Question 1

Assume that one laborer produces 6 units of output, two laborers produce 14 units, three laborers 22 units, four laborers 24 units, and five laborers 25 units.Diminishing returns set in when the firm hires:

Accepted Answer

The law of diminishing returns states that as additional units of a variable input are added to a fixed input, the marginal product of the variable input will eventually begin to decrease. In this case, we see that the marginal product of labor begins to decrease with the fourth laborer, as the output only increases by 2 units from three to four laborers, and only by 1 unit from four to five laborers. Therefore, the best choice is D, the fourth laborer.

Question 2

If a firm is experiencing diminishing returns, then:

Accepted Answer

Diminishing returns occur when the marginal physical product (MPP) of the variable resource decreases as more of it is employed, while keeping all other resources constant. This means that each additional unit of the variable resource is adding less and less to total output, resulting in diminishing returns.

Question 3

Short run refers to a period of time during which:

Accepted Answer

In the short run, some factors of production are fixed while some others are variable. This means the producer cannot adjust all factors of production to change the level of output. For example, in the short run, a firm may be able to change the quantity of labor it uses to produce a good, but it may not be able to change its factory size or the amount of capital it has.

Question 4

Which of the following reflects the correct relationship between average total cost (ATC)and marginal cost (MC)?

Accepted Answer

When MC is less than ATC, it indicates that the ATC is decreasing. This is because the additional production at a lower cost than the average cost of production brings down the ATC. Therefore, option C is the correct choice.

Question 5

When average total cost is minimum, it is:

Accepted Answer

When average total cost is minimum, it is equal to marginal cost. This is because the slope of the average total cost curve at its minimum point is equal to the slope of the marginal cost curve. Therefore, the answer is D.

Question 6

The law of diminishing returns applies:

Accepted Answer

The law of diminishing returns applies in the short run because at least one input is fixed, while others are variable. As more and more of the variable input is added, eventually the additional output will start to decline, indicating diminishing returns to that variable input. In the long run, all inputs are variable, so the law of diminishing returns is no longer a relevant concept.

Question 7

If labor is the only variable input, an increase in the quantity of labor:

Accepted Answer

According to the law of diminishing marginal returns, as more units of a variable input (labor, in this case) are added while holding all other inputs constant, the marginal product of that input will eventually decrease. Therefore, the output will increase initially at an increasing rate, but as more laborers are added, the increase in output will eventually slow down and even begin to decrease. This is reflected in choice D.

Question 8

At its minimum point, the average-total-cost curve is intersected by the:

Accepted Answer

At its minimum point, the average total cost curve is intersected by the marginal cost curve. This is because when marginal cost is below average total cost, it pulls the average down, and when it is above, it pulls the average up. The intersection point represents the minimum average total cost.

Question 9

Suppose that the total fixed cost of producing five sailboats is $4, 000, total variable cost is $4, 000, and the total cost of producing six sailboats is $10, 000.The marginal cost of the sixth sailboat is:

Accepted Answer

The marginal cost of producing the sixth sailboat is the additional cost incurred by producing one more sailboat, which is calculated by subtracting the total cost of producing five sailboats from the total cost of producing six sailboats. The total cost of producing five sailboats is the sum of total fixed cost ($4,000) and total variable cost ($4,000), which equals $8,000. The total cost of producing six sailboats is $10,000. Therefore, the marginal cost of the sixth sailboat is $10,000 - $8,000 = $2,000.

Question 10

Fixed costs are costs paid for:

Accepted Answer

The answer of Fixed costs are costs paid for:
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Question 11

Diminishing marginal returns means that as you combine more units of a variable resource with a set of fixed resources:

Accepted Answer

Diminishing marginal returns mean that as more units of a variable resource are added to a fixed resource, the marginal physical product (MPP) of each additional unit will eventually decrease. This is because the fixed resources (such as land or machinery) have a limited capacity and cannot indefinitely support increasing amounts of the variable resource (such as labor or fertilizer). As a result, the returns on each additional unit of the variable resource will eventually diminish, leading to a decrease in the MPP.

Question 12

When more and more units of a variable factor are combined with constant amount of fixed factor, such that the variable factor becomes abundant compared to the fixed factor, the output will eventually:

Accepted Answer

This refers to the law of diminishing returns or the law of variable proportion. Initially, as more units of a variable factor are combined with a constant amount of fixed factor, the output increases at an increasing rate. However, as the variable factor becomes abundant compared to the fixed factor, the output increases at a diminishing rate until it reaches a point where it remains constant, and eventually falls if more units of the variable factor are added. Therefore, the correct choice is B, as the output increases at a diminishing rate.

Question 13

If average variable cost is falling, then:

Accepted Answer

The answer of If average variable cost is falling, then:
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Question 14

Marginal fixed cost:

Accepted Answer

The answer of Marginal fixed cost:
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Question 15

"As I add more workers to the factory line, the additional output produced by each additional worker seems to decline.Eventually, the workers just get in each others' way." This statement by a factory supervisor refers to:

Accepted Answer

The statement is referring to the law of diminishing marginal returns, which states that as more units of a variable input (in this case, workers) are added to a fixed input (the factory line), the additional output produced by each additional unit of the variable input will eventually decrease. This is because the fixed input (the factory line) can only handle a certain amount of production before becoming limiting, causing the variable input to become less efficient and eventually leading to negative returns. The reference to the workers getting in each other's way indicates that the factory has likely reached its capacity and adding more workers is not beneficial.

Question 16

Marginal cost equals:

Accepted Answer

Marginal cost is the change in total cost divided by the change in total output, so the correct answer is D. Choice A is incorrect because total cost divided by total quantity is average cost. Choice B is incorrect because the slope of the demand curve is not related to marginal cost. Choice C is incorrect because the slope of the total product curve when at its maximum is related to marginal product, not marginal cost. Choice E is incorrect because the slope of the supply curve is related to marginal revenue, not marginal cost.

Question 17

If an average cost curve is U-shaped, then:

Accepted Answer

The answer of If an average cost curve is U-shaped,...

Question 18

Average total cost is calculated by dividing:

Accepted Answer

Average total cost is calculated by dividing total cost by total output. This gives the average cost associated with producing each unit of output.

Question 19

After hiring a new employee, a manager finds that the total output has increased.When the manager hires another employee however, he realizes that although the total production has increased, the increment is less than the previous case.This is the result of:

Accepted Answer

This is the result of diminishing marginal returns. This concept states that as more units of a variable input (in this case, employees) are added to a fixed level of inputs (such as equipment or workspace), the marginal (additional) output eventually decreases. This means that each additional employee contributes less to total output than the previous employee, leading to a slower increase in production when more employees are added.

Question 20

If the total cost of producing 2 pounds of cheese is $6 and the total cost of producing 4 pounds of cheese is $8, then:

Accepted Answer

Average total cost (ATC) is the total cost of production divided by the quantity of output, so ATC = total cost / quantity.

For 2 pounds of cheese, the ATC is 6/2 = 3. 
For 4 pounds of cheese, the ATC is 8/4 = 2.

Since the ATC decreases as the quantity of output increases, we can say that the average total cost is declining. Therefore, the correct answer is B.

Quiz 9: Supply: The Costs of Doing Business