Deck 8: The Cost of Production

Question 1

If there are no fixed costs and variable costs are constant at $1.00 per unit over the relevant range of output,what will the average total cost be after 1 unit of output is produced?

A)$0
B)$1
C)$1.50
D)$2

Answer 1

B

Question 2

Total fixed cost is the same regardless of:

A)how many new machines a firm purchases.
B)how many facilities a firm shuts down.
C)how much new capital a firm rents.
D)how much output the firm produces.

Answer 2

D

Question 3

Which of the following most completely describes the cost to a firm associated with the use of its resources in a particular way?

A)Its monetary outlay for inputs
B)Its explicit cost
C)The implicit cost of not renting its own resources
D)The opportunity cost of its resources

Answer 3

D

Question 4

If total fixed costs are $1,000,variable costs are constant at $5.00 per unit over the relevant range of output and average total cost is $6,what is total variable cost?

A)$100
B)$1,000
C)$5,000
D)$6,000

Question 5

The monetary cost of the space a restaurant rents to produce meals can be categorized as a:

A)variable cost.
B)marginal cost.
C)fixed cost.
D)opportunity cost.

Question 6

Jane Doe has her own law practice.She pays $1,500 in rent for her offices per month.She also pays $4,000 a month in salaries to secretaries and staff,utility bills worth $500 a month,and miscellaneous bills worth $1,000 a month.She recently received an offer to work for a legal firm for $8,000 a month,but she declined that in order to run her own practice.Which of the following most completely describes the cost Jane incurs per month to run her own practice?

A)$15,000
B)$7,000
C)$5,500
D)$6,000

Question 7

Marico Corp.can manufacture 45,000 ball bearings per day at one of its production facilities.If the company uses the same facility for manufacturing rivets,a total of 30,000 rivets can be produced each day.Calculate Marico Corp.'s implicit cost per day of producing rivets at this facility.

A)The monetary value of 45,000 ball bearings
B)The monetary value of 30,000 rivets
C)The monetary value of 15,000 ball bearings
D)The monetary value of 15,000 rivets

Question 8

If fixed costs are $1,000 and variable costs are constant at $1.00 per unit over the relevant range of output,what will the average total cost be when 2,000 units are produced?

A)$0.50
B)$1.00
C)$1.50
D)$2.00

Question 9

Which of the following can be classified as an implicit cost of production?

A)The cost of raw materials
B)Rent forgone on the office building
C)Interest paid on debt
D)Salary paid to workers

Question 10

A firm's costs are determined by:

A)its production function.
B)the market price of its product.
C)the market demand curve.
D)its production possibility frontier.

Question 11

Suppose you quit your job as an accountant earning an annual salary of $50,000 to buy foreclosed homes,fix them up,and then resell them.You have $200,000 of your own money to invest in this,half of which you use to purchase three homes for a combined $500,000 (borrowing the remaining $400,000),and spend the remaining $100,000 of your money on materials.Over the course of one year you fix up all three homes and resell them for a total of $700,000.Assume that your loan to purchase the homes is payable in one lump sum at the end of one year.If you can borrow and lend money at a 6% annual rate of interest,what was your total cost of renovating these three homes?

A)$572,000
B)$600,000
C)$624,000
D)$686,000

Question 12

If total fixed costs are $1,000,variable costs are constant at $5.00 per unit over the relevant range of output and the average total cost is $6,how many units are being produced?

A)10
B)100
C)1,000
D)1,100

Question 13

If fixed costs are $10,000 and variable costs are constant at $1.00 per unit over the relevant range of output,what will the average total cost be when 10,000 units are produced?

A)$0.20
B)$2.00
C)$5.00
D)$1.00

Question 14

A firm's production cost equaling the opportunity cost of its resources reflects the fact that:

A)resources are best-suited to producing one particular good.
B)firms typically make one primary product.
C)resources can be used to make many different products.
D)firms often make more than one product.

Question 15

Suppose a builder constructs a house that he hopes to sell to a prospective future buyer before he finishes building it.After spending six months and $300,000 in acquiring the land and constructing the house,market conditions change and the builder fails to find a buyer willing to pay his asking price of $360,000.The builder further realizes that by investing $300,000 in a bank deposit he would have been able to earn $4,500 as interest.Which of the following is the economically efficient way for the builder to view his investment?

A)The $300,000 is a sunk cost and should be ignored when negotiating a price for the home.
B)The $300,000 is the builder's opportunity cost and he should not accept any offer below that.
C)He should advertise more heavily in an attempt to sell the home for at least $300,000.
D)He should raise the price even further to better reflect the additional opportunity costs of his time and capital expenditures.

