Question 1

Economies of scale are said to exist whenever:
A) the learning curve is upward-sloping.
B) increases in output bring about higher output.
C) increases in output bring about higher input prices.
D) the elasticity of total cost with respect to output is greater than 1.
E) the long-run average cost curve is downward-sloping.

Accepted Answer

Economies of scale occur when the long-run average cost (LRAC) curve slopes downward. This means that as output increases, the cost per unit of output decreases due to factors such as increased specialization, more efficient use of resources, and spreading of fixed costs over a larger output. Therefore, E is the best choice. The other options are incorrect because they do not correspond to the definition of economies of scale.

Question 2

Hedge Fun is a landscaping firm that specializes in topiary.It contracts with the owners of 140 local homes and provides its service at an annual fee of $1,300.Its average variable cost is $900,and its annual fixed cost is $28,000.What is the degree of operating leverage?
A) 0.5.
B) 1.
C) 1.5.
D) 2.
E) 2.5.

Accepted Answer

Degree of operating leverage (DOL) = % change in operating profit / % change in sales.

To calculate the DOL, we need to first determine the operating profit, which can be calculated as follows:

Operating profit = Total revenue - Total variable costs - Fixed costs

= ($1,300 x 140) - ($900 x 140) - $28,000

= $98,000 - $126,000

= -$28,000 (i.e., the company is currently operating at a loss)

Once we have the operating profit, we can calculate the DOL as:

DOL = % change in operating profit / % change in sales

= ($98,000 - $28,000) / $127,400

= 0.546

Therefore, the closest choice is D, 2.

Question 3

Hedge Fun is a landscaping firm that specializes in topiary.It contracts with the owners of 125 local homes and provides its service at an annual fee of $1,300.Its average variable cost is $800,and its annual fixed cost is $28,000.What is the break-even level of output?
A) 125.
B) 87.
C) 63.
D) 56.
E) None of the above.

Accepted Answer

The break-even level of output is where the total revenue equals total cost, or where the profit is zero. 
Total revenue = price x quantity
Price = $1,300 
Variable cost per unit = $800 
Fixed cost = $28,000 
For break-even, 
$1,300q = $800q + $28,000 
$500q = $28,000 
q = 56 
Therefore, the break-even level of output is 56.

Question 4

If price is below average total cost but above average variable cost,the break-even level of output:
A) is greater than the profit-maximizing level of output.
B) is zero.
C) can't be calculated since losses will be earned at each level of output including the profit-maximizing level.
D) approaches infinity.
E) equals the profit-maximizing level of output.

Accepted Answer

When price is below average total cost but above average variable cost, the firm incurs losses at all output levels, including the profit-maximizing level, making it impossible to calculate a break-even level of output.

Question 5

Break-even analysis usually assumes:
A) marginal revenue is declining with output.
B) all costs are variable.
C) managers wish to minimize fixed costs.
D) marginal costs are increasing with output.
E) average variable costs are constant.

Accepted Answer

Break-even analysis assumes that the average variable costs are constant, while fixed costs are already known. This assumption allows managers to determine the level of sales required to cover all costs and earn a profit, and the contribution margin per unit needed to reach the break-even point. Marginal revenue, fixed costs, and marginal costs are not necessarily assumed to behave in a specific way in break-even analysis.

Question 6

Brandy's Restaurant estimates that its total cost of providing Q meals per month is given by TC = 6,000 + 2Q.If Brandy charges $4 per meal,what is its break-even level of output?
A) 1,000 meals.
B) 1,500 meals.
C) 2,000 meals.
D) 2,500 meals.
E) 3,000 meals.

Accepted Answer

The answer of Brandy's Restaurant estimates that its total cost...

Question 7

Long-run average cost equals long-run marginal cost whenever:
A) the production function exhibits constant returns to scale.
B) fixed costs are zero.
C) no factor always has increasing marginal returns.
D) the cost of capital is near zero.
E) long-run marginal cost is at its minimum.

Accepted Answer

Long-run average cost only equals long-run marginal cost when the production function exhibits constant returns to scale. In this case, changes in output do not affect the average cost, only the marginal cost. Options B, C, D, and E do not ensure the conditions where the long-run average cost equals the long-run marginal cost.

Question 8

Bill's Mechanical Devices Inc.produces robots for the automotive industry.If its average variable costs are given by AVC = 25,its fixed costs are $2,500,and it charges $75 a robot,what is Bill's break-even level of output?
A) 25 robots.
B) 33.3 robots.
C) 50 robots.
D) 75 robots.
E) 100 robots.

Accepted Answer

To find the break-even level of output, we need to determine the number of robots Bill's Mechanical Devices Inc. needs to sell to cover its total costs, both variable and fixed costs.

The break-even point can be calculated using the following formula:

Break-even output = Total fixed costs / (Price per unit - Average variable cost per unit)

Substituting the given values:

Break-even output = 2500 / (75 - 25) = 50 robots

Therefore, Bill's Mechanical Devices Inc. needs to sell 50 robots to reach the break-even point.

