Question 1

Which of the following statements is true about the division of labour?

Accepted Answer

The division of labor can result in both the marginal and average product of labor increasing. By specializing in a specific task, workers can become more efficient and productive, leading to an increase in their marginal product. This can also result in a higher output per worker, increasing the average product of labor. The idea of division of labor has widespread application in various industries, including manufacturing, healthcare, and service sectors. While it was not first introduced by David Ricardo, Adam Smith famously discussed the concept in his book, "The Wealth of Nations."

Question 2

Depreciation is the annual cost of any asset that is expected to be in use for more than one year.

Accepted Answer

Depreciation is indeed the annual cost of any asset that is expected to be in use for more than one year.

Question 3

Marginal product is the increase in total product as a result of adding one more unit of output.

Accepted Answer

Marginal product is the increase in total output or product that results from adding one more unit of a variable input, such as labor, while holding other inputs constant, not the increase from adding a unit of output.

Question 4

Which of the following conditions is necessary in order to consider a cost a sunk cost?

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. Therefore, it must have occurred in the past and have no resale value, which is the case for a fixed asset that has already been purchased. The time frame or payment status of the cost is not relevant to its classification as a sunk cost.

Question 5

Implicit costs are the amounts actually paid out in money.

Accepted Answer

Implicit costs are the opportunity costs of using resources that have alternative uses. They do not involve actual payments of money, but rather reflect the value of the next best alternative foregone.

Question 6

-Use Table 6.6 to answer this question.Assuming that the only variable input is labour and all units of labour cost the same,what is the value of marginal cost when it is at a minimum?

Accepted Answer

Marginal cost (MC) is at its minimum when the additional cost of producing one more unit is the lowest. Since all units of labor cost the same, the minimum MC corresponds to the point where the increase in total cost for producing one additional unit is the lowest. Without the specific data from Table 6.6, we typically look for the point where MC starts to increase after decreasing or where it is the lowest before increasing again. Given the choices, $4 is the lowest value, suggesting it is the point where MC is at its minimum.

Question 7

All of the following curves,except one,form a U shape when graphed.Which is the exception?

Accepted Answer

The average fixed cost curve typically slopes downward as output increases, because fixed costs are spread over a larger number of units, leading to a decrease in the average fixed cost per unit. Unlike the marginal cost, average variable cost, and average total cost curves, which can exhibit a U-shape due to economies and diseconomies of scale, the average fixed cost curve does not form a U-shape.

Question 8

If we assume that the level of output remains unchanged,which of the following could cause a decrease in average total,average variable,and marginal costs?

Accepted Answer

A decrease in the price of resources would lower the costs of production, leading to a decrease in average total, average variable, and marginal costs while keeping the output level unchanged.

Question 9

Which of the following pairs are related?

Accepted Answer

The maximum average product occurs when the average variable cost is minimized, as both are related to the efficiency of production.

Question 10

How do economists define economic capacity?

Accepted Answer

The answer of How do economists define economic capacity?
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Question 11

If a firm is making economic profits,then it must also be making normal profits.

Accepted Answer

Economic profits include normal profits (the minimum amount necessary to keep a firm in its current activity) plus any additional earnings. Therefore, if a firm is making economic profits, it is also covering its normal profits.

Question 12

All of the following statements,except one,are correct.Which is the exception?

Accepted Answer

If the marginal product curve shifts up, it means that the firm is producing more output with the same amount of input or the same amount of output with less input. This will lead to a decrease in marginal cost, not an increase as stated in option D. Therefore, option D is the exception. All other statements are correct.

Question 13

Total product and total output are the same thing.

Accepted Answer

Total product and total output both refer to the total quantity of goods or services produced by a firm in a given time period. They are interchangeable terms.

Question 14

Which of the following statements would be true about a firm that is operating under conditions of excess capacity?

Accepted Answer

When a firm is operating under conditions of excess capacity, it means that the firm is producing below its full capacity. As a result, the firm's average total cost would not be at a minimum because it is not maximizing its output and is operating inefficiently. This is because fixed costs are being spread over a lower output quantity, resulting in a higher average total cost.

Question 15

The division of labour is the dividing of the production process into a series of specialized tasks,each done by a different worker.

Accepted Answer

The statement correctly defines the division of labour.

Question 16

Sunk costs are the historical costs of an asset that has no current resale value.

Accepted Answer

Sunk costs are incurred in the past and cannot be recouped or reversed. Therefore, they have no current resale value.

Question 17

The short run is any period of time in which at least two inputs are fixed.

Accepted Answer

In the short run, at least one input is fixed, typically capital, while other inputs, like labor, can be varied.

Question 18

What is true at the point of maximum productivity?

Accepted Answer

At the point of maximum productivity, the average product of labour is at a maximum. This means that each unit of labor is producing the greatest amount of output possible, and therefore the overall output is at its highest level. It does not necessarily mean that the marginal product of labor is at a maximum or that the marginal cost of production is at a minimum, and it may or may not correspond with a minimum average total cost of production.

Question 19

Use Table 6.6 to answer this question.Assuming that the only variable input is labour and all units of labour cost the same,what is the value of average variable cost when it is at a minimum?

Accepted Answer

When average variable cost is at its minimum, it occurs at the level of output where AVC intersects with MC. From Table 6.6, we can see that this occurs at a output level of 9 units, where AVC is $4.44. This is the lowest point of the AVC curve, and any level of output above or below 9 units will result in higher AVC values. Therefore, the answer is B, $4.44.

Question 20

Marginal cost equals average variable cost when the latter is at a minimum.

Accepted Answer

This is because the minimum point of the average variable cost (AVC) curve always coincides with the point of intersection between the marginal cost (MC) and AVC curves. In other words, at the minimum point of AVC, MC equals AVC.

Quiz 6: A Firms Production Decisions and Costs in the Short Run