Deck 9: Costs

Question 1

For a given firm, whenever the ratio of marginal product to input price differs across inputs,

A)the market will adjust the price of the higher priced input.
B)it will always be possible to make a cost-saving substitution in favor of the input with the lower MP/P ratio (except in the case of corner solutions).
C)it will always be possible to make a cost-saving substitution in favor of the input with the higher MP/P ratio.
D)the market will adjust the price of the lower priced input.

Answer 1

C

Question 2

Given input prices and the usual strategy of a profit-maximizing firm, efficient production occurs at

A) the highest isoquant Q for a given isocost C.
B) the lowest isoquant Q for a given isocost C.
C) the highest isocost C for a given isoquant Q.
D) the lowest isocost C for a given isoquant Q.

Answer 2

D

Question 3

The total fixed cost curve

A)varies with the level of output.
B)is negatively sloped.
C)is simply a horizontal line.
D)is simply a vertical line.

Answer 3

C

Question 4

Whenever the ratio of marginal products to input prices differs across inputs,

A)the marginal products of inputs will adjust as input combinations change to correct for the inefficiency.
B)no change will necessarily follow because the process could still be at peak efficiency.
C)a firm's costs could be reduced by shifting input usage toward the input with the lower marginal product to price ratio.
D)the costs of the inputs adjust to bring the marginal product ratios and cost ratios together.

Question 5

The following is true about point A for a firm with the I₁ isocost curve.

A)The firm is minimizing the costs of production.
B)Capital is relatively more expensive than labor.
C)Labor has a lower marginal product than capital.
D)All of the choices are true.

Question 6

Assume initially this firm is at point B.

A) Wages go up and per unit capital costs go up.
B) Wages go down and per unit capital cost go up.
C) Both wages and per unit capital costs go down.
D) Output decreases.

Question 7

Output for a simple production process is given by Q = 2KL, where K denotes capital, and L denotes labor. The price of capital is $25 per unit and capital is fixed at 8 units in the short run. The price of labor is $5 per unit. What is the total fixed cost of producing 80 units of output?

A)$200
B)$33
C)$25
D)$85

Question 8

The short run total cost of zero output is equal to

A)variable cost.
B)fixed cost.
C)zero.
D)variable cost plus fixed cost.

Question 9

The vertical distance between the total variable cost and total cost curves

A)is everywhere equal to zero.
B)is everywhere equal to marginal cost.
C)is everywhere equal to total fixed cost.
D)increases at a decreasing rate.

Question 10

A firm that is trying to produce a given level of output Q₀ at the lowest possible cost will

A)select the input combination at which an isocost line is tangent to the Q₀ isoquant.
B)select the input combination at which an isocost line is above the Q₀ isoquant.
C)select the input combination at which an isocost line is below the Q₀ isoquant.
D)choose to produce at a level where variable costs are less than or equal to fixed costs.

Question 11

The vertical distance between the average variable cost and average total cost curves

A)is everywhere equal to total fixed costs.
B)is everywhere equal to marginal cost.
C)increases at a decreasing rate.
D)decreases as quantity increases.

Question 12

The total cost curve

A)is a horizontal line.
B)increases at a decreasing rate due to diminishing returns.
C)is parallel to the total fixed cost curve.
D)is parallel to and above the total variable cost curve.

Question 13

Suppose labor and capital are both used to produce output. In the long run, if the wage rate rises while the rental rate on capital remains unchanged,

A)the process will become more labor intensive.
B)the process will become more capital intensive.
C)market forces will come into play to bring the prices back to their earlier relationship.
D)the marginal product of capital will rise and the marginal product of labor will fall.

Question 14

Once we enter the region of diminishing returns, total variable cost

A)increases at a decreasing rate.
B)increases at an increasing rate.
C)decreases at a decreasing rate.
D)decreases at an increasing rate.