Question 9

Lot's Wife Manufacturing produces rear-view video systems for buses.The firm's cost function is TC = 2,000 + 120Q.If the systems sell for $145,what is the break-even rate of production?
A) 200.
B) 120.
C) 80.
D) 55.
E) None of the above.

Accepted Answer

To find the break-even rate of production, we need to set the total cost (TC) equal to the total revenue (TR):

TC = TR
2,000 + 120Q = 145Q
2,000 = 25Q
Q = 80

Therefore, the break-even rate of production is 80 units.

Question 10

Economies of scope exist when it is cheaper to produce:
A) with a large fixed plant and equipment.
B) at increasing rates of output.
C) given quantities of two different products together than to produce the same quantities separately.
D) given quantities of two different products separately than to produce the same quantities together.
E) using more than one technique.

Accepted Answer

Economies of scope occur when producing two or more different products together is more cost-effective than producing them separately. This is because common resources (such as labor, plant, and equipment) can be shared to reduce overall costs.

Question 11

Framjam Sports Equipment produces basketballs at its factory in Kentucky and soccer balls at its factory in Illinois.At its current annual rate of production,the cost of producing basketballs is $80,000 and the cost of producing soccer balls is $45,000.If the firm consolidates production at a single location,the annual cost of production will be $100,000.What is the degree of economies of scope in this case?
A) 5.
B) 4.
C) 0.75.
D) 0.25.
E) None of the above.

Accepted Answer

The degree of economies of scope is calculated as (C(A) + C(B) - C(A,B)) / C(A,B). Here, C(A) is $80,000, C(B) is $45,000, and C(A,B) is $100,000. So, (80,000 + 45,000 - 100,000) / 100,000 = 0.25.

Question 12

Trudeau's Body Shop incurs total costs given by TC = 2,400 + 100Q.If the price it charges for a paint job is $120,what is its break-even level of output?
A) 20 paint jobs.
B) 40 paint jobs.
C) 60 paint jobs.
D) 90 paint jobs.
E) 120 paint jobs.

Accepted Answer

The answer of Trudeau's Body Shop incurs total costs given...

Question 13

Framjam Sports Equipment produces basketballs at its factory in Kentucky and soccer balls at its factory in Illinois.At its current annual rate of production,the cost of producing basketballs is $70,000 and the cost of producing soccer balls is $45,000.If the firm consolidates production at a single location,the annual cost of production will be $100,000.What is the degree of economies of scope in this case?
A) 15.
B) 0.25.
C) 0.15.
D) 0.85.
E) None of the above.

Accepted Answer

The degree of economies of scope can be calculated as follows:

Degree of economies of scope = (Cost of producing both products separately - Cost of producing both products together) / Cost of producing both products separately

= [(70,000 + 45,000) - 100,000] / (70,000 + 45,000)

= 15,000 / 115,000

= 0.13 or 13%

Therefore, the degree of economies of scope is 0.15.

The best choice is C.

Question 14

Hedge Fun is a landscaping firm that specializes in topiary.It contracts with the owners of 125 local homes and provides its service at an annual fee of $1,300.Its average variable cost is $800,and its annual fixed cost is $28,000.What is the degree of operating leverage?
A) 2.7.
B) 2.1.
C) 1.8.
D) 1.3.
E) None of the above.

Accepted Answer

The answer of Hedge Fun is a landscaping firm that...

Quiz 6: The Analysis of Costs

Economies of scale are said to exist whenever:

Hedge Fun is a landscaping firm that specializes in topiary.It contracts with the owners of 140 local homes and provides its service at an annual fee of $1,300.Its average variable cost is $900,and its annual fixed cost is $28,000.What is the degree of operating leverage?

Hedge Fun is a landscaping firm that specializes in topiary.It contracts with the owners of 125 local homes and provides its service at an annual fee of $1,300.Its average variable cost is $800,and its annual fixed cost is $28,000.What is the break-even level of output?

If price is below average total cost but above average variable cost,the break-even level of output:

Break-even analysis usually assumes:

Brandy's Restaurant estimates that its total cost of providing Q meals per month is given by TC = 6,000 + 2Q.If Brandy charges $4 per meal,what is its break-even level of output?

Long-run average cost equals long-run marginal cost whenever:

Bill's Mechanical Devices Inc.produces robots for the automotive industry.If its average variable costs are given by AVC = 25,its fixed costs are $2,500,and it charges $75 a robot,what is Bill's break-even level of output?

Lot's Wife Manufacturing produces rear-view video systems for buses.The firm's cost function is TC = 2,000 + 120Q.If the systems sell for $145,what is the break-even rate of production?

Economies of scope exist when it is cheaper to produce:

Trudeau's Body Shop incurs total costs given by TC = 2,400 + 100Q.If the price it charges for a paint job is $120,what is its break-even level of output?

Hedge Fun is a landscaping firm that specializes in topiary.It contracts with the owners of 125 local homes and provides its service at an annual fee of $1,300.Its average variable cost is $800,and its annual fixed cost is $28,000.What is the degree of operating leverage?