Question 1

The amount that must be paid for an item under prevailing market conditions is:
A) historical cost.
B) replacement cost.
C) incremental cost.
D) current cost.

Accepted Answer

Current cost refers to the amount that must be paid for an item under prevailing market conditions.

Question 2

In the short run, the:
A) firm has complete flexibility with respect to input use.
B) availability of all inputs is fixed.
C) operating period is longer than the planning period.
D) availability of at least one input is fixed.

Accepted Answer

In the short run, at least one input is fixed, meaning that the firm cannot adjust its usage in response to changes in output or prices. The availability of other inputs may vary, but the fixed input creates a constraint on production.

Question 3

Noncash expenses are:
A) explicit costs.
B) sunk costs.
C) incremental costs.
D) implicit costs.

Accepted Answer

Noncash expenses are costs that do not require an actual cash payment but still impact a company's financial statements. Examples include depreciation and amortization expenses, which reflect the decline in value of an asset over time. These expenses are considered implicit costs, as they represent the opportunity cost of using the asset instead of selling it.

Question 4

The acquisition cost of an asset is:
A) a replacement cost.
B) an implicit cost.
C) an explicit cost.
D) an opportunity cost.

Accepted Answer

The answer of The acquisition cost of an asset is:
A)...

Question 5

If a total product curve exhibits increasing returns to a variable input, the cost elasticity is:
A) equal to one.
B) greater than one.
C) unknown, without further information.
D) less than one.

Accepted Answer

The answer of If a total product curve exhibits increasing...

Question 6

The amount paid is:
A) historical cost.
B) opportunity cost.
C) current cost.
D) replacement cost.

Accepted Answer

The amount paid for an asset is referred to as its historical cost, which is the original monetary value of the asset at the time of purchase.

Question 7

In the decision process, management should ignore:
A) implicit costs.
B) historical costs.
C) sunk costs.
D) incremental costs.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. Therefore, they should not be considered in the decision-making process. Ignoring sunk costs allows management to focus on the relevant costs and benefits of a decision, which are the future costs and benefits that will result from taking a particular action. Implicit costs, historical costs, and incremental costs are all relevant costs that should be considered in the decision-making process.

Question 8

If the productivity of variable factors is decreasing in the short-run:
A) marginal cost must increase as output increases.
B) average cost must decrease as output increases.
C) average cost must increase as output increases.
D) marginal cost must decrease as output increases.

Accepted Answer

When the productivity of variable factors decreases, it means that each additional unit of input contributes less to output, leading to an increase in marginal cost as output increases.

Question 9

The foregone value associated with the current rather than next-best use of a given asset is called:
A) current cost.
B) replacement cost.
C) historical cost.
D) opportunity cost.

Accepted Answer

Opportunity cost is the cost incurred by choosing one option over the next best alternative. It is the value foregone by not choosing the next best alternative. Therefore, D is the correct answer. Current cost refers to the cost of replacing or reproducing an asset at the current market price. Replacement cost is the cost of replacing or reproducing an asset at its original cost. Historical cost refers to the cost of an asset when it was acquired or purchased. None of these terms directly refer to the foregone value associated with the current rather than next-best use of a given asset.

Question 10

Fixed costs include:
A) variable labor expenses.
B) output-related energy costs.
C) output-related raw material costs.
D) variable interest costs for borrowed capital.

Accepted Answer

Variable interest costs for borrowed capital are fixed costs because they do not change with the level of output.

Question 11

In the decision process, management should always consider:
A) relevant costs.
B) sunk costs.
C) implicit costs only.
D) historical costs.

Accepted Answer

Relevant costs are the costs that are directly related to the decision being made and can impact future cash flows. Sunk costs, historical costs, and implicit costs are not relevant to the decision making process as they cannot be changed or recovered.

Question 12

Incremental cost:
A) always equals marginal cost.
B) never involves multiple outs.
C) is the added cost tied to a given managerial decision.
D) is typically less than historical cost.

Accepted Answer

Incremental cost is the additional cost incurred due to a specific managerial decision. It is not necessarily equal to marginal cost or limited to a single output. The historical cost is not directly related to incremental cost, so option D is also incorrect.

Question 13

Marginal cost equals:
A) average variable cost at its maximum point.
B) the change in total fixed cost divided by the change in quantity.
C) the change in total variable cost divided by the change in quantity.
D) total cost divided by quantity.

Accepted Answer

Marginal cost is the change in total variable cost divided by the change in quantity. This means that it measures the increase in total cost that results from producing one additional unit of output.

Question 14

Each point on a long-run average cost curve is the minimum:
A) point on the short-run marginal cost curve.
B) short-run average cost of production.
C) long-run average cost of production.
D) point on the short-run average cost curve.

Accepted Answer

The answer of Each point on a long-run average cost...

Question 15

In the long run, the:
A) availability of at least one input is fixed.
B) Firm's operating decisions are typically constrained by prior capital expenditures.
C) availability of all but one input is fixed.
D) firm has complete flexibility with respect to input use.

Accepted Answer

In the long run, all inputs are variable, allowing the firm complete flexibility in adjusting its input use to optimize production.

Question 16

A firm's capacity is the output:
A) maximum that can be produced in the long-run.
B) level where short-run average costs are minimized.
C) level where long-run average costs are minimized.
D) maximum that can be produced in the short-run.

Accepted Answer

The answer of A firm's capacity is the output:
A) maximum...

Question 17

Incremental cost is the change in:
A) total cost caused by a given managerial decision.
B) noncash expenses caused by a given managerial decision.
C) out-of-pocket costs caused by a given managerial decision.
D) variable cost caused by a given managerial decision.

Accepted Answer

The answer of Incremental cost is the change in:
A) total...

Question 18

Average cost declines as output expands in a production process with:
A) constant returns to scale.
B) decreasing returns to scale.
C) decreasing returns to a factor input.
D) increasing returns to scale.

Accepted Answer

Increasing returns to scale means that as output expands, the average cost of production declines. This is because the fixed costs and overheads are spread over a larger volume of output, reducing the per-unit cost.

Question 19

If the slope of a long-run total cost function decreases as output increases, the firm's underlying production function exhibits:
A) constant returns to scale.
B) decreasing returns to scale.
C) decreasing returns to a factor input.
D) increasing returns to scale.

Accepted Answer

If the slope of the long-run total cost function decreases as output increases, it indicates that the firm is experiencing increasing returns to scale, meaning that as production increases, the cost per unit of output decreases.

Question 20

Sunk costs:
A) typically involve multiple units of output.
B) do not vary across decision alternatives.
C) come into play when judging the costs of adding a new product line, advertising campaign, production shift, or organization structure.
D) play a role in determining the optimal course of action.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered, so they do not vary across decision alternatives and should not affect future decisions.

Quiz 8: Cost Analysis and Estimation

The amount that must be paid for an item under prevailing market conditions is:

In the short run, the:

Noncash expenses are:

The acquisition cost of an asset is:

If a total product curve exhibits increasing returns to a variable input, the cost elasticity is:

The amount paid is:

In the decision process, management should ignore:

If the productivity of variable factors is decreasing in the short-run:

The foregone value associated with the current rather than next-best use of a given asset is called:

Fixed costs include:

In the decision process, management should always consider:

Incremental cost:

Marginal cost equals:

Each point on a long-run average cost curve is the minimum:

In the long run, the:

A firm's capacity is the output:

Incremental cost is the change in:

Average cost declines as output expands in a production process with:

If the slope of a long-run total cost function decreases as output increases, the firm's underlying production function exhibits:

Sunk costs: