Question 1

The following figure shows the long-run average cost curve of a firm.
Figure 6-1
 
-Refer to Figure 6-1.The production function of the firm displays constant returns to scale when output is increased from _____.
A)0A to 0E
B)0C to 0D
C)0D to 0E
D)0A to 0B
E)0B to 0D

Accepted Answer

Constant returns to scale occur when doubling the inputs leads to a doubling of output. This occurs in the range of 0C to 0D on the graph, as the slope of the long-run average cost curve remains constant in this range. This indicates that the firm is able to increase its output without experiencing increasing costs per unit, indicating constant returns to scale.

Question 2

A firm that produces and sells toys has a factory located in New Town built on a 50,000 square feet plot of land.The following table gives information about the costs of production and output of the firm.
Table 6-1
 
-Refer to Table 6-1.What is the average fixed cost of producing a toy?
A)$38
B)$20
C)$40
D)$51
E)$30

Accepted Answer

D

Question 3

A law firm will be paid $500 to send one of its lawyers to a client to take a routine deposition.The firm can send a 2nd year lawyer whose usual billing rate is $150 per hour and who is currently working on a lucrative tax deal,or it can send a 4th year associate (billing rate $200 per hour)who is currently overseeing the selection and hiring of law students as summer associates.Based on this information,the firm should send: A)the 2^nd year lawyer because his billable rate is lower. B)the 4^th year lawyer because her billable rate is higher. C)the 2^nd year lawyer because he is currently more productive. D)either the 2^nd year lawyer or the 4^thyear associate since the firm receives the same $500 fee. E)the 4^th year lawyer because her current work is less valuable to the firm.

Accepted Answer

The 4th year lawyer should be sent because her current work of overseeing the selection and hiring of summer associates is less valuable compared to the lucrative tax deal the 2nd year lawyer is working on.

Question 4

A firm produces 100 units of output at an average variable cost of $5 and incurs a total fixed cost of $700.Which of the following is true?
A)The firm's average total cost is $12.
B)The firm's total variable cost is $1,200.
C)The firm's marginal cost is constant and equal to $5.
D)The firm's average fixed cost is $5.
E)The firm's total cost is $500.

Accepted Answer

We can calculate the firm's total variable cost as:
Total variable cost = Average variable cost x Quantity of output
Total variable cost = $5 x 100 = $500
Therefore, the firm's total cost is:
Total cost = Total fixed cost + Total variable cost
Total cost = $700 + $500 = $1,200
The firm's average total cost is:
Average total cost = Total cost / Quantity of output
Average total cost = $1,200 / 100 = $12
Thus, A is the correct choice as the firm's average total cost is $12.

Question 5

Bill gives up his present job in Delaware to pursue a graduate school program in New York.What is the opportunity cost of his decision?
A)The difference between the cost of living in New York and in Delaware
B)The total tuition cost of the program
C)The increase in wages that he can expect as a result of higher educational qualifications
D)The wages that he forgoes when he quits his job
E)The cost of relocating to New York from Delaware

Accepted Answer

The opportunity cost of Bill's decision is the value of the next best alternative forgone, which in this case is the wages that he forgoes when he quits his job in Delaware to pursue graduate school in New York. This is because he could have continued working and earning wages if he had not pursued the graduate program.

Question 6

If a firm were to stop production of its only product,the firm's total cost will be equal to _____.
A)zero
B)its total fixed cost
C)its total variable cost
D)its opportunity cost
E)its average cost

Accepted Answer

If a firm stops production of its only product, it will still have to pay its fixed costs such as rent, salaries, etc. Therefore, the firm's total cost will be equal to its total fixed cost.

Question 7

A firm that produces and sells toys has a factory located in New Town built on a 50,000 square feet plot of land.The following table gives information about the costs of production and output of the firm.
Table 6-1
 
-Refer to Table 6-1.What is the average variable cost of producing a toy?
A)$0.40
B)$3.80
C)$5.20
D)$4
E)$5

Accepted Answer

To find the average variable cost, we need to divide the total variable cost by the output. Looking at the table, the total variable cost for producing 1000 toys is $3800. Therefore, the average variable cost of producing a toy is $3.80 (3800/1000).

Question 8

When a firm's production function exhibits constant returns to scale:
A)the short-run average cost curve will be horizontal.
B)the long-run average cost curve will be U-shaped.
C)the long-run marginal cost curve will be upward sloping.
D)the short-run average variable cost curve will be downward sloping.
E)the long-run average cost curve will be horizontal.

Accepted Answer

When a firm's production function exhibits constant returns to scale, the long-run average cost curve will be horizontal. This means that as the firm increases its scale of production, it can produce goods at the same average cost. In other words, there are no economies or diseconomies of scale.

