Deck 7: Analysis of Costs

Question 1

If 25 units of a good are produced at a fixed cost of $50 and a total cost of $550, then the average total cost of producing the good is:

A)$15.
B)$20.
C)$25.
D)$30.
E)none of the above.

Answer 1

none of the above.

Question 2

Diminishing returns to factors of production cause:

A)diminishing opportunity costs.
B)the ratio of fixed costs to total costs to increase.
C)average fixed costs to decrease.
D)marginal costs to rise.
E)none of the above.

Answer 2

marginal costs to rise.

Question 3

Why is the average fixed cost curve not a U-shape?

A)average fixed costs is always increasing because of purchases.
B)average fixed costs remain constant regardless of output.
C)average fixed cost declines steadily as output increases
D)average fixed cost curve is U-shaped.
E)none of the above.

Answer 3

average fixed cost declines steadily as output increases

Question 4

A driver wishes to buy gasoline and have her car washed.She finds that the wash costs $3.00 when she buys 19 gallons at $1.00 each, but that if she buys 20 gallons, the car wash is free.Thus the marginal cost of the twentieth gallon of gas is:

A)-$2.00.
B)$0.00.
C)$1.00.
D)$2.00.
E)none of the above.

Question 5

Use the following to answer questions :
Figure 7-1
Given the curve shown in Figure 7-1, the marginal product of labor will be maximized at:

A)0 units of output.
B)1 unit of output.
C)2 units of output.
D)3 units of output.
E)not enough information to tell.

Question 6

Marginal cost is the:

A)total cost divided by the number of units produced.
B)fixed cost divided by the number of units produced
C)extra fixed cost of producing an additional unit of output.
D)extra average cost of producing an additional unit of output.
E)extra cost of producing an additional unit of output.

Question 7

If output rises and total costs remain fixed, then:

A)average cost will fall.
B)average cost will rise.
C)average cost will eventually increase.
D)fixed cost will eventually rise.
E)variable cost will eventually become fixed at some maximum level.

Question 8

If 25 units of a good are produced at a fixed cost of $50 and a total cost of $550, then the average variable cost of producing the good is:

A)$15.
B)$20.
C)$25.
D)$30.
E)none of the above.

Question 9

The intersection of the marginal cost curve and the average cost curve characterizes the point of:

A)maximum profit.
B)minimum average cost.
C)minimum marginal cost.
D)minimum opportunity cost.
E)minimum profit.

Question 10

Costs that change as output changes:

A)fixed cost
B)variable cost.
C)sunk cost.
D)overhead cost.
E)is defined by none of the above.

Question 11

Microsoft lets you have their software, Internet Explorer.By what you know about marginal cost how can they do this and stay in business?

A)They went out of business because of this.
B)The marginal cost of distributing an extra unit of software is very close to zero.
C)The marginal cost is high but they do it anyway.
D)They are covering their fixed costs.
E)They now charge for Internet Explorer.

Question 12

Which of the following are rules about the relation between average cost and marginal cost:

A)When marginal cost is below average cost, it is pulling average cost down.
B)When MC is above AC, it is pulling up AC.
C)When MC just equals AC, AC is constant.
D)All of the above.
E)None of the above.

Question 13

A firm's MC curve:

A)is essentially its TC curve scaled for its fractional share of the market
B)shows the addition to total cost needed to produce each additional unit of output.
C)is its unit cost of output, TC/q.
D)is approximately equal to all the above.
E)is defined by none of the above.

Question 14

Use the following to answer questions :
Figure 7-1
Given the curves shown in Figure 7-1, the marginal cost of the 3rd unit of output is:

A)$6.00.
B)$10.00.
C)$16.00.
D)$25.00.
E)none of the above.

Question 15

A fixed cost is:

A)the cost of any input whose per-unit price has been fixed, whether by long-term contract or by some similar means.
B)a cost whose increases are exactly proportional to increases in output.
C)any component included in average cost which enters in AC as the same fixed per-unit amount, no matter what the level of plant output may be.
D)a cost which the firm would incur even if its output were zero.
E)none of the above.

