Deck 13: The Costs of Production

Question 1

Figure 13-1
Refer to Figure 13-1.Suppose the production function shifts from TP2 to TP1.Such a shift in the total product curve is most likely due to a decrease in the firm's

A)costs of production.
B)product price.
C)market share.
D)productivity.

Answer 1

D

Question 2

Figure 13-1
Refer to Figure 13-1.Suppose the production function shifts from TP1 to TP2.Such a shift in the total product curve is most likely due to an increase in the firm's

A)costs of production.
B)productivity.
C)product price.
D)market share.

Answer 2

B

Question 3

Eldin is a house painter.He can paint three houses per week.He is considering hiring his friend Murphy.Murphy can paint five houses per week.What is the maximum total output possible if Eldin hires Murphy?

A)2 houses
B)3 houses
C)5 houses
D)8 houses

Answer 3

D

Question 4

Suppose that for a particular business there are no implicit costs.Then

A)accounting profit will be greater than economic profit.
B)accounting profit will be the same as economic profit.
C)accounting profit will be less than economic profit.
D)the relationship between accounting profit and economic profit cannot be determined without more information.

Question 5

The difference between accounting profit and economic profit relates to

A)the manner in which revenues are defined.
B)how marginal revenue is calculated.
C)the manner in which costs are defined.
D)the price of the good in the market.

Question 6

Which of the following statements is correct?

A)Opportunity costs equal explicit minus implicit costs.
B)Economists consider opportunity costs to be included in a firm's total revenues.
C)Economists consider opportunity costs to be included in a firm's costs of production.
D)All of the above are correct.

Question 7

Scenario 13-7
Wanda owns a lemonade stand.She produces lemonade using five inputs: water,sugar,lemons,paper cups,and labor.Her costs per glass are as follows: 0.01 dinar for water,0.02 dinar for sugar,0.03 dinar for lemons,0.02 dinar for cups,and 0.10 dinar for the opportunity cost of her labor.She can sell 300 glasses for 0.50 dinar each.
Refer to Scenario 13-7.What are Wanda's implicit costs per glass?

A)0.18
B)0.10
C)0.08
D)0.02

Question 8

Refer to Table 13-2.At which number of workers does diminishing marginal product begin?

A)1
B)2
C)3
D)4

Question 9

Economists normally assume that the goal of a firm is to
(i)sell as much of its product as possible.
(ii)set the price of the product as high as possible.
(iii)maximize profit.

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

Question 10

Which of the following expressions is correct?

A)accounting profit = total revenue - explicit costs
B)economic profit = total revenue - implicit costs
C)economic profit = total revenue - explicit costs
D)Both a and b are correct.

Question 11

Which of the following would be an example of an implicit cost?
(i)forgone investment opportunities
(ii)wages of workers
(iii)raw materials costs

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

Question 12

Scenario 13-7
Wanda owns a lemonade stand.She produces lemonade using five inputs: water,sugar,lemons,paper cups,and labor.Her costs per glass are as follows: 0.01 dinar for water,0.02 dinar for sugar,0.03 dinar for lemons,0.02 dinar for cups,and 0.10 dinar for the opportunity cost of her labor.She can sell 300 glasses for 0.50 dinar each.
Refer to Scenario 13-7.What are Wanda's explicit costs per glass?

A)0.18
B)0.10
C)0.08
D)0.02

Question 13

A production function describes

A)how a firm maximizes profits.
B)how a firm turns inputs into output.
C)the minimal cost of producing a given level of output.
D)the relationship between cost and output.

Question 14

When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor,the firm is experiencing

A)diminishing labor.
B)diminishing output.
C)diminishing marginal product.
D)negative marginal product.

Question 15

Figure 13-1
Refer to Figure 13-1.Which of the following could explain why the total product curve would shift from TP2 to TP1?

A)There is additional capital equipment available to the firm.
B)Labor skills have become rusty and outdated in the firm.
C)The firm has developed improved production technology.
D)The firm is now receiving a higher price for its product.

Question 16

The amount of money that a firm pays to buy inputs is called

A)total cost.
B)variable cost.
C)marginal cost.
D)fixed cost.

Question 17

The marginal product of an input in the production process is the increase in

A)total revenue obtained from an additional unit of that input.
B)profit obtained from an additional unit of that input.
C)total revenue obtained from an additional unit of that input.
D)quantity of output obtained from an additional unit of that input.