Question 16

Ben decides to expand his ice cream store so he can begin selling sub sandwiches.He spends $20,000 in preparing his new sandwich shop.His marginal cost of selling sub sandwiches is $3 and he estimates that he can sell 10,000 subs for $6 each.He soon learns of a nearby store that is now selling identical subs for $3.50 each.Ben should:

A)quit selling subs since his average total cost of selling subs is greater than the $3.50 price he would now have to charge.
B)sell subs for $3.50 each,considering the $20,000 to be a sunk cost and ignoring it.
C)sell subs as long the price he receives exceeds his average fixed costs of selling subs.
D)lower his price to $5 to cover his average total cost of selling subs.

Question 17

If total fixed costs are $1,000,variable costs are constant at $5.00 per unit over the relevant range of output and average total cost is $6,what is average fixed cost?

A)$1
B)$5
C)$10
D)$1,000

Question 18

Identify the example of sunk cost from the following.

A)A higher wage demanded by the labor union
B)Failure to meet the annual sales target
C)The lumber used to produce office furniture
D)Raw materials damaged by fire in the warehouse

Question 19

Which of the following is correct?

A)Total Fixed Cost = Total Cost + Total Variable Cost
B)Total Cost = Total Variable Cost + Marginal Cost
C)Average Fixed Cost = Average Total Cost - Average Variable Cost
D)Average Total Cost = Marginal Cost + Average Fixed Cost

Question 20

If there are no fixed costs and variable costs are constant at $1.00 per unit over the relevant range of output,what is marginal cost when 1 unit of output is produced?

A)$0
B)$0.50
C)$1
D)$2

Question 21

If the marginal cost curve intersects the average variable cost curve at 1,000 units per day,the rate of output at which average total cost is minimized is _____.

A)1,000 units
B)more than 1,000 units
C)less than 500 units
D)500 units

Question 22

Which of the following statements about marginal cost is correct?

A)When the marginal product of a variable input is rising,the marginal cost will fall.
B)When marginal cost equals average cost,average cost is at its maximum.
C)In the short-run,the marginal cost curve is parallel to the average variable cost curve.
D)When marginal cost is falling,total fixed cost is rising.

Question 23

In the figure given below,curves F,C,and G denote the total cost,the total variable cost,and the total fixed cost of a firm.
In Figure 8-1,which of the following distances represent the total cost of producing BT units of output?

A)SR
B)ST
C)RT
D)AB

Question 24

In the figure given below,curves F,C,and G denote the total cost,the total variable cost,and the total fixed cost of a firm.
Refer to Figure 8-1.The total fixed costs of the firm are identified by the distance:

A)RS.
B)ST.
C)BR.
D)BT.

Question 25

In the short run,a firm's marginal cost rises because of:

A)a decline in output prices.
B)a decline in marginal productivity of inputs.
C)decreasing returns to scale.
D)the flexibility in input usage.

Question 26

Once diminishing returns have set in,each additional unit of output:

A)requires less of the variable input than the previous unit.
B)requires less cost outlay than the previous unit.
C)requires more of the fixed input than the previous unit.
D)requires more cost outlay than the previous unit.

Question 27

If the marginal product of the variable input rises and then falls,the MC curve will:

A)rise and then fall.
B)fall and then rise.
C)downward sloping throughout.
D)not depend upon the path of the marginal product of the variable input.

Question 28

When output expands from the fourth to the fifth unit,the total variable cost of production rises from $400 to $500,while the total fixed cost remains constant at $100.Compute the marginal cost of producing the fifth unit.

A)$50
B)$200
C)$400
D)$100

Question 29

In the short-run,diminishing marginal returns are associated with:

A)declining average variable costs.
B)rising marginal cost.
C)rising average fixed cost.
D)falling average total cost.

Question 30

Which of the following statements is not true?

A)Average variable cost falls,reaches a minimum and begins to rise.
B)Average total cost falls,reaches a minimum and begins to rise.
C)Average fixed cost falls,reaches a minimum,and begins to rise.
D)Marginal cost falls,reaches a minimum and begins to rise.

Question 31

In the figure given below,curves F,C,and G denote the total cost,the total variable cost,and the total fixed cost of a firm.
Refer to Figure 8-1.Which of the following is true at the output level BT?