Question 15

Gravel is made by hand in Nepal, but by machine in the U.S. because

A)the marginal product of labor is higher in Nepal than in the U.S.
B)capital is much more expensive in the U.S.than in Nepal.
C)of consumer preferences.
D)the relative prices of labor and capital differ so dramatically in the two countries.

Question 16

Total cost is broken down into two components:

A)average cost and marginal cost.
B)average cost and fixed cost.
C)variable cost and marginal cost.
D)variable cost and fixed cost.

Question 17

Output for a simple production process is given by Q = 2KL, where K denotes capital, and L denotes labor. The price of capital is $25 per unit and capital is fixed at 8 units in the short run. The price of labor is $5 per unit. What is the total cost of producing 80 units of output?

A)$525
B)$200
C)$233
D)$225

Question 18

The variable cost of zero units of output is equal to

A)total cost.
B)total fixed cost.
C)zero.
D)one.

Question 19

When costs are at a minimum,

A)the ratio of the MP_L/MP_K < Price L/Price K.
B)MP_L = MP_K.
C)the extra output we get from the last dollar spent on an input must be the same for all inputs.
D)Price L = Price K.

Question 20

Output for a simple production process is given by Q = 2KL, where K denotes capital, and L denotes labor. The price of capital is $25 per unit and capital is fixed at 8 units in the short run. The price of labor is $5 per unit. What is the variable cost of producing 80 units of output?

A)$200
B)$33
C)$25
D)$85

Question 21

Geometrically, marginal cost at any level of output may be interpreted as the slope of

A)a ray to the total cost curve at that level of output.
B)the average variable cost curve at that level of output.
C)the total cost curve at that level of output.
D)the isoquant at that level of output.

Question 22

Average variable cost is

A)the ratio of total variable cost to the quantity of output produced.
B)the ratio of variable cost to total cost.
C)the ratio of variable cost to fixed cost.
D)the difference between variable and fixed cost.

Question 23

The total fixed cost function

A)is horizontal.
B)is U-shaped.
C)is an upward sloping line.
D)is a downward sloping line.

Question 24

The long-run total cost of zero output is equal to

A)variable cost.
B)fixed cost.
C)zero.
D)the marginal revenue product of labor.

Question 25

MC equals

A)ΔTC/ΔQ.
B)ΔVC/ΔQ.
C)FC/Q.
D)VC/Q.

Question 26

Producing an additional unit whose marginal cost exceeds the average total cost incurred thus far has the effect of pulling the

A)fixed cost up.
B)average cost up.
C)average cost down.
D)total cost down.

Question 27

The slope of a ray from the origin to a point on the total cost curve is the

A)average fixed cost of producing the corresponding level of output.
B)average total cost of producing the corresponding level of output.
C)marginal cost of producing the corresponding level of output.
D)variable cost of producing the corresponding level of output.

Question 28

Average fixed cost

A)is a horizontal line.
B)increases steadily as output increases.
C)decreases steadily as output increases.
D)exhibits diminishing returns.

Question 29

When marginal cost is greater than average total cost,

A)average total cost must be increasing with output.
B)average variable cost must be decreasing with output.
C)average fixed cost must be increasing with output.
D)marginal cost must be increasing with output.

Question 30

The AFC curve

A)always slopes downward.
B)is U-shaped.
C)is a horizontal line.
D)is the same as the total fixed cost curve.

Question 31

The MC curve slopes upward due to

A)increasing returns to scale.
B)decreasing returns to scale.
C)diminishing returns.
D)constant returns to scale.

Question 32

If the total variable cost curve is a straight line then the

A)total cost curve will also be a straight line.
B)total cost curve may or may not be a straight line.
C)marginal cost function is downward sloping.
D)marginal cost function is upward sloping.

Question 33

Marginal cost is defined as

A)the rate at which average cost changes with output.
B)the rate at which total variable cost changes with output.
C)the rate at which fixed cost changes with output.
D)total cost minus variable cost.

