Question 1

X and Y are inputs used to produce good Z. If another unit of X increases but the units of Y are constant, then what is true according to the law of diminishing marginal returns?

Accepted Answer

The law of diminishing marginal returns states that as additional units of one input (X) are added to a fixed amount of another input (Y), the marginal product of the input being increased (X) will eventually decrease.

Question 2

Reed's Accounting Firm has 100 workers and 90 computers and currently serves 200 households. If Reed adds another accountant to his staff, he can serve 220 households. What does the law of diminishing marginal returns predict if he adds two more accountants?

Accepted Answer

The law of diminishing marginal returns states that as more units of a variable input (like labor) are added to fixed amounts of other inputs (like capital), the additional output from each new unit of input will eventually decrease. Since adding the first accountant increases the number of households served by 20, adding a second and third accountant is likely to result in less than a 20 household increase per accountant due to the fixed number of computers (capital).

Question 3

Before long, when you add an additional worker to a firm, the next one won't contribute as much as the previous one. This statement reflects the idea of:

Accepted Answer

This statement reflects the concept of diminishing marginal product, which occurs when adding an additional factor of production results in a smaller increase in output.

Question 4

The cost of a unit of labor is the:

Accepted Answer

The cost of a unit of labor is referred to as the wage. This is the payment made to employees for their labor or services.

Question 5

The cost of a unit of capital is the:

Accepted Answer

The cost of a unit of capital is referred to as the rental rate. This is the price paid for the use of a unit of capital for a given period of time.

Question 6

If a firm owns the building that it is located in, what is the firm's rental rate?

Accepted Answer

The rental rate for a firm that owns its building is the opportunity cost of renting it to someone else. This is because the firm foregoes potential rental income by using the building for its own operations instead of leasing it out.

Question 7

If Mackenzie owns the equipment that she uses to bake pies, then her:

Accepted Answer

The rental rate in this context refers to the opportunity cost of using the equipment herself instead of renting it out to someone else. Since Mackenzie owns the equipment, she foregoes the potential income she could earn from renting it out, making choice C correct.

Question 8

The cost minimizing combination of inputs is the combination:

Accepted Answer

The cost-minimizing combination of inputs occurs where the marginal product of each input relative to its cost is equal. This ensures that the firm is getting the most output per unit of input cost, which is a fundamental principle of cost minimization in economics.

Question 9

Mackenzie wants to produce more pies. If she rents another oven for $100, she can make another 200 pies. If she hires another worker at a wage of $15, she can make another 45 pies. What statement is true based on this information?

Accepted Answer

Hiring another worker at a wage of $15 will minimize costs because the marginal product of labor per dollar spent is greater than the marginal product of capital per dollar spent.

Question 10

Generally, a firm can lower its cost of producing a given level of output by hiring:

Accepted Answer

A firm can lower its cost of producing a given level of output by hiring more of the input with the highest marginal product per dollar spent. This approach ensures that the firm is getting the most output per unit of input cost, which is a key strategy in minimizing production costs while maintaining output levels.

Question 11

The cost of any amount of output is minimized when the:

Accepted Answer

The cost of any amount of output is minimized when the marginal product per dollar spent on each input is equal across all inputs. This ensures that the firm is allocating its resources in the most efficient way possible, getting the most output per unit of input cost.

Question 12

The cost of inputs that cannot be changed in the short run is the _____ cost.

Accepted Answer

Fixed costs are those costs that do not change with the level of output in the short run, such as rent, salaries, and insurance. These costs are incurred regardless of the level of production.

Question 13

What cost cannot be changed in the short run?

Accepted Answer

Fixed costs cannot be changed in the short run; they are incurred regardless of the level of output produced.

Question 14

The amount spent on something that cannot be changed is a _____ cost.

Accepted Answer

Fixed costs are expenses that do not change with the level of production or sales, such as rent, salaries, and insurance, and are thus not affected by the company's level of activity.

Question 15

The cost of all inputs that can be changed in the short run are a firm's _____ cost.

Accepted Answer

Variable costs are those costs that change based on the level of production or output in the short run, such as materials and labor directly involved in production. Fixed costs, in contrast, do not change with the level of production.

Question 16

What is the difference between fixed cost and variable cost?

Accepted Answer

Fixed costs do not change with the level of production or sales, such as rent or salaries, and can be adjusted in the long run. Variable costs change with the level of production, like raw materials, and can be adjusted in both the short and long run.

Question 17

An airline finds itself with so many potential customers that all of its flights sell out. It decides to offer more flights around the clock with its existing fleet. Which of the following is NOT example of a variable cost of offering more flights?

Accepted Answer

The cost of purchasing another plane is a fixed cost, not a variable cost. Variable costs change with the level of output (in this case, the number of flights), such as hiring more staff or buying more snacks for the flights. Purchasing another plane is a one-time expense that does not vary with the number of flights operated.

Question 18

A firm's total cost is equal to its:

Accepted Answer

Total cost in economics is the sum of fixed and variable costs. Fixed costs do not change with the level of output, while variable costs do.

Question 19

Jason's carpentry business has a fixed cost of $5,000 from equipment and tool rental and a variable cost of $40,000 when he builds 100 bookshelves per year. The total cost of producing 100 bookshelves is:

Accepted Answer

The total cost of producing 100 bookshelves includes both the fixed cost of $5,000 and the variable cost of $40,000, adding up to $45,000.

Question 20

Roger makes short films. After he rents his film equipment for $20,000, he cannot change that decision. It costs him $5,000 per film for editing, location expenses, and other expenses incurred for each film. What is his variable cost if he produces 10 films?

Accepted Answer

Variable costs are costs that change with the level of output. Since it costs Roger $5,000 per film for various expenses, and he produces 10 films, the total variable cost is 10 films * $5,000/film = $50,000.

Quiz 8: Production Costs