Question 1

If a firm experiences constant returns to the variable input in the short run,
A) marginal cost will be greater than average variable cost, but the two will become more equal as output increases.
B) marginal cost will be less than average variable cost, but the two will become more equal as output increases.
C) marginal cost will be greater than average variable cost, and the difference between the two will become larger as output increases.
D) marginal cost and average variable cost will be equal over the range of output in question.

Accepted Answer

If a firm experiences constant returns to the variable input in the short run, it means that the additional output produced by each additional unit of the variable input is constant. In this case, the marginal cost will not increase as output increases and will be equal to the average variable cost. Therefore, the correct answer is D.

Question 2

-Refer to Scenario 2. Diminishing marginal returns starts to occur between units:
A) 2 and 3.
B) 3 and 4.
C) 4 and 5.
D) 5 and 6.

Accepted Answer

The answer of 
-Refer to Scenario 2. Diminishing marginal returns...

Question 3

Assume there is an improvement in technology that increases the marginal product of each unit of labor. This would have the effect of:
A) reducing the average total cost, average variable cost, and marginal cost of production.
B) increasing the average total cost, average variable cost, and marginal cost of production.