Question 1

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

Accepted Answer

The cost of producing an additional unit of a good may differ from the average cost due to various factors such as economies of scale, changes in input prices, etc.

Question 2

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

Accepted Answer

Variable costs change with the level of production, so if a firm produces nothing, it incurs no variable costs. Fixed costs, however, are incurred regardless of the level of production.

Question 3

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

Accepted Answer

Economists assume that people make decisions by weighing the benefits and costs of each additional or marginal unit of a good or service.

Question 4

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

Accepted Answer

This statement is true. In addition to total cost, related measures of cost that can be derived include average cost, marginal cost, fixed cost, and variable cost.

Question 5

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

Accepted Answer

Diminishing marginal product occurs when the marginal product of an input decreases as the quantity of that input increases while holding all other inputs constant. This is reflected in the production function becoming flatter as inputs increase.

Question 6

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

Accepted Answer

Accountants are responsible for recording and classifying financial transactions, preparing financial statements, advising on tax strategies, and analyzing financial data to provide insights and recommendations to management. They play a crucial role in managing the financial health of a business by keeping track of the money that flows in and out of the company.

Question 7

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

Accepted Answer

Economists consider implicit costs, which represent the opportunity costs of using resources owned by the firm for its current purpose rather than the next best alternative, important for understanding economic profit, even though these costs do not involve a direct money outlay.

Question 8

Average variable cost and marginal cost are two ways for economists to say the same thing.

Accepted Answer

While both average variable cost and marginal cost are measures of cost in economics, they are not the same thing. Average variable cost is calculated by dividing total variable cost by the quantity produced, while marginal cost is the cost of producing one additional unit of output.

Question 9

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

Accepted Answer

Economists assume that the goal of a firm is to maximize profit, not revenue. While revenue is important, it is ultimately profit (revenue minus costs) that determines a firm's financial success.

Question 10

The cost of capital includes both any interest payments in loans as well as any forgone interest on savings used to finance the business.

Accepted Answer

The cost of capital takes into account the interest payments made on loans, as well as the opportunity cost of using savings to fund the business (i.e. the potential interest that could have been earned if the savings were invested or deposited in an interest-bearing account instead).

Question 11

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.

Accepted Answer

In the short run, a firm's production capacity is fixed, so it cannot easily adjust its input levels. However, in the long run, all inputs can be adjusted, allowing the firm to change its production capacity. This difference in flexibility has an impact on the firm's cost curves, causing them to be steeper in the short run and flatter in the long run.

Question 12

The short run is defined as the period of time in which all factors of production are fixed.

Accepted Answer

In the short run, at least one factor of production is fixed, while others can vary to change the level of output.

Question 13

Accounting profit and economic profit are two ways to say the same thing.

Accepted Answer

Accounting profit only takes into account explicit costs, while economic profit takes into account implicit costs as well. Therefore, they are not the same thing.

Question 14

Costs are a key determinate of a firm's production and pricing decisions.

Accepted Answer

Costs play a crucial role in shaping a firm's production decisions and ultimately its pricing decisions. Profit margins, break-even points, and overall profitability are heavily influenced by a firm's costs, including production costs, overhead costs, and marketing costs. Therefore, understanding and managing costs effectively is essential to running a successful business.

Question 15

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

Accepted Answer

Economists typically include opportunity costs when discussing a firm's costs. Opportunity costs refer to the value of the next best alternative that was foregone in order to pursue a certain decision or action. These costs may not always be explicit or easily quantifiable, but they are an important factor to consider in any economic analysis of a firm's decisions.

Question 16

Costs that have already been incurred and are non-recoverable should be included in marginal cost calculations.

Accepted Answer

Marginal cost calculations should only include costs that will be incurred as a result of producing one more unit of a good or service, not costs that have already been incurred and are non-recoverable, which are considered sunk costs.

Question 17

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

Accepted Answer

Variable costs are directly related to the quantity of output produced. As the quantity of production increases, variable costs also increase and decrease if the quantity of production decreases.

Question 18

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

Accepted Answer

If the total cost curve becomes flatter as output increases, it indicates increasing marginal product, as each additional unit of input contributes more to output, reducing the cost per unit.

Question 19

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

Accepted Answer

The shape of the total cost curve is directly related to the shape of the production function. Specifically, as the production function becomes increasingly difficult to expand in the short-run, total cost will increase at an accelerating rate due to the law of diminishing returns. This will result in a progressively steeper upward slope for the total cost curve.

Question 20

Average variable cost is equal to the quantity of output divided by the total variable cost.

Accepted Answer

Average variable cost is equal to total variable cost divided by the quantity of output.

Quiz 13: The Costs of Production