Deck 13: The Costs of Production

Question 1

Economists and accountants agree on the inclusion of implicit costs into the cost analysis of a firm.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Variable costs equal fixed costs when nothing is produced.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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 8

Examination of the costs of production is unnecessary to the field of industrial organisation.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

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

Question 17

Economists and accountants both include forgone income as a cost to a small business owner.

Question 18

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

Question 19

In the long run there are no fixed inputs.

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

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 23

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

Question 24

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

Question 25

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

Question 26

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

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

Jack received all As in his classes last semester. If Jack gets all Cs in his classes this semester, his grade point average may or may not fall.

Question 34

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

Question 35

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 36

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

Question 37

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

Question 38

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

Question 39

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 40

Fixed costs are those costs that remain fixed no matter how long the time horizon is.

Question 41

An example of an implicit cost of production for a forestry company would be:

A) the costs of planting an area with trees
B) the interest income that could have been earned in a bank if the company hadn't used its profit to finance a new replanting
C) the cost of transporting the logs to a sawmill
D) all of the above

Question 42

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 43

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 44

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 45

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 46

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 47

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

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

Question 48

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 49

Opportunity costs are comprised of:

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

Question 50

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

Question 51

An example of an explicit cost of production would be:

A) having to give up wages to become an entrepreneur
B) the cost of glass for a lens manufacturer
C) an entrepreneur using their own savings for finance and giving up on the interest payments they were previously getting
D) none of the above

Question 52

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 53

Suppose a firm produced 500 units of output but sold only 400 of the units it produced. The average cost of production for each unit of output produced was $100. Each of the 400 units sold were sold for a price of $80. The total revenue of this firm would be:

A) $50 000
B) $40 000
C) $32 000
D) -$8 000

Question 54

As a starting point, economists assume that firms are organised to: (i) maximise their sales
(ii) maximise their profit
(iii) minimise their tax

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

Question 55

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

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

Question 56

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 57

Cost of capital can also be seen as implicit costs.

Question 58

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 59

Profit plus total costs equals:

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

Question 60

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 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

Accountants are primarily interested in the:

A) stock of assets of firms
B) marginal costs of production of firms
C) taxes due on capital assets of firms
D) flow of cash into and out of firms

Question 63

A production function is a relationship between inputs and:

A) revenue
B) costs
C) profit
D) quantity of output

Question 64

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 65

Accounting profit:

A) will never exceed economic profit
B) is a better measure of profitability than economic profit
C) is generally as large as economic profit
D) is most often equal to economic profit

Question 66

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) $\Delta$ labour/ $\Delta$ total cost

Question 67

Amy owns a photography business. Her friend who is an economist most likely includes which of the following costs on her financial statements?

A) the bank interest payments on her savings before she used them to buy her cameras and lenses
B) the cost of developing her film
C) the salary Amy is paying herself
D) all of the above

Question 68

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 69

Identify the statement about the production function that is true?

A) the slope of the production function measures the average product of labour
B) the slope of the production function measures marginal cost
C) the slope of the production function measures the marginal product of a worker
D) the square-root of the production function measures the marginal product of labour

Question 70

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 71

Amy owns a photography business. Her accountant most likely includes which of the following costs on her financial statements?

A) the bank interest payments on her savings before she used them to buy her cameras and lenses
B) the cost of developing her film
C) the salary Amy was previously earning as a teacher
D) all of the above

Question 72

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 73

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 74

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

A) experienced workers in labour teams will not share their skills with others
B) there are enough personal computers to allocate them to new staff in an office
C) there are shortages of skilled workers in the forestry sector
D) new workers have to use the oldest technology in a plant

Question 75

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 76

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 77

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 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) damaged or lost inventory

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

Question 79

Diminishing marginal product of labour occurs when adding another unit of labour:

A) increases output but not by as large a margin as previous units of labour
B) decreases output
C) increases output by more than the margin of previously employed labour
D) none of the above are true

Question 80

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