Question 9

In the short run,if the marginal product of labor is decreasing,then:
A)marginal cost must be increasing.
B)the marginal revenue of the firm must be decreasing.
C)average total cost must be increasing.
D)average variable cost must be decreasing.
E)average total cost must be decreasing.the marginal revenue product of labor must be increasing.

Accepted Answer

When the marginal product of labor is decreasing, it means that each additional unit of labor is adding less output than the previous unit. This leads to an increase in the marginal cost of producing each additional unit of output, as more resources (labor) are required to produce the same amount of output.

Question 10

The average fixed cost for a firm _____.
A)is constant at all levels of output
B)is increasing over all levels of output
C)first increases at an increasing rate and then declines
D)first decreases and then increases as output increases
E)is decreasing over all levels of output

Accepted Answer

Average fixed cost (AFC) decreases as output increases because the total fixed cost is spread over a larger number of units. Fixed costs do not change with the level of output, so as more units are produced, the cost attributed to each unit decreases.

Question 11

Assume that an investor invests $100,000 in a business venture.He earns an economic profit of $5,000.If the rate of return on an investment of equal risk is 10%,what is the rate of return that he earned on his investment?
A)25%
B)15%
C)10%
D)5%
E)20%

Accepted Answer

The rate of return the investor earned on his investment is calculated as follows:
Rate of return = (Economic profit / Investment) x 100%
Rate of return = (5,000 / 100,000) x 100%
Rate of return = 5%
The rate of return on an investment of equal risk is 10%. Therefore, the investor earned a lower rate of return than what he would have earned on a similar investment. The difference between the two rates of return is called the risk premium. In this case, the risk premium is 5%. 
To calculate the risk premium, we subtract the rate of return the investor earned from the rate of return on an investment of equal risk:
Risk premium = 10% - 5%
Risk premium = 5%
Therefore, the investor earned a rate of return of 5% and a risk premium of 5%. The best choice is B, 15%.

Question 12

Dana,who is a trained yoga instructor,spends 4 hours on Monday baking and packing 10 boxes of cookies.She sells the cookies for $10 a box.Given that she can also teach yoga for $80 an hour,what is her opportunity cost of baking cookies?
A)$320
B)$100
C)$220
D)$420
E)$800

Accepted Answer

Dana's opportunity cost of baking cookies is the income she foregoes by not teaching yoga. Since she could earn $80 per hour teaching yoga and spends 4 hours baking cookies, her opportunity cost is 4 hours * $80/hour = $320.

Question 13

The economic profit on an investment is zero when:
A)the total revenue from the investment exceeds the costs of the investment.
B)the revenue from the investment just covers the fixed cost of the investment.
C)the accounting profit and economic profit are equal.
D)the investment earns a normal rate of return.
E)the sunk cost of the investment is zero.

Accepted Answer

Economic profit is zero when the investment earns a normal rate of return, which means the revenue from the investment just covers both the explicit costs (such as wages, rent, materials) and implicit costs (such as opportunity cost of the entrepreneur's time and capital) of the investment. At this point, the investor is not making any additional profit above what they could earn in their next best alternative.

Question 14

Which of the following is true of a firm's fixed costs?
A)A firm should shut down if it cannot cover its fixed costs.
B)Fixed costs are incurred regardless of the firm's level of output.
C)Fixed costs are the same as a firm's total costs.
D)Fixed costs are reduced to zero if the firm produces no output.
E)Accounting profit equals economic profit when fixed costs fall to zero.

Accepted Answer

Fixed costs are costs that do not vary with the level of output, such as rent and salaries. They are incurred regardless of the firm's level of output, so option B is correct. Option A is incorrect because a firm may still be able to cover its variable costs and should continue producing even if it is not able to cover its fixed costs. Option C is incorrect because total costs include both fixed and variable costs. Option D is incorrect because fixed costs cannot be reduced to zero unless the firm shuts down completely. Option E is also incorrect because accounting profit only takes into account explicit costs and does not consider the opportunity costs of using resources to run the business.

Question 15

If short-run average cost is increasing then:
A)average fixed cost must be increasing.
B)marginal cost must be decreasing.
C)marginal cost must be greater than short-run average cost.
D)the production function displays decreasing returns to scale.
E)average variable cost must be decreasing.

Accepted Answer

If short-run average cost is increasing, it means that the cost of producing each additional unit is increasing. This implies that the marginal cost must be greater than the short-run average cost. If marginal cost were decreasing, it would mean that the cost of producing each additional unit is decreasing, which would contradict the premise that short-run average cost is increasing. The other choices are not necessarily true based on the given information.

Question 16

Which of the following is true of the long run?
A)The average fixed cost is higher in the long run than in the short run.
B)All inputs costs are variable in the long run.
C)The firm produces at a higher cost in the long run than in the short run.
D)All inputs to production are kept fixed in the long run.
E)Total costs are greater than variable costs in the long run.