Question 16

Which of the following is true at the quantity of output where average cost has reached its minimum level?

A)AVC = FC.
B)MC = AVC.
C)MC = AC.
D)AC = AFC.
E)Output price = AVC.

Question 17

Which of the following is typically not U-shaped?

A)Average cost
B)Average variable cost
C)Average fixed cost
D)Marginal cost
E)All of the above are usually U-shaped.

Question 18

Use the following to answer questions :
Figure 7-1
Given the curves shown in Figure 7-1, the average variable cost of 3 units of output is:

A)$3.00.
B)$8.00.
C)$16.33.
D)$25.00.
E)none of the above.

Question 19

Use the following to answer questions :
Figure 7-1
Given the curves shown in Figure 7-1, the average fixed cost of 3 units of output is:

A)$3.00.
B)$6.00.
C)$8.33.
D)$25.00.
E)none of the above.

Question 20

Which of the following is true if marginal cost is above average variable cost as output rises?

A)Average total cost must be falling.
B)Average fixed cost must be rising.
C)Average variable cost must be falling.
D)Average variable cost must be rising.
E)None of the above.

Question 21

Use the following to answer questions :
Table 7-1
In Table 7-1, where is the minimum of the AC curve?

A)Between Q = 3 and Q = 4
B)Between Q = 4 and Q = 5
C)Between Q = 5 and Q = 6
D)Between Q = 6 and Q = 7
E)Impossible to tell from the information given.

Question 22

A driver wishes to buy gasoline and have his car washed.He finds that the wash costs $2.50 when he buys 19 gallons at $1.10 each, but that if he buys 20 gallons, the car wash is free.Thus the marginal cost of the twentieth gallon to him is:

A)$1.40.
B)$1.10.
C)-$1.40.
D)-$1.10.
E)$2.50.

Question 23

If a firm produces more goods than it sells and buys more raw materials than it uses up during the year, an inventory adjustment must be made so as not to:

A)overstate earnings for the year.
B)understate earnings for the year.
C)overstate liabilities at the end of the year.
D)understate liabilities at the end of the year.
E)overstate assets at the end of the year.

Question 24

At the quantity of output where average cost has reached its minimum level:

A)average variable cost will equal marginal cost.
B)profit must be at its maximum level.
C)marginal cost will equal marginal profit.
D)marginal cost will equal average cost.
E)marginal cost will equal fixed cost.

Question 25

If it is true that handling the mail does not get cheaper as the volume of mail increases, which of the following best explains this fact?

A)The Post Office is run by the government and therefore is inefficient.
B)The rule "the bigger the volume, the lower the cost" is true only if other things remain the same; since technological knowledge changes constantly, the cost of handling mail need not fall.
C)Although the rule "the bigger the volume, the lower the cost" is true of most industries, it is not true of all of them.
D)The rule "the bigger the volume, the lower the cost" is true only up to a point, beyond which costs rise.
E)The rule "the bigger the volume, the lower the cost" generally applies only to private industry.

Question 26

Use the following to answer questions :
Table 7-1
In Table 7-1, where is the minimum of the AVC curve?

A)Q = 3
B)Q = 4
C)Q = 5
D)Q = 6
E)None of the above.

Question 27

Use the following to answer questions :
Table 7-1
What is AFC at Q = 5 in Table 7-1?

A)3
B)4
C)5
D)7.5
E)15

Question 28

If the total cost of producing 6 units is $48 and the marginal cost of the seventh unit is $15, then:

A)the average total cost of 7 units is $9.
B)the average variable cost of 7 units is $9.
C)fixed costs are $8.
D)fixed costs are $33.
E)none of the above are true.

Question 29

Use the following to answer questions :
Figure 7-2
In Figure 7-2, what are total fixed costs at Q = 2?