A)The firm's fixed cost is RT.
B)The firm's average variable cost is RT/BT.
C)The firm's marginal cost is RT/RB.
D)The firm's variable cost is AB

Question 32

If $\Delta$ TC represents the change in total cost, $\Delta$ w the change in the wage rate, $\Delta$ TFC the change in total fixed cost, $\Delta$ q the change in output,and $\Delta$ AC the change in average cost,the marginal cost of the firm can be defined as:

A) $\Delta$ TC/ $\Delta$ w.
B) $\Delta$ TFC/ $\Delta$ q.
C) $\Delta$ AC/ $\Delta$ q.
D) $\Delta$ TC/ $\Delta$ q.

Question 33

If there are no fixed costs and variable costs are constant at $1.00 per unit over the relevant range of output,what is the marginal cost of the second unit?

A)$0
B)$0.50
C)$1
D)$2

Question 34

Which of the following is true of the total variable cost curve in the short run?

A)It depicts the law of decreasing returns to scale.
B)It is a straight line parallel to the horizontal axis.
C)It is independent of the production function.
D)It lies below the short-run total cost curve.

Question 35

When labor is the only variable input used in production,marginal cost [MC]:

A)is inversely related to the marginal product of labor [MP_L].
B)is inversely related to the wage rate [w].
C)is positively related to MP_L.
D)is negatively related to labor supply [S_L].

Question 36

The law of diminishing marginal returns:

A)is relevant in both the short and the long-run.
B)says that increasing fixed inputs eventually results in smaller and smaller increases in total output.
C)says that increasing variable inputs eventually results in smaller and smaller increases in total output.
D)says that increasing variable inputs eventually results in smaller and smaller increases in total cost.

Question 37

Once diminishing returns have set in,each additional unit of the variable input:

A)decreases total output.
B)adds less to total output.
C)adds more to total output.
D)does not affect total output.

Question 38

A total product curve whose slope is continually rising at an increasing rate:

A)indicates that an infinite amount of labor is needed to produce a given level of output.
B)does not reflect diminishing marginal returns.
C)does not reflect increasing marginal returns.
D)describes a production function where labor is the only input.

Question 39

Which of the following determines the shape of the marginal cost curve in the short run?

A)The marginal product of labor is first increasing and then decreasing
B)The wage rate first decreases and then increases throughout the range of output
C)The price of output produced by labor is first decreasing and then increasing
D)The presence of economies of scale in the product market

Question 40

Which of the following does not decline as output increases?

A)Marginal cost
B)Average fixed cost
C)Average cost
D)Total fixed cost

Question 41

The expansion path identifies:

A)the least costly combination of inputs required to produce various levels of output.
B)the firm's demand curves for the inputs.
C)the various combinations of inputs that can be used to produce a given level of output.
D)the least-cost combination of outputs.

Question 42

Which of the following statements regarding the relationship between average cost and marginal cost is not true?

A)When marginal cost is below average total cost,average total cost falls.
B)When marginal cost is above average variable cost,average variable cost rises.
C)When marginal cost is equal to average total cost,average total cost is minimized.
D)When marginal cost is above average fixed cost,average fixed cost rises.

Question 43

Suppose labor is on the horizontal axis and capital on the vertical axis.If the total cost is defined by the equation TC = $400 + $15L + $10K,the slope of the isocost curve is:

A)-0.667
B)-1.5
C)-8
D)-40

Question 44

Suppose labor is on the horizontal axis and capital is on the vertical axis.If the wage rate is $15 per worker per hour and the rental rate of capital is $10 per unit per hour,what is the slope of the isocost curve?

A)-0.667
B)-1.5
C)-10
D)-15

Question 45

Which of the following statements about the relationship between marginal cost and average cost is correct?

A)When MC is falling,AC is rising.
B)AC equals MC at MC's lowest point.
C)When MC exceeds AC,AC must be rising.
D)When AC exceeds MC,MC must be rising.

Question 46

The slope of the total variable cost curve equals the:

A)average variable cost.
B)marginal cost.
C)average cost.
D)marginal physical product.

Question 47

Consider a graph with a total variable cost curve.Cost is on the vertical axis and output on the horizontal axis.The marginal cost can be represented by:

A)a ray from the origin to a point tangent to the total variable cost curve.
B)a ray from the origin to a point on the total variable cost curve.
C)the slope at a particular point on the total variable cost curve.
D)the distance from the origin to a point on the total variable cost curve.

Question 48

The long-run expansion path for a firm:

A)is not necessarily linear,but always slopes upward.
B)may be backward-bending,if a firm uses less of one input as output increases.
C)may be backward-bending,if the firm uses more of both inputs as output increases.
D)is always linear,but not necessarily upward-sloping.