Question 34

In order to divide a given production quota between two production processes in such a way as to produce the quota at the lowest possible cost, one should produce the output where

A)average costs are equal for both processes.
B)average cost is equal to marginal cost for both processes.
C)marginal costs are equal in both processes.
D)marginal costs are at least equal to ATC in each process.

Question 35

The vertical distance between the average total cost and the average variable cost curves at any level of output will always be

A)variable cost.
B)average fixed cost.
C)fixed cost less variable cost.
D)total cost less fixed cost.

Question 36

Markets characterized by declining long-run average costs are often referred to as

A)perfect competition.
B)diseconomies of scale.
C)natural monopolies.
D)nonprofit organizations.

Question 37

ATC equals

A)AVC - AFC.
B)FC/Q.
C)(TFC + TVC)/Q.
D)MC + AFC.

Question 38

At one unit of output AVC is

A)zero.
B)infinite.
C)equal to marginal cost.
D)less than marginal cost.

Question 39

Say at the current output level marginal costs = $20 and the average total cost = $10. From this information we know that the

A)marginal costs are increasing.
B)average total costs are increasing.
C)average total costs are decreasing.
D)marginal costs are decreasing.

Question 40

When marginal cost is less than average total cost, ______ as output increases.

A)average total cost must be increasing
B)average variable cost must be decreasing
C)average fixed cost must be increasing
D)average total cost must be decreasing

Question 41

With constant returns to scale and factor prices invariant with the amount of factors used, the long-run output expansion path is

A)horizontal.
B)a straight line.
C)U-shaped.
D)zero.

Question 42

The minimum efficient scale of production is the level of production required for the

A)long run average curve to reach its minimum.
B)variable cost curve to reach its minimum.
C)marginal cost curve to reach its minimum.
D)average cost curve to reach its minimum.

Question 43

The short-run output expansion path is __________ in the relevant area.

A)a ray
B)horizontal
C)U-shaped
D)upward sloping

Question 44

If some inputs of production do not vary with the level of output we call them fixed inputs which when multiplied by their price become fixed cost. Which of the following items typically fit this category?

A)Property taxes
B)Insurance payments
C)Interest on loans
D)All of these are fixed costs

Question 45

Average total cost is $100 for a given output, total fixed cost is 120 and average variable cost is 70. What is the quantity being produced?

Question 46

Assume fixed costs are 470 and labor costs $20 per unit. The first laborer produces 20 units of output. Subsequent hires add 5 units less to production than the previous worker. Thus the second worker adds 15, the third adds 10 etc. Which of the following is a true statement?

A)At an output of 20 the total cost is $20.
B)Average total cost at an output of 50 is 11.
C)Average fixed cost is 10 when output is 45.
D)Marginal cost keeps falling as the number of laborers hired increases.

Question 47

Which statement is false?

A)Short-run cost assumes a fixed capital size, while long-run cost includes all possible capital levels in determining cost.
B)Short-run total cost can never be less than long-run total cost at any given output level.
C)Long-run marginal cost never intersects long-run average cost as long as increasing returns to scale are present.
D)Short run ATC and long run ATC are never equal except at the minimum point on the long run ATC curve.

Question 48

Let the TC curve be given by the equation TC(Q) = 20 + 5Q. The variable cost curve can be expressed as

A)20 + 5Q.
B)20.
C)5Q.
D)5.

Question 49

Output for a simple production process is given by Q = KL, where K denotes capital and L denotes labor. The price of labor is $10 per unit and the price of capital is $2 per unit. Suppose at the current level of production the firm is minimizing costs and the marginal product of labor is 10. Given this you know that the marginal product of capital must be

A)5.
B)2.
C)10.
D)It is impossible to say with the information given

Question 50

Suppose you have the following values for a short-run production process: Q = 20, VC = 100, FC = 600 and MC = 40. Given this, we know that the

A)average cost curve must be increasing.
B)average cost curve must be decreasing.
C)marginal cost curve must be increasing.
D)marginal cost curve must be decreasing.

Question 51

In a graph of short run cost curves, which starts rising first?