A)5
B)10
C)13.75
D)15
E)None of the above.

Question 30

If q = 1, 2, 3 units of output, and total costs are, respectively, $2, 3, 4, then in this range of output marginal cost:

A)is constant.
B)is rising.
C)is falling.
D)is $2.00, $1.50, $1.33.
E)can't be determined by the data given.

Question 31

Use the following to answer questions :
Table 7-1
What is MC between Q = 3 and Q = 4 in Table 7-1?

A)10
B)15
C)20
D)25
E)None of the above.

Question 32

Depreciation measures:

A)the total cost of a capital input.
B)the annual cost of a capital input that a company actually owns itself.
C)the amount for which a capital input could be sold.
D)the amount of cost for each worker.
E)none of the above.

Question 33

Use the following to answer questions :
Figure 7-2
In Figure 7-2 what is AVC at Q = 5?

A)9
B)10
C)12
D)17.5
E)None of the above.

Question 34

Suppose that a sneaker company produces output using capital and labor.Capital costs $50 per unit and labor costs $5 per unit.If the firm is minimizing the costs of production when the marginal product of capital is 100 units, the marginal product of labor is:

A)5 units.
B)10 units.
C)50 units.
D)100 units.
E)none of the above.

Question 35

Use the following to answer questions :
Figure 7-2
In Figure 7-2, the minimum of the AC curve occurs:

A)between Q = 2 and Q = 3.
B)between Q = 3 and Q = 4.
C)at Q = 4.
D)between Q = 4 and Q = 5.
E)none of the above.

Question 36

Knowledge of total variable costs and fixed costs for various outputs enables one to determine which of the following?

A)Average cost.
B)Average fixed cost.
C)Average variable cost.
D)Marginal cost.
E)All the above.

Question 37

Assets are valued:

A)in different ways, depending on the state of inflation or deflation.
B)at their purchase prices minus accumulated depreciation.
C)at the amount for which they could be sold.
D)by accountants, using any careful or arbitrary assumptions they choose.
E)in general by rule-of-thumb, so that mistakes are not uncommon.

Question 38

The incorporation of capital and labor saving technological advance will cause the average cost curve of a firm to:

A)shift to the left.
B)shift upward.
C)shift downward.
D)turn more sharply in the neighborhood of its minimum.
E)none of the above.

Question 39

If it costs $30 to produce the first unit of a good and $28, $27, $25, $23,$24, and $25 to produce the next six units, respectively, then the minimum of the average cost curve could occur at:

A)1 unit.
B)2 units.
C)3 units.
D)5 units.
E)none of the above.

Question 40

In our analysis, a firm answering the "how" question in choosing inputs is assumed to:

A)minimize profits.
B)minimize production costs.
C)maximize profits.
D)minimize average total costs.
E)minimize fixed costs.

Question 41

If I know the variable cost schedule, I can derive the marginal cost schedule with no further information.

Question 42

Marginal cost can be derived given total cost at all levels of production.

Question 43

Use the following to answer questions :
Table 7-2
In Table 7-2, what are total assets?

A)$190,000
B)$200,000
C)$205,000
D)$215,000
E)None of the above.

Question 44

The retained earnings item on the balance sheet is:

A)equal to net profit for the period in question.
B)equal to the total of plowed-back earnings shown on previous income statements.
C)equal to the total of all earnings-after-taxes figures shown on previous income statements.
D)offset by an intangible asset account, such as goodwill.
E)equal to total assets minus total liabilities.

Question 45

Taxes payable on a company's balance sheet are:

A)part of the retained earnings of the company.
B)a long-term liability.
C)a short-term liability.
D)part of the total assets of the company.
E)none of these.

Question 46

Use the following to answer questions :
Table 7-2
What is the company's net worth in Table 7-2?

A)$60,000
B)$80,000
C)$90,000
D)$100,000
E)Impossible to tell from the information given.