Accepted Answer

In the long run, all inputs costs are variable as the firm has more flexibility to adjust its inputs and production processes. The other choices are incorrect as average fixed cost may decrease in the long run (choice A), the firm may produce at a lower cost in the long run (choice C), all inputs are not fixed in the long run (choice D), and total costs may be equal to or less than variable costs in the long run (choice E).

Question 17

Accounting profit differs from economic profit because:
A)accounting cost does not include sunk cost.
B)economic cost includes all relevant opportunity costs.
C)accounting cost includes the implicit costs of production.
D)accounting cost does not include fixed cost.
E)economic cost does not include the explicit costs of production.

Accepted Answer

Accounting profit only takes into account the explicit costs of production (such as wages, rent, and materials), while economic profit includes both explicit and implicit costs (such as opportunity costs and the cost of using resources not in production). Therefore, choice B is correct because economic profit includes all relevant opportunity costs. The other choices are incorrect because accounting cost does include sunk cost (choice A), accounting cost does not include the implicit costs of production (choice C), accounting cost can include fixed cost (choice D), and economic cost includes both explicit and implicit costs of production (choice E).

Question 18

When average total cost is at its minimum point:
A)marginal cost is also at its minimum point.
B)marginal cost is equal to zero.
C)marginal cost is constant.
D)average total cost is equal to marginal cost.
E)the firm is maximizing profit.

Accepted Answer

When average total cost is at its minimum point, marginal cost equals average total cost. This is because the marginal cost curve intersects the average total cost curve at its lowest point.

Question 19

Amanda invests $500,000 in a new business venture.Which of the following correctly identifies the relevant opportunity cost that she faces?
A)The potential profits from the business
B)The discounted present value of future profits from the business
C)The rate of interest that could have been earned on $500,000
D)The probability of losing the initial investment of $500,000
E)The rate of return on $500,000 invested in the business

Accepted Answer

The opportunity cost that Amanda faces is the rate of interest that she could have earned on her $500,000 if she had not invested it in the new business venture. This is because the opportunity cost represents the next best alternative that Amanda had to forego in order to invest in the business. Therefore, option C is the correct choice. The other options are either irrelevant or do not represent the opportunity cost in this scenario.

Question 20

The money that a firm has already spent on research and development for a project should be categorized as _____ when the firm is deciding whether to make an additional investment in the project.
A)an implicit cost
B)a variable cost
C)a sunk cost
D)a marginal cost
E)an overhead cost

Accepted Answer

The money that a firm has already spent on research and development for a project is considered a sunk cost. This means that it is a cost that cannot be recovered and should not be considered when deciding whether to make an additional investment in the project. Only future costs and benefits should be considered.

Quiz 6: Cost Analysis

The following figure shows the long-run average cost curve of a firm. Figure 6-1 -Refer to Figure 6-1.The production function of the firm displays constant returns to scale when output is increased from _____.

A firm that produces and sells toys has a factory located in New Town built on a 50,000 square feet plot of land.The following table gives information about the costs of production and output of the firm. Table 6-1 -Refer to Table 6-1.What is the average fixed cost of producing a toy?

A firm produces 100 units of output at an average variable cost of $5 and incurs a total fixed cost of $700.Which of the following is true?

Bill gives up his present job in Delaware to pursue a graduate school program in New York.What is the opportunity cost of his decision?

If a firm were to stop production of its only product,the firm's total cost will be equal to _____.

A firm that produces and sells toys has a factory located in New Town built on a 50,000 square feet plot of land.The following table gives information about the costs of production and output of the firm. Table 6-1 -Refer to Table 6-1.What is the average variable cost of producing a toy?

When a firm's production function exhibits constant returns to scale:

In the short run,if the marginal product of labor is decreasing,then:

The average fixed cost for a firm _____.

Assume that an investor invests $100,000 in a business venture.He earns an economic profit of $5,000.If the rate of return on an investment of equal risk is 10%,what is the rate of return that he earned on his investment?

Dana,who is a trained yoga instructor,spends 4 hours on Monday baking and packing 10 boxes of cookies.She sells the cookies for $10 a box.Given that she can also teach yoga for $80 an hour,what is her opportunity cost of baking cookies?

The economic profit on an investment is zero when:

Which of the following is true of a firm's fixed costs?

If short-run average cost is increasing then:

Which of the following is true of the long run?

Accounting profit differs from economic profit because:

When average total cost is at its minimum point:

Amanda invests $500,000 in a new business venture.Which of the following correctly identifies the relevant opportunity cost that she faces?

The money that a firm has already spent on research and development for a project should be categorized as _____ when the firm is deciding whether to make an additional investment in the project.