Question 1

In a study of banking by asset size over time,we can find which asset sizes are tending to become more prominent.The size that is becoming more predominant is presumed to be least cost.This is called:

Accepted Answer

Survivorship analysis involves examining which characteristics or factors are most likely to lead to survival or success in a given industry or market. In the context of banking by asset size, survivorship analysis would involve studying which asset sizes are most likely to survive and grow over time. The size that becomes more predominant is presumed to be the most successful and least costly, making it a desirable target for other banks to emulate.

Question 2

A linear total cost function implies that:

Accepted Answer

C

Question 3

Break-even analysis usually assumes all of the following except:

Accepted Answer

Break-even analysis typically distinguishes between variable and fixed costs, rather than assuming there is no distinction. Choices B, C, and D are common assumptions in break-even analysis.

Question 4

Which of the following is not a limitation of the survivor technique for measuring the optimum size of firms within an industry?

Accepted Answer

The answer of Which of the following is not a...

Question 5

Which of the following is not an assumption of the linear breakeven model:

Accepted Answer

The linear breakeven model assumes a constant selling price per unit, fixed costs that are independent of output level, a single product or constant mix, and that all costs can be classified as either fixed or variable. However, the model does not assume a decreasing variable cost per unit.

Question 6

The linear breakeven model excludes ____ from the analysis.

Accepted Answer

The linear breakeven model typically excludes financing costs (such as interest) and taxes from the analysis, focusing instead on operational costs and revenues to determine the breakeven point.

Question 7

In the linear breakeven model,the breakeven sales volume (in dollars)is equal to fixed costs divided by:

Accepted Answer

The answer of In the linear breakeven model,the breakeven sales...

Question 8

In the linear breakeven model,the breakeven sales volume (in dollars)can be found by multiplying the breakeven sales volume (in units)by:

Accepted Answer

The breakeven sales volume in dollars is found by multiplying the breakeven sales volume in units by the selling price per unit. This gives the total sales revenue needed to cover all fixed and variable costs, reaching the breakeven point.

Question 9

In the linear breakeven model,the relevant range of output is that range where the linearity assumptions of the model are assumed to hold.

Accepted Answer

The linear breakeven model assumes that there is a linear relationship between total revenue and total costs within a certain range of output. This range is known as the relevant range of output. Outside of this range, the assumptions of the model may not hold true, and the relationship between revenue and costs may not be linear. Therefore, option A is correct.

Question 10

A ____ total cost function implies that marginal costs ____ as output is increased.

Accepted Answer

A linear total cost function implies that the marginal cost is constant, regardless of the level of output. Therefore, as output increases, the marginal cost remains constant. Among the given choices, only option D meets this requirement.

Question 11

Evidence from empirical studies of long-run cost-output relationships lends support to the:

Accepted Answer

Empirical studies have shown that the long-run total cost function initially exhibits economies of scale, leading to a linear relationship between total cost and output over a considerable range of output examined. This means that as output increases, total costs increase at a constant rate.

Question 12

The short-run cost function is:

Accepted Answer

The short-run cost function is relevant to decisions in which one or more inputs to the production process are fixed, such as when a business is trying to optimize production with limited resources. Therefore, option B is the best choice. Option A is incorrect because the long-run cost function contains all variable inputs. Option C is incorrect because short-run costs are relevant to optimal pricing and production output decisions. Option D is incorrect as the short-run cost function is not used in making investment decisions for new production facilities.

Question 13

Theoretically,in a long-run cost function:

Accepted Answer

In a long-run cost function, all inputs are considered variable. This is because in the long run, a firm can adjust all inputs, including both capital and labor, to achieve its desired level of output. Therefore, choice B is the best answer. Choice A is incorrect because in the long run, no inputs are fixed. Choice C is incorrect because while some inputs may be fixed in the short run, in the long run all inputs are considered variable. Choice D is incorrect because while some firms may operate with fixed proportions of capital and labor, this is not a universal feature of long-run cost functions.

Question 14

The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.

Accepted Answer

The degree of operating leverage is calculated as the percentage change in EBIT (Earnings Before Interest and Taxes) divided by the percentage change in sales. This measures how a company's operating income changes with respect to its sales.

Question 15

The primary disadvantage of engineering methods for measuring cost functions is that they deal with the managerial and entrepreneurial aspects of the production process or plant.

Accepted Answer

The statement is incorrect. The primary disadvantage of engineering methods for measuring cost functions is that they tend to be narrowly focused on the physical aspects of production and may not consider other important factors such as labor costs or market demand.

Question 16

A ____ total cost function yields a U-shaped average total cost function.

Accepted Answer

Both cubic and quadratic total cost functions can yield a U-shaped average total cost function.

Question 17

George Webb Restaurant collects on the average $5 per customer at its breakfast & lunch diner.Its variable cost per customer averages $3,and its annual fixed cost is $40,000.If George Webb wants to make a profit of $20,000 per year at the diner,it will have to serve__________ customers per year.

Accepted Answer

To calculate the required number of customers, we need to use the following formula:

Profit = (Revenue - Variable Cost) * Number of Customers - Fixed Cost

We know the profit that the diner wants to make, the variable cost per customer, and the fixed cost. We also know that the revenue per customer is $5.

Substituting these values in the formula, we get:

$20,000 = ($5 - $3) * N - $40,000

Solving for N (number of customers), we get:

N = ($20,000 + $40,000) / ($5 - $3)

N = 30,000

Therefore, the diner needs to serve 30,000 customers per year to make a profit of $20,000. Hence, the best choice is C) 30,000 customers.

Question 18

A ____ total cost function implies that marginal costs ____ as output is increased.

Accepted Answer

A quadratic total cost function implies that the marginal cost, which is the derivative of the total cost function, increases linearly as output is increased.

Question 19

In the linear breakeven model,the difference between selling price per unit and variable cost per unit is referred to as:

Accepted Answer

The difference between selling price per unit and variable cost per unit is known as contribution margin per unit. This is the amount of money that is left over after all variable costs are deducted from the selling price, and it is used to cover fixed costs and generate profits. Option A (variable margin per unit) is not a commonly used term. Option B (variable cost ratio) is the proportion of variable costs to sales, while Option D (target margin per unit) is the amount of money that a company must earn on each unit sold to achieve its desired profit level. Neither of these options describes the difference between selling price and variable cost per unit. Therefore, the correct answer is C.

Question 20

What is another term meaning the degree of operating leverage?

Accepted Answer

The degree of operating leverage (D.O.L.) is a measure that assesses the impact of fixed costs on the profitability of a company, making all the options correct. It reflects the importance of fixed costs (A), is related to operating profit elasticity (B), indicates the level of business risk associated with fixed costs (C), and is directly abbreviated as D.O.L. (D).

Quiz 9: Applications of Cost Theory