Deck 9: Applications of Cost Theory

Question 1

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

A)existence of a non-linear cubic total cost function
B)hypothesis that marginal costs first decrease,then gradually increase over the normal operating range of the firm
C)hypothesis that total costs increase quadratically over the ranges of output examined
D)hypothesis that total costs increase linearly over some considerable range of output examined
E)none of the above

Answer 1

D

Question 2

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

A)cubic
B)quadratic
C)linear
D)a and b only
E)a,b,and c

Answer 2

D

Question 3

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

A)unit selling price less unit variable cost
B)contribution margin per unit
C)one minus the variable cost ratio
D)a and b only
E)a,b,and c

Answer 3

C

Question 4

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

A)in the short run,there is no distinction between variable and fixed costs.
B)revenue and cost curves are straight-lines throughout the analysis.
C)there appears to be perfect competition since the price is considered to remain the same regardless of quantity.
D)the straight-line cost curve implies that marginal cost is constant.
E)both c and d

Question 5

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

A)one minus the variable cost ratio
B)contribution margin per unit
C)selling price per unit
D)standard deviation of unit sales
E)none of the above

Question 6

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

Question 7

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

A)linear;increase linearly
B)quadratic;are constant
C)cubic;increase linearly
D)linear;are constant
E)none of the above

Question 8

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.

A)10,000 customers
B)20,000 customers
C)30,000 customers
D)40,000 customers
E)50,000 customers

Question 9

The short-run cost function is:

A)where all inputs to the production process are variable
B)relevant to decisions in which one or more inputs to the production process are fixed
C)not relevant to optimal pricing and production output decisions
D)crucial in making optimal investment decisions in new production facilities
E)none of the above

Question 10

The linear breakeven model excludes ____ from the analysis.

A)financing costs
B)taxes
C)contribution margin
D)a and b only
E)a,b,and c

Question 11

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

A)variable margin per unit
B)variable cost ratio
C)contribution margin per unit
D)target margin per unit
E)none of the above

Question 12

Theoretically,in a long-run cost function:

A)all inputs are fixed
B)all inputs are considered variable
C)some inputs are always fixed
D)capital and labor are always combined in fixed proportions
E)b and d

Question 13

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

A)since the technique does not employ actual cost data in the analysis,there is no way to assess the magnitude of the cost differentials between firms of varying size and efficiency.
B)the managerial and entrepreneurial aspects of the production process are not included in the analysis
C)because of legal factors,the long-run cost curve derived by this technique may be distorted and may not measure the cost curve postulated in economic theory
D)a and b
E)b and c

Question 14

What is another term meaning the degree of operating leverage?

A)The measure of the importance of fixed cost.
B)The operating profit elasticity.
C)The measure of business risk.
D)D.O.L.
E)All of the above.

Question 15

A $\underline{\text{ linear }}$ total cost function implies that:

A)marginal costs are constant as output increases
B)average total costs are continually decreasing as output increases
C)a and b
D)none of the above

Question 16

Which of the following is $\underline{\text{ not }}$ an assumption of the linear breakeven model:

A)constant selling price per unit
B)decreasing variable cost per unit
C)fixed costs are independent of the output level
D)a single product (or a constant mix of products)is being produced and sold
E)all costs can be classified as fixed or variable

Question 17

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

A)linear;increase linearly
B)quadratic;increase linearly
C)cubic;increase linearly
D)a and b
E)none of the above

Question 18

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.

Question 19

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:

A)regression to the mean analysis.
B)breakeven analysis.
C)survivorship analysis.
D)engineering cost analysis.
E)a Willie Sutton analysis.

Question 20

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

A)percentage;sales;percentage;EBIT
B)unit;sales;unit;EBIT
C)percentage;EBIT;percentage;sales
D)unit;EBIT;unit;sales
E)none of the above

Question 21

In the linear breakeven model,a firm incurs operating losses whenever output is less than the breakeven level.

Question 22

For each of the following cost-output relationships,describe the shape (U-shape,decreasing,increasing,constant)of the average total cost and marginal cost functions (C = total cost,Q = output):

Question 23

Offshore Petroleum's fixed costs are $2,500,000 and its debt repayment requirements are $1,000,000.Selling price per barrel of oil is $18 and variable costs per barrel are $10.
(a) Determine the breakeven output (in dollars).
(b) Determine the number of barrels of oil that offshore must produce and sell in order to earn a target (operating) profit of $1,500,000.
(c) Determine the degree of operating leverage at an output of 400,000 barrels.
(d) Assuming that sales of oil are normally distributed with a mean of 362,500 barrels and a standard deviation of 100,000 barrels, determine the probability that Offshore will incur an operating loss.