Question 47

The income statement is a statement of:

A)profit and loss, receipts and sales, at some instant in time.
B)assets, liabilities, and net worth, at some instant in time.
C)sales receipts minus proper cost charges against sales, thereby showing earnings over a period of time.
D)changes in the value of assets, liabilities, and capital between two periods of time.
E)wages and salaries paid to employees.

Question 48

As production increases, average fixed costs always decline (if they are non-zero).

Question 49

Net worth on a company's balance sheet is properly described as:

A)the market value of the company itself.
B)the market value of the company's shares.
C)accumulated undistributed profits.
D)capital contributed by the shareholders.
E)total assets minus total liabilities, as shown on the books of the company.

Question 50

Marginal cost is equal to the per unit change in variable cost.

Question 51

Because opportunity costs always equal market price, opportunity costs also includes accounting costs.

Question 52

Average costs and marginal costs always rise and decline at the same time.

Question 53

Opportunity cost would still exist if I mow the lawn instead of planting the garden.

Question 54

Use the following to answer questions :
Table 7-2
If $40,000 worth of inventory were destroyed in an accident, what would the company in Table 7-2's new net worth be?

A)$50,000
B)$60,000
C)$90,000
D)$175,000
E)None of the above.

Question 55

The marginal cost curve can cut the average variable cost curve from below only at its minimum.

Question 56

If AC is above MC, MC must be rising.

Question 57

An accountant who forgets about depreciation charges for the year in drawing up the profit and loss statement and balance sheet will:

A)overstate the profits for the year.
B)understate the profits for the year.
C)overstate the liabilities of the firm.
D)understate the liabilities of the firm.
E)understate the net worth of the firm.

Question 58

Unlike fixed costs, variable costs are zero if output is zero.

Question 59

If a firm uses $1 million worth of raw materials; pays wages of $500,000; rent of $100,000; and interest of $100,000, and sells its output for $2 million, its net earnings before taxes are:

A)$300,000.
B)$400,000.
C)$700,000.
D)$1,000,000.
E)$2,000,000.

Question 60

Which of the following is not found in a balance sheet?

A)Net earnings after taxes.
B)Inventories.
C)Accounts payable.
D)Net worth.
E)Depreciation allowances.

Question 61

Total cost divided by output, TC/q, equals AC.

Question 62

If a firm is producing toasters using two inputs, and the MP₁/P₁=MP₂ /P₂, then the firm is minimizing costs.

Question 63

When marginal cost is rising, average cost is always rising.

Question 64

Net worth as shown on the company's balance sheet represents capital contributed by the shareholders plus accumulated undistributed profits.

Question 65

The item "taxes payable" is a long-term liability.

Question 66

AFC can never rise as output increases.

Question 67

If MC is less than AC, AC must be falling.

Question 68

Fixed assets are shown on the balance sheet at a figure equivalent to their replacement cost.

Question 69

In the short run, plant capacity but not output can be altered.

Question 70

If marginal cost is falling, then total cost is falling at an increasing rate.

Question 71

If you know fixed cost and the marginal cost of producing 10 units of output, then you can always compute the average cost of producing 10 units of output.

Question 72

Cash is the only asset on the balance sheet whose money value is exact and not merely an estimate.

Question 73

The substitution rule requires firms to substitute into the use of new technology whenever possible.

Question 74

Both the balance sheet and the income statement indicate the flow of sales, cost, and revenue over the accounting period.

Question 75

Fixed costs are irrelevant to a firm that is trying to maximize profits.

Question 76

After-tax earnings are the total of dividends and retained earnings.

Question 77

There are many interconnections between a company's balance sheet and its income statement.

Question 78

A company's depreciation charge on its income statement represents a writing down of the value of fixed assets to their current market value.

Question 79

Dividends are not an expense on a company's income statement.

Question 80

If the total value of assets remains unchanged but the addition to retained earnings is positive, then total liabilities must have decreased.