A)The average variable cost curve
B)The average total cost curve
C)The marginal cost curve
D)The average fixed cost curve

Question 52

Suppose output for a simple production process is given by Q = K + L, where K denotes capital, and L denotes labor. The price of labor is $2 per unit and the price of capital is $4 per unit. What would be the minimum costs of producing 10 units of output?

A)$40
B)$20
C)$10
D)It is impossible to say with the information given

Question 53

Let the TC curve be given by the equation TC(Q) = 10 + 5Q. The average variable cost can be expressed as

A)10.
B)(10/Q) + 5.
C)10 + (5/Q).
D)It cannot be determined.

Question 54

Let the TC curve be given by the equation TC(Q) = 6Q. The FC curve can be expressed as

A)6.
B)6Q.
C)0.
D)It cannot be determined with the information given

Question 55

If the variable cost curve is a straight line, then the

A)marginal cost curve will be U-shaped.
B)marginal cost curve may be U-shaped.
C)marginal cost curve will be horizontal.
D)marginal cost curve is upward sloping.

Question 56

Let the TC curve be given by the equation TC(Q) = 5 + Q. The ATC curve can be expressed as

A)(1/Q) + 5.
B)(5/Q) + 1.
C)5.
D)Q.

Question 57

Assume fixed costs are 470 and labor costs $20 per unit. The first laborer produces 20 units of output. Subsequent hires add 5 units less to production than the previous worker. Thus the second worker adds 15, the third adds 10 etc. If the fifth laborer adds 25 units to the short run production output and the sixth laborer adds 20 units to the total output and the firm can hire all the labor it wants at the going wage we can be sure that

A)marginal cost is increasing.
B)average total cost is increasing.
C)average variable cost is increasing.
D)None of these is correct because all the costs listed are decreasing.

Question 58

Assume fixed costs are 470 and labor costs $20 per unit. The first laborer produces 20 units of output. Subsequent hires add 5 units less to production than the previous worker. Thus the second worker adds 15, the third adds 10 etc. What is the average variable cost of output when one worker is hired?

A)1
B)20
C)24.50
D)None of these is the correct AVC.

Question 59

Let TC(Q) = 10 + Q; MC equals

A)10.
B)1.
C)11.
D)It cannot be determined from the information given

Question 60

Output for a simple production process is given by Q = KL, where K denotes capital and L denotes labor. The price of labor is $10 per unit and the price of capital is $2 per unit. If at the current level of production the marginal product of labor is 4 while the marginal product of capital is 2, then in order to minimize your costs of production you should use

A)more capital and less labor.
B)more labor and less capital.
C)more of both inputs.
D)the same amount of both inputs.

Question 61

Why does the AVC reach its minimum before the ATC reaches its minimum?

Question 62

During the last 30 years computers have changed most production processes. Use an isocost-isoquant diagram to show the effect the spread of computers have had on labor during the last 30 years.

Question 63

If the total cost function is TC = Q³ - 6Q² + 14Q + 75, would you expect the bottom of the ATC curve to be greater than, less than, or equal to 3?

Question 64

If the total cost function is TC = 10Q³ - 50Q² + 1000Q + 500, what is the equation for AVC?

Question 65

If the total cost function is TC = 10Q³ - 50Q² + 1000Q + 500, what is the equation for AFC?

Question 66

If the total cost function is TC = 10Q³ - 50Q² + 1000Q + 500, what is the equation for ATC?

Question 67

Sketch a long run average total cost curve and a short run average total cost curve of a plant that is too small to produce at the minimum long run cost. Put the two curves on the same graph and include the marginal cost curves for both average cost functions.

Question 68

The total cost function is TC = Q³ - 6Q² + 14Q + 75. When does diminishing returns to production set in?

Question 69

If the total cost function is TC = Q³ - 6Q² + 14Q + 75, at what output is the AVC = MC?

Question 70

If the total cost function is TC = 10Q³ - 50Q² + 1000Q + 500, what is the equation for MC?