the contribution margin per unit.

Question 21

Economic theory suggests that a cubic function is an appropriate form for an empirical short-run total variable cost curve.

Question 22

Logistics is also referred to as supply chain management.

Question 23

Just-in-time inventory management and globalization have contributed to the emergence and growth of logistics.

Question 24

Logistics refers to the rational assessment of supply and demand by consumers.

Question 25

Logistics merges a firm's design and manufacturing functions into a centrally managed unit.

Question 26

Fairweather Construction, Inc., has the following short-run total cost schedule:
(i) What is the firm's average fixed cost when Q = 5?
(ii) What is the firm's average variable cost when Q = 4?
(iii) What is the firm's average total cost when Q = 4?
(iv) What is the firm's marginal cost when Q = 10?
(v) At what level of output does the firm begin to experience diminishing returns?

Question 27

Fairview Construction, Inc., has the following short-run total cost schedule:
(i) What is the firm's average fixed cost when Q = 5?
(ii) What is the firm's average variable cost when Q = 7?
(iii) What is the firm's average total cost when Q = 8?
(iv) What is the firm's marginal cost when Q = 9?
(v) At what level of output does the firm begin to experience diminishing returns?

Question 28

Oceanview Construction, Inc., has the following short-run total cost schedule:
(i) What is the firm's average fixed cost when Q = 5?
(ii) What is the firm's average variable cost when Q = 4?
(iii) What is the firm's average total cost when Q = 10?
(iv) What is the firm's marginal cost when Q = 8?
(v) At what level of output does the firm begin to experience diminishing returns?

Question 29

Farview Construction, Inc., has the following short-run total cost schedule:
(i) What is the firm's average fixed cost when Q = 10?
(ii) What is the firm's average variable cost when Q = 4?
(iii) What is the firm's average total cost when Q = 7?
(iv) What is the firm's marginal cost when Q = 9?
(v) At what level of output does the firm begin to experience diminishing returns?

Question 30

Bob and Bill are college students. They are trying to decide what to do over the next summer. Bob's father has suggested that they both come and work at his plastics manufacturing company where each will earn $3,600 over the summer. Bill's father, who runs the local farmer's market, suggests that they go to a local resort area and sell fresh fruit and vegetables to tourists. Their markup on the produce would be twenty-five percent, so each $1.00 of revenue would involve a variable cost of $0.80. In addition to purchasing the produce, they would have to rent a location. The cost to rent a small roadside stand for the summer is $2,400.
(i) How many dollars worth of produce will they have to sell in order to break even in an accounting sense?
(ii) How many dollars worth of produce will they have to sell in order to break even in an economic sense?

Question 31

Barb and Cheryl are college students. They are trying to decide what to do over the next summer. Barb's mother has suggested that they both come and work at her plastics manufacturing company where each will earn $5,250 over the summer. Cheryl's mother, who runs the local farmer's market, suggests that they go to a local resort area and sell fresh fruit and vegetables to tourists. Their markup on the produce would be one-third, so each $1.00 of revenue would involve a variable cost of $0.75. In addition to purchasing the produce, they would have to rent a location. The cost to rent a small roadside stand for the summer is $2,500.
(i) How many dollars worth of produce will they have to sell in order to break even in an accounting sense?
(ii) How many dollars worth of produce will they have to sell in order to break even in an economic sense?