Question 1

In the oil tanker industry, large companies have lower risk and are able to optimize vessel utilization.If consolidation allows companies to lower their long-run average total costs, this is an example of:

Accepted Answer

The statement describes how larger companies are able to optimize vessel utilization and reduce their long-run average total costs, which is a result of the economies of scale in the oil tanker industry.

Question 2

The difference between average total cost and average variable cost decreases with an increase in output.

Accepted Answer

As output increases, the fixed costs get spread over a larger number of units, decreasing the average total cost. However, the variable costs also increase with output, but not as quickly as fixed costs, resulting in a narrower gap between average total cost and average variable cost.

Question 3

When more and more doses of fertilizers are added to a fixed plot of agricultural land, the crop yield initially declines but eventually rises.

Accepted Answer

Initially, the crop yield increases with the addition of fertilizers due to enhanced nutrient availability, but beyond a certain point, excessive fertilizers can lead to a decline in yield due to nutrient imbalance, toxicity, or environmental harm.

Question 4

As long as there are fixed resources, diminishing marginal returns will never exist.

Accepted Answer

Diminishing marginal returns occur when adding one more unit of a variable input results in a smaller increase in output than the previous unit added. This is because as you add more and more of a variable input while holding other inputs constant, you eventually reach a point where the output gained from each additional unit of the variable input decreases. This can happen even if there are fixed resources, as long as the amount of the variable input being added is increasing.

Question 5

Overhead costs are identical to fixed costs.

Accepted Answer

Overhead costs can include both fixed and variable costs, whereas fixed costs do not vary with the level of production or sales.

Question 6

The average fixed cost continues to decline with expansion of output.

Accepted Answer

This statement is true because as production increases, fixed costs are spread over a larger output, causing the average fixed cost to decrease.

Question 7

The phrase "to spread the overhead" refers to reducing the cost that are not directly attributable to the production process.

Accepted Answer

"To spread the overhead" typically means to allocate or distribute indirect costs such as rent, utilities, and administrative expenses among different products or departments in order to reduce the overall cost per unit or service produced.

Question 8

If marginal physical product of labor is declining, then average physical product must also be declining.

Accepted Answer

The marginal physical product of labor can decline while the average physical product is still increasing, as long as the marginal physical product is above the average physical product. The average physical product only starts to decline when the marginal physical product falls below the average physical product.

Question 9

Economies and diseconomies of scale are the reasons why short-run average total cost decreases and then increases.

Accepted Answer

Economies and diseconomies of scale explain why long-run average total costs decrease and then increase, not short-run costs. Short-run costs are influenced by variable and fixed costs, not economies and diseconomies of scale.

Question 10

In the long run, the producer can change the entire plant size to produce a certain level of the output.

Accepted Answer

In the long run, the producer can increase or decrease the size of the entire plant to produce the desired level of output. This includes increasing or decreasing the number of workers, amount of equipment, and size of the facility.

Question 11

Every firm has to bear its fixed costs even when it produces nothing.

Accepted Answer

Fixed costs are those costs that do not vary with the level of production. These costs still have to be paid even if the firm is not producing anything. Examples of fixed costs include rent, salaries of permanent employees, insurance, and lease payments.

Question 12

If short-run average total costs are rising in the oil tanker industry, it implies that economies of scale exist in that industry.

Accepted Answer

The answer of If short-run average total costs are rising...

Question 13

If the cost borne by a firm when output is zero is $100 and that of producing 5 units is $250, then the variable cost of the firm is equal to $150.

Accepted Answer

To calculate the variable cost, we need to subtract the cost of zero output from the cost of producing 5 units. Variable cost = $250 - $100 = $150.

Question 14

When the marginal-cost curve lies above the average-total-cost curve, the average-total-cost curve slopes up and the average-variable-cost curve slopes down.

Accepted Answer

When the marginal-cost curve lies above the average-total-cost curve, it indicates that the average total cost is increasing. However, the direction of the slope of the average-variable-cost curve depends on its position relative to the marginal-cost curve, not the position of the marginal-cost curve relative to the average-total-cost curve.

Question 15

If a firm experiences economies of scale throughout it will have a horizontal long-run average total cost curve.

Accepted Answer

Economies of scale imply that as a firm increases production, the average total cost of production decreases. A horizontal long-run average-total-cost curve would indicate constant returns to scale, not economies of scale.

Question 16

In the long run, total cost is equal to total fixed cost at an output of zero.

Accepted Answer

The answer of In the long run, total cost is...

Question 17

If a firm has constant returns to scale, then doubling all of its inputs will just double its output.

Accepted Answer

Constant returns to scale means that if all inputs are increased by a given factor, output will increase by the same factor. Therefore, if all inputs are doubled, output will also double.

Question 18

Economies of scale exist when the long-run average-total-cost curve is positively sloped.

Accepted Answer

Economies of scale exist when the long-run average-total-cost curve is negatively sloped, indicating that as production increases, average costs decrease. Positive slope of the curve indicates diseconomies of scale, where average costs increase as production increases.

Question 19

If marginal product increases with an increase in the variable input, the marginal cost must also increase as more units of the input are hired.

Accepted Answer

This statement is false. Marginal product and marginal cost are not directly related. It is possible for marginal product to increase with an increase in the variable input while marginal cost decreases or remains constant. The relationship between marginal product and marginal cost depends on various other factors such as fixed costs, output levels, and input prices.

Question 20

The marginal cost curve intersects the average total cost curve at the firm's most efficient point of production.

Accepted Answer

This statement is true, as the intersection of the marginal cost and average total cost curves indicates the point at which the firm is producing at the lowest possible cost. This point is also known as the minimum efficient scale.

Quiz 41: Supply: the Costs of Doing Business