Question 18

To an economist,the field of industrial organization answers which of the following questions?

A)Why are consumers subject to the law of demand?
B)Why do firms experience diminishing marginal products of inputs?
C)How does the number of firms affect prices and the efficiency of market outcomes?
D)Why do firms consider production costs when determining product supply?

Question 19

When a firm's only variable input is labor,then the slope of the production function measures the

A)quantity of labor.
B)quantity of output.
C)total cost.
D)marginal product of labor.

Question 20

Jacqui decides to open her own business and earns 50,000 dollars in accounting profit the first year.When deciding to open her own business,she turned down three separate job offers with annual salaries of 30,000,40,000,and 45,000 dollars.What is Jacqui's economic profit from running her own business?

A)-55,000 dollars
B)-5,000 dollars
C)5,000 dollars
D)20,000 dollars

Question 21

Table 13-8 $$\begin{array} { | c | l | l | } \hline \begin{array} { c } \text { Quantity } \\\text { of Output }\end{array} & \begin{array} { l } \text { Fixed } \\\text { Cost } \\\text { (dinar) }\end{array} & \begin{array} { l } \text { Variable } \\\text { Cost (dinar) }\end{array} \\\hline 0 & 20 & 0 \\\hline 1 & 20 & 10 \\\hline 2 & 20 & 40 \\\hline 3 & 20 & 80 \\\hline 4 & 20 & 130 \\\hline 5 & 20 & 200 \\\hline 6 & 20 & 300 \\\hline\end{array}$$

-Refer to Table 13-8.What is the shape of the marginal cost curve for this firm?

A)constant
B)upward-sloping
C)downward-sloping
D)U-shaped

Question 22

Figure 13-5
Refer to Figure 13-5.Curve D is increasing because

A)of diminishing marginal product.
B)of increasing marginal product.
C)marginal product first increases,then decreases.
D)marginal product first decreases,then increases.

Question 23

Total cost can be divided into two types of costs:

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

Question 24

Table 13-8 $$\begin{array} { | c | l | l | } \hline \begin{array} { c } \text { Quantity } \\\text { of Output }\end{array} & \begin{array} { l } \text { Fixed } \\\text { Cost } \\\text { (dinar) }\end{array} & \begin{array} { l } \text { Variable } \\\text { Cost (dinar) }\end{array} \\\hline 0 & 20 & 0 \\\hline 1 & 20 & 10 \\\hline 2 & 20 & 40 \\\hline 3 & 20 & 80 \\\hline 4 & 20 & 130 \\\hline 5 & 20 & 200 \\\hline 6 & 20 & 300 \\\hline\end{array}$$

-Refer to Table 13-8.What is the average variable cost of producing 5 units of output?

A)4
B)5
C)40
D)44

Question 25

Table 13-8 $$\begin{array} { | c | l | l | } \hline \begin{array} { c } \text { Quantity } \\\text { of Output }\end{array} & \begin{array} { l } \text { Fixed } \\\text { Cost } \\\text { (dinar) }\end{array} & \begin{array} { l } \text { Variable } \\\text { Cost (dinar) }\end{array} \\\hline 0 & 20 & 0 \\\hline 1 & 20 & 10 \\\hline 2 & 20 & 40 \\\hline 3 & 20 & 80 \\\hline 4 & 20 & 130 \\\hline 5 & 20 & 200 \\\hline 6 & 20 & 300 \\\hline\end{array}$$

-Refer to Table 13-8.What is the average fixed cost of producing 5 units of output?

A)4
B)5
C)40
D)44

Question 26

Marginal cost increases as the quantity of output increases.This reflects the property of

A)increasing total cost.
B)diminishing total cost.
C)increasing marginal product.
D)diminishing marginal product.

Question 27

Some costs do not vary with the quantity of output produced.Those costs are called

A)marginal costs.
B)average costs.
C)fixed costs.
D)explicit costs.

Question 28

Table 13-13 $$\begin{array} { | c | c | } \hline \text { Output } & \text { Total Cost (dolars) } \\\hline 0 & \$ 40 \\\hline 10 & \$ 60 \\\hline 20 & \$ 90 \\\hline 30 & \$ 130 \\\hline 40 & \$ 180 \\\hline 50 & \$ 240 \\\hline\end{array}$$

-Refer to Table 13-13.What is the total fixed cost for this firm?

A)20
B)30
C)40
D)50

Question 29

Thirsty Thelma owns and operates a small lemonade stand.When Thelma is producing a low quantity of lemonade she has few workers and her equipment is not being fully utilized.Because she can easily put her idle resources to use,

A)the marginal cost of an extra worker is large.
B)the marginal cost of one more glass of lemonade is smaller than if output were high.
C)the marginal product of an extra worker is small.
D)her lemonade stand is likely to be crowded with workers.

Question 30

Consider the following information about baseball production at Bobby's Baseball Factory: $$\begin{array} { | c | c | } \hline \text { Worker } & \text { Marginal Product } \\\hline 1 & 3 \\\hline 2 & 5 \\\hline 3 & 8 \\\hline 4 & 10 \\\hline 5 & 7 \\\hline 6 & 4 \\\hline 7 & 2 \\\hline\end{array}$$ Bobby pays all his workers the same wage,and labor is his only variable cost.From this information we can conclude that Bobby's average variable cost decreases

A)as output rises from 0 to 10,but rises after that.
B)as output rises from 0 to 26,but rises after that.
C)as output rises from 0 to 33,but increases after that.
D)continually as output rises.

Question 31

Table 13-8 $$\begin{array} { | c | l | l | } \hline \begin{array} { c } \text { Quantity } \\\text { of Output }\end{array} & \begin{array} { l } \text { Fixed } \\\text { Cost } \\\text { (dinar) }\end{array} & \begin{array} { l } \text { Variable } \\\text { Cost (dinar) }\end{array} \\\hline 0 & 20 & 0 \\\hline 1 & 20 & 10 \\\hline 2 & 20 & 40 \\\hline 3 & 20 & 80 \\\hline 4 & 20 & 130 \\\hline 5 & 20 & 200 \\\hline 6 & 20 & 300 \\\hline\end{array}$$

-Refer to Table 13-8.What is the marginal cost of producing the fifth unit of output?

A)4
B)40
C)50
D)70

Question 32

Figure 13-5
Refer to Figure 13-5.Curve A represents which type of cost curve?

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

Question 33

The nature of a firm's cost (fixed or variable)depends on the

A)firm's revenues.
B)time horizon under consideration.
C)price the firm charges for output.
D)explicit but not implicit costs.

Question 34

Figure 13-3
Refer to Figure 13-3.Assuming that the firm depicted produces biscuits,which of the statements below is most consistent with the shape of the total cost curve?

A)Producing an additional biscuit is always more costly than producing the previous biscuit.
B)Total production of biscuits decreases with additional units of input.
C)Producing additional biscuits is equally costly,regardless of how many biscuits are already being produced.
D)Producing additional biscuits becomes increasingly costly only when the number of biscuits already being produced is large.

Question 35

Average total cost equals

A)change in total costs divided by quantity produced.
B)change in total costs divided by change in quantity produced.
C)(fixed costs + variable costs)divided by quantity produced.
D)(fixed costs + variable costs)divided by change in quantity produced.

Question 36

Consider the following information about bread production at Beth's Bakery: $$\begin{array} { | c | c | } \hline \text { Worker } & \text { Marginal Product } \\\hline 1 & 5 \\\hline 2 & 7 \\\hline 3 & 10 \\\hline 4 & 11 \\\hline 5 & 8 \\\hline 6 & 6 \\\hline 7 & 4 \\\hline\end{array}$$ Beth pays all her workers the same wage,and labor is her only variable cost.From this information we can conclude that Beth's marginal cost

A)declines as output increases from 0 to 33,but increases after that.
B)declines as output increases from 0 to 11,but increases after that.
C)increases as output increases from 0 to 11,but declines after that.
D)is constant.

Question 37

Table 13-13 $$\begin{array} { | c | c | } \hline \text { Output } & \text { Total Cost (dolars) } \\\hline 0 & \$ 40 \\\hline 10 & \$ 60 \\\hline 20 & \$ 90 \\\hline 30 & \$ 130 \\\hline 40 & \$ 180 \\\hline 50 & \$ 240 \\\hline\end{array}$$

-Refer to Table 13-13.What is average fixed cost when output is 40 units?

