Question 1

Which of the following will cause the average cost curve of making cigarettes to shift?

Accepted Answer

All of the options listed will cause the average cost curve of making cigarettes to shift. A penalty increases the fixed costs, a tax per pack effectively raises the variable cost per unit, and a wage increase raises the cost of production labor, all of which affect the average cost of production.

Question 2

Consider a general Cobb-Douglas production function
q = ALᵃKᵇ
where A,a and b are positive constants.
Using this production function,derive the short-run cost function for a fixed capital stock,K₀,wage rate w,and capital rental rate r.

Accepted Answer

The answer of Consider a general Cobb-Douglas production function
q =...

Question 3

Marginal cost is equal to

Accepted Answer

Marginal cost is the additional cost incurred by producing one more unit of a good or service. It includes both the increase in total cost from increasing the amount of labor by one unit (choice A) and the increase in variable cost from increasing the amount of labor by one unit (choice B). Therefore, both choices A and B are correct and the answer is C.

Question 4

Which of the following will cause the average fixed cost curve of making cigarettes to shift?

Accepted Answer

A $5 million penalty charged to each cigarette maker is a fixed cost, affecting the average fixed cost curve by increasing it. Other options relate to variable costs or demand, not directly altering the average fixed cost curve.

Question 5

If the average cost of producing a good is increasing as a firm produces more of the good,then which of the following must be TRUE?

Accepted Answer

When the average cost (AC) of producing a good is increasing, it implies that the marginal cost (MC) of producing an additional unit is higher than the current average cost, which causes the average cost curve to rise. This situation encompasses all the given options: AFC (Average Fixed Cost) falls as output increases because fixed costs are spread over a larger number of goods, AVC (Average Variable Cost) is rising because the average cost of producing each unit increases, and MC must be greater than AVC for the average cost to increase.

Question 6

For the following, please answer "True" or "False" and explain why.
-A consumer purchases a book by driving across town to a bookstore,standing in line for five minutes to pay the cashier,and then pays $5.The same book is purchased by another consumer who spends two minutes placing the order over the Internet for $10.The book necessarily cost the first consumer less.

Accepted Answer

The opportunity cost of driving across town and standing in line may have raised the total cost of the book to the first consumer to more than $10.

Question 7

For the following, please answer "True" or "False" and explain why.
-The marginal cost curve intersects the average fixed cost curve at its minimum.

Accepted Answer

Marginal cost intersects average variable cost (and average cost)at its minimum.

Question 8

For the following, please answer "True" or "False" and explain why.
-The "Law of Diminishing Marginal Returns" could also be termed the "Law of Increasing Marginal Costs."

Accepted Answer

Since MC = w/MPL in the short run,the fact that MPL eventually declines means that MC must eventually increase.

Question 9

For the following, please answer "True" or "False" and explain why.
-After employing her last laborer,Rachel notices that her Average Product has decreased.True or False: Her marginal cost is greater than her average variable cost.

Accepted Answer

The decrease in average product indicates an increase in average variable cost.The average variable cost rises when the marginal cost is greater than the AVC.

Question 10

In the long run,fixed costs are

Accepted Answer

In the long run, all costs are variable, meaning that fixed costs, such as equipment or lease expenses, can be adjusted or avoided entirely. This contrasts with the short run, where fixed costs cannot be changed.

Question 11

Consider a general cost function C(q),with Average Cost=C(q)/q.Prove using calculus that the quantity which minimizes the Average Cost function is also at the point where the Marginal Cost equals the Average Cost.To do this,first derive the necessary condition for the AC to be at a minimum.

Accepted Answer

The answer of Consider a general cost function C(q),with Average...

Question 12

Suppose each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the short run,an increase in the price of shovels will result in

Accepted Answer

The answer of Suppose each worker must use only one...

Question 13

Evren wants to go into the donut business.For $500 per month he can rent a bakery complete with all the equipment he needs to make a dozen different kinds of donuts (K = l,r = 500).He must pay unionized donut bakers a monthly salary of $400 each.He projects his monthly production function to be
Q = 5KL
where Q is tons of donuts.
a.With the current level of capital,what is the marginal product of labor? Is the marginal product diminishing? Explain.
b.If Evren wishes to make 25 tons of donuts,how many bakers are required given the current level of capital? How much will it cost to produce this (total cost)?
c.Derive Evren's short-run cost function with K=1.
d.Derive the marginal cost curve from your answer to c.and show the relationship between the marginal cost and marginal product of labor.

Accepted Answer

The answer of Evren wants to go into the donut...

Question 14

Suppose firm has a constant marginal product of labor - one additional worker adds four units of output given any initial quantity of workers.What do the average variable and marginal costs look like for this firm? Provide a graph of the MC and AVC.

Accepted Answer

The answer of Suppose firm has a constant marginal product...

Question 15

Which of the following will cause the marginal cost curve of making cigarettes to shift?

Accepted Answer

A penalty or advertising campaign would not directly affect the production costs of making cigarettes, while a tax on cigarettes would increase the cost and therefore shift the marginal cost curve.

Question 16

A specific tax of $1 per unit of output will affect a firm's

Accepted Answer

A specific tax of $1 per unit of output will increase the firm's average variable cost (since it is an additional cost per unit of output) and therefore increase its average total cost. However, the fixed cost remains the same since it is not affected by the level of output. Meanwhile, the marginal cost will increase by the exact amount of the tax, which is $1 per unit of output.

Question 17

Ed's construction company has the following short-run cost function: q³ - 10q² + 36q.
a.What level of output will minimize the average cost? What is the AC at this point?
b.Does the production process indicate diminishing returns? How can you tell?

Accepted Answer

The answer of Ed's construction company has the following short-run...

Question 18

Explain why the marginal cost curve intersects a U-shaped average cost curve at its minimum point.

Accepted Answer

The answer of Explain why the marginal cost curve intersects...

Question 19

If a particular production process is subject to diminishing marginal returns to labor at every level of output,then at every level of output

Accepted Answer

The answer of If a particular production process is subject...

Question 20

Alison lives in a small town where she plans to hire workers to help her make candy.Her production function for candy is
q = 4LK.⁵
She begins producing with K=4.The cost of capital is $50/unit.The wage depends on the amount of workers she employs.Specifically,w(L)= 10 + 2L.
a.Does Alison's production function exhibit diminishing marginal return to labor? Explain.
b.Derive Alison's short-run cost function.
c.What is the shape of Alison's Marginal Cost.
d.Does the relationship w/MP = MC hold? Show this explicitly.

Accepted Answer

The answer of Alison lives in a small town where...

Quiz 7: Costs