Question 1

For a widget manufacturer, the quantity of steel that the company needs to purchase changes in proportion to the number of widgets produced. In other words, the price paid for steel is a(n) _____ cost for the widget ﬁrm.

Accepted Answer

Variable costs change in proportion to the level of production. Since the quantity of steel needed changes with the number of widgets produced, it is considered a variable cost.

Question 2

A ﬁrm's output increases from 1760 units to 1890 units when labour employed increases from 147 to 148 workers. The marginal product of labour is _____ units.

Accepted Answer

The marginal product of labor is the change in output when one additional unit of labor is employed. Here, it is 1890 - 1760 = 130 units.

Question 3

When the marginal product of a factor of production is falling, it follows that _____.

Accepted Answer

When the marginal product of a factor of production is falling, it typically means that each additional unit of the factor is adding less to total output than the previous unit did. This decrease in productivity leads to an increase in the marginal cost of producing each additional unit, as more of the factor is required to produce the same amount of output.

Question 4

Which one of the following statements is correct?

Accepted Answer

Average total cost is calculated by dividing the total costs (fixed and variable costs combined) by the total output. This gives the cost per unit of output produced.

Question 5

If the total output of the ﬁrm is increasing in the short run, this means that _____.

Accepted Answer

The marginal product of the variable inputs being positive means that adding more of the variable inputs (like labor) is resulting in an increase in total output. This is a direct relationship between input and output in the production process.

Question 6

As long as the average variable cost of production is falling, _____.

Accepted Answer

When the average variable cost (AVC) of production is falling, it means that the cost of producing an additional unit (marginal cost, MC) is less than the AVC up to that point. This is because the AVC decreases only when the additional unit costs less to produce than what the average has been, pulling the average down.

Question 7

A small ﬁrm employs only 5 workers. 4 workers produce a total of 154 units of output. With the addition of the 5th worker, output increases by 50 units. What is the total output of the ﬁrm?

Accepted Answer

The total output with all 5 workers is the initial 154 units plus the additional 50 units contributed by the 5th worker, totaling 204 units.

Question 8

A ﬁrm's marginal cost of production is _____.

Accepted Answer

Marginal cost refers to the cost of producing one additional unit of output, which varies as the production level changes.

Question 9

A variable cost of production is one which _____.

Accepted Answer

Variable costs of production vary with the level of output and revenue, meaning they increase as production increases and decrease as production decreases.

Question 10

When the quantity of labor is increased substantially without increasing the amount of capital, the ﬁrm experiences _____.

Accepted Answer

When the quantity of labor is increased substantially without a corresponding increase in the amount of capital, the firm typically experiences diminishing returns. This is because, beyond a certain point, each additional unit of labor contributes less to output than the previous unit, given the fixed amount of capital.

Question 11

The marginal cost curve cuts the average cost curve at the point where the average cost is _____.

Accepted Answer

The marginal cost curve intersects the average cost curve at its minimum point because when marginal cost is below average cost, it pulls the average cost down, and when it is above, it pushes the average cost up.

Question 12

The law of diminishing returns shows that, in the short run, _____.

Accepted Answer

The law of diminishing returns indicates that as more units of a variable input (like labor) are added to fixed inputs (like machinery), the additional output (marginal product) from each new unit of input eventually decreases. This decrease in marginal product leads to an increase in the cost of producing each additional unit, hence variable costs rise as the marginal product of labor falls.

Question 13

If a ﬁrm incurs a total cost of £874 when it produces 10 units of output and a total cost of £950 when it produces 11 units of output, its marginal cost of production is _____.

Accepted Answer

The marginal cost is the change in total cost when one additional unit is produced. Here, it is £950 - £874 = £76.

Question 14

In the short run, the ﬁxed costs of production _____.

Accepted Answer

Fixed costs do not change with the output level in the short run, meaning they remain constant regardless of the amount of goods or services produced.

Question 15

Suppose that the amount of capital and plant size are ﬁxed for a ﬁrm. With 10 workers, it can produce 180 units of output and with 11 workers, the output produced is 190 units. Which of the following statements is true?

Accepted Answer

The average product of labor when 11 workers are hired is 190/11 = 17.27 units, which is greater than the marginal product of the 11th worker, which is 10 units (190 - 180).

Question 16

Which of the following statements best describes a ﬁrm's costs at a zero level of output?

Accepted Answer

At a zero level of output, a firm does not incur any variable costs because it is not producing anything, but it still incurs fixed costs such as rent, salaries, and insurance, which do not vary with the level of output. Therefore, total costs equal the fixed costs, which are positive.

Question 17

If the marginal product of labour starts falling, this means that _____.

Accepted Answer

When the marginal product of labor starts falling, it indicates diminishing returns to labor, suggesting that task specialization is no longer economically viable as additional workers contribute less to output.

Question 18

For a football club, the bulk of a professional footballer's wages is not linked directly to the creation of output, namely, football games. Even if revenues drop, clubs still have to honour their contractual obligations with their players. This means that, for the club, the footballers' salary is a(n) _____ cost.

Accepted Answer

Fixed costs are expenses that do not change in relation to the level of output or activity. In this case, footballers' salaries remain constant regardless of the number of football games played or the revenue generated, making them a fixed cost for the club.

Question 19

Which one of the following costs will remain unchanged as more output is produced by a ﬁrm?

Accepted Answer

Interest paid on money borrowed by the firm is a fixed cost, meaning it does not change with the level of output produced.

Question 20

An example of a ﬁxed cost of producing a good is the _____.

Accepted Answer

Rent paid for the office building is a fixed cost because it does not change with the level of production or output. Fixed costs remain constant regardless of the company's level of production.

Quiz 3: Firms in the Marketplace