A)1.00
B)3.32
C)5.00
D)8.00

Question 38

Suppose that a firm has only one variable input,labor,and firm output is zero when labor is zero.When the firm hires 6 workers the firm produces 90 units of output.Fixed costs of production are $6 and the variable cost per unit of labor is 10 dollars.The marginal product of the seventh unit of labor is 4.Given this information,what is the marginal cost of production when the firm hires the 7th worker?

A)1.50
B)2.50
C)5
D)10

Question 39

Suppose Jan started up a small lemonade stand business last month.Variable costs for Jan's lemonade stand now include the cost of

A)building the lemonade stand.
B)hiring an artist to design a logo for her sign.
C)lemons and sugar.
D)All of the above are correct.

Question 40

Table 13-13 $$\begin{array} { | c | c | } \hline \text { Output } & \text { Total Cost (dolars) } \\\hline 0 & \$ 40 \\\hline 10 & \$ 60 \\\hline 20 & \$ 90 \\\hline 30 & \$ 130 \\\hline 40 & \$ 180 \\\hline 50 & \$ 240 \\\hline\end{array}$$

-Refer to Table 13-13.What is average variable cost when output is 50 units?

A)3.60
B)4.00
C)4.40
D)4.80

Question 41

In setting the production level,a firm's cost curves

A)by themselves do not tell us what decisions the firm will make.
B)dictate what decisions the firm will make.
C)have no bearing on what decisions the firm will make.
D)None of the above is correct.

Question 42

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

Question 43

A firm's total profit equals its marginal revenue minus its marginal cost.

Question 44

Average total cost and marginal cost express information that is already contained in a firm's total cost.

Question 45

Economies of scale occur when a firm's

A)marginal costs are constant as output increases.
B)long-run average total costs are decreasing as output increases.
C)long-run average total costs are increasing as output increases.
D)marginal costs are equal to average total costs for all levels of output.

Question 46

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

Question 47

The typical total-cost curve is U-shaped.

Question 48

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

Question 49

In the long run Firm A incurs total costs of $900 when output is 30 units and $1,200 when output is 40 units.Firm A exhibits

A)diseconomies of scale because total cost is rising as output rises.
B)constant returns to scale because average total cost is constant as output rises.
C)diseconomies of scale because average total cost is rising as output rises.
D)economies of scale because average total cost is falling as output rises.

Question 50

Accountants often ignore implicit costs.

Question 51

Diminishing marginal productivity implies decreasing total product.

Question 52

The field of industrial organization addresses how the number of firms affects prices in a market and the efficiency of the market outcome.

Question 53

Figure 13-9
The figure below depicts average total cost functions for a firm that produces automobiles.
Refer to Figure 13-9.This firm experiences diseconomies of scale at what output levels?

A)output levels greater than N
B)output levels between M and N
C)output levels less than M
D)All of the above are correct as long as the firm is operating in the long run.

Question 54

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

Question 55

Constant returns to scale occur when the firm's long-run

A)total costs are constant as output increases.
B)average total costs are constant as output increases.
C)average cost curve is falling as output increases.
D)average cost curve is rising as output increases.

Question 56

For a typical firm,fixed costs increase in direct proportion to the increases in output.

Question 57

Accounting profit is greater than or equal to economic profit.

Question 58

The economic field of industrial organization examines how firms' decisions about prices and quantities depend on the market conditions they face.

Question 59

The long-run average total cost curve is always

A)flatter than the short-run average total cost curve,but not necessarily horizontal.
B)horizontal.
C)falling as output increases.
D)rising as output increases.

Question 60

Economies of scale occur when

A)long-run average total costs rise as output increases.
B)long-run average total costs fall as output increases.
C)average fixed costs are falling.
D)average fixed costs are constant.

Question 61

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 62

A key difference between accountants and economists is their different treatment of the cost of capital.Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate?
Explain.

Question 63

The production function depicts a relationship between which two variables?
Also,draw a production function that exhibits diminishing marginal product.

Question 64

How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve?
Explain or draw a graph.

Question 65

What are opportunity costs?
How do explicit and implicit costs relate to opportunity costs?

Question 66

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

Question 67

What effect,if any,does diminishing marginal product have on the shape of the marginal cost curve?