Question 49

Assume that labor is plotted on the horizontal axis and capital is plotted on the vertical axis.A firm plans to spend $1,000 per week on inputs and confronts a wage rate of $10 per hour and a capital rental rate of $20 per hour.Given this information,what will be the slope of the isocost curve?

A)-2
B)-1/2
C)-100
D)-50

Question 50

Which of the following is true?

A)When average cost is decreasing,total cost must also be decreasing.
B)When average cost is decreasing,average product of labor must be decreasing.
C)When average cost is decreasing,marginal cost must be less than average cost.
D)When average cost is decreasing,output must be decreasing.

Question 51

Average fixed cost [AFC] is the:

A)horizontal distance between average total cost [ATC] and average variable cost [AVC].
B)vertical distance between ATC and AVC.
C)horizontal distance between ATC and the Y-axis.
D)vertical distance between ATC and the X-axis.

Question 52

A firm uses labor as an input in production.In the short-run,its average cost will reach a minimum where:

A)average product of labor reaches a maximum.
B)marginal product of labor reaches a maximum.
C)marginal cost begins to increase.
D)marginal cost equals average cost.

Question 53

A tangency between an isocost line and an isoquant shows all the following,except:

A)the maximum output attainable by a firm at a given cost.
B)the minimum cost necessary to produce a given output.
C)an input combination where the ratio of marginal products equals the ratio of the input prices.
D)an input combination where the returns to labor and capital inputs are equal.

Question 54

Which of the following can be identified from an isocost line?

A)The least costly combination of inputs needed to produce a given level of output
B)The relative prices of inputs
C)The technological relationships among inputs
D)The rate at which one input can be substituted for another in the production process

Question 55

Which of the following is true of the expansion path?

A)It always slopes upward.
B)It slopes upward as long as input prices are constant.
C)It slopes upward as long as the firm uses more of both inputs as output increases.
D)It is always linear,but not necessarily upward-sloping.

Question 56

If total cost rises as the level of output produced increases,then:

A)marginal cost must be rising.
B)marginal cost must be constant.
C)marginal cost must be falling.
D)marginal cost must be positive.

Question 57

In the figure given below,curves F,C,and G denote the total cost,the total variable cost,and the total fixed cost of a firm.
In Figure 8-1,R identifies the point:

A)of inflection.
B)where AVC reaches a minimum.
C)where MC reaches a minimum.
D)where diminishing marginal returns set in.

Question 58

A firm uses labor as an input in production.For the range of output where the average product of labor is increasing:

A)the marginal product of labor must be below the average product of labor.
B)the total product is at a maximum.
C)the marginal cost must also be increasing.
D)the average variable cost must be decreasing.

Question 59

Although isocost lines and budget lines are similar,they differ in that:

A)budget lines are linear while isocost lines can be curved.
B)the consumer is constrained to the budget line while the firm can have more than one isocost line.
C)the slope of a budget line equals the price ratio while the slope of an isocost line is not related to prices.
D)budget lines do not have a constant expenditure.

Question 60

The point of tangency between an isoquant and the isocost line indicates:

A)that in the long run fixed costs are equal to variable costs.
B)the maximum cost incurred for producing one unit of output.
C)that in the long run marginal costs tend to exceed fixed costs.
D)the minimum cost necessary to produce a particular level of output.

Question 61

Suppose the government restricts the amount of capital equipment firms can purchase in an attempt to increase employment.If a firm expands output then its long-run average costs will be:

A)less than they would be without the restriction.
B)more than they would be without the restriction.
C)the same as they would be without the restriction.
D)uncertain.Need more information

Question 62

A firm is employing 100 units of labor and 50 units of capital to produce 200 widgets.Labor costs $10 per unit and capital $5 per unit.For the quantities of inputs employed,MP_L = 2 and MP_K = 5.In this situation,the firm:

A)is producing the maximum output possible given the prices and relative productivities of the inputs.
B)could lower its production costs by using more labor and less capital.
C)could increase its output at no extra cost by using more capital and less labor.
D)should use more of both inputs in equal proportions.

Question 63

Suppose a firm that uses labor and capital as the only inputs in production is currently on the long-run expansion path.The marginal product of labor and capital at this least cost combination are 60 units and 80 units respectively and the wage rate of labor is $6.Calculate the rental cost of capital borne by the firm.

A)$10
B)$8
C)$5
D)$12

Question 64

If constant returns to scale apply to the entire range of production,then the long-run total cost curve would most likely:

A)be a straight line from the origin.
B)to increase at a decreasing rate initially,and then increase at an increasing rate.
C)to increase at an increasing rate initially,and then increase at a decreasing rate.
D)be U-shaped.

Question 65

Consider a firm that uses labor and capital as the only inputs.Suppose labor is on the horizontal axis and capital is on the vertical axis.Further,the expansion path has shifted down and average cost curves have shifted up.Which of following provides the most likely explanation for what has happened?

A)The wage rate decreased
B)The wage rate increased
C)The price of capital decreased
D)The price of capital increased

Question 66

Assume that Donnell Corp.is currently producing 500 units of output per period,using 25 units of labor and 20 units of capital.Values for the marginal product of each input and the prices of the inputs are as follows: MP_K = 100,MP_L = 200,w = 2,and r = 3.Given the information above,which of the following is true?

A)The firm is currently using the optimal levels of capital and labor.
B)The firm should increase capital and reduce labor usage.
C)The firm should increase labor and reduce capital usage.
D)The firm is not using the optimal levels of capital and labor,and it is impossible to determine the optimal levels from the given information.

Question 67

Increasing returns to scale imply that:

A)average costs are constant.
B)average costs are falling.
C)average costs are increasing.
D)average costs are negative.

Question 68

Each point on an expansion path:

A)has a constant input price ratio.
B)has the same marginal rate of technical substitution [MRTS].
C)has the same total cost.
D)is cost-minimizing.

Question 69

Suppose a firm is using two inputs,labor and capital.What will happen if the price of labor falls?

A)The firm's average cost curve will shift upward.
B)The firm's marginal cost curve will shift downward.
C)To produce the same level of output,the firm would need more capital.
D)The firm's total cost of production will increase.

Question 70

Which of the following is guaranteed by increasing returns to scale in production experienced in the long run?

A)Negative marginal costs
B)Zero average costs
C)Declining average costs
D)Rising marginal costs

Question 71

Which of the following is true at every point on the expansion path?

A)It shows the combinations of inputs having the maximum productivity.
B)It shows the various levels of output that can be produced using a given level of inputs.
C)It shows the various combinations of inputs that can be used to produce a given level of output.
D)It shows the maximum output attainable at a given cost.

Question 72

The rule of cost minimization indicates that a firm should:

A)employ inputs so as to maximize output.
B)employ inputs such that the marginal product per dollar spent is equal for all inputs.
C)minimize total costs.
D)minimize marginal costs.

Question 73

Suppose the wage rate is $15 per hour and the rental rate of capital is $10 per hour.If the marginal product of labor is 60 and the marginal product of capital 10,the profit maximizing firm should:

A)hire more labor and less capital.
B)utilize more capital and less labor.
C)maintain its current input mix of capital and labor.
D)employ more of both capital and labor.

Question 74

If the marginal product of labor is four times the marginal product of capital and the price of labor is twice the price of capital,then:

A)labor will be substituted for capital by a profit maximizing firm.
B)capital will be substituted for labor by a profit maximizing firm.
C)output cannot be expanded any further by using the same input levels.
D)input usage should be left unchanged.

Question 75

The long-run average cost curve always:

A)reflects the law of diminishing returns.
B)reflects constant returns to scale.
C)shows the least-cost method of production for each level of output.
D)has an inverted U-shape.

Question 76

A firm employs 100 units of labor and 50 units of capital to produce 200 widgets.Labor costs $10 per unit and capital costs $21 per unit.For the quantities of inputs employed,MP_L = 3 and MP_K = 3.In this situation,the firm:

A)is producing the maximum amount possible at the lowest possible cost.
B)could lower its production costs by using more capital and less labor.
C)could increase its output at no extra cost by using more labor and less capital.
D)should keep its input usage unchanged.

Question 77

Which of the following assumptions is made by economists while constructing a firm's marginal cost [MC] and average cost [AC] curves?

A)Input prices are constant.
B)Output is constant.
C)Output price is constant.
D)Technology will vary.

Question 78

Which of the following explains the shape of the long-run average cost curve?

A)Returns to scale
B)Returns to labor
C)Returns to capital
D)Rental rate on capital

Question 79

Which of the following depicts the change in per-unit cost of production resulting from a decrease in the input prices,given the output produced by the firm is constant?

A)An upward shift of the marginal cost curve
B)A rightward shift of the total cost curve
C)A downward shift of the average cost curve
D)An upward shift of the isocost curve

Question 80

Which of the following is true of cost minimization?

A)It is equivalent to profit maximization.
B)It is sufficient for profit maximization.
C)It is necessary for profit maximization.
D)It is unrelated to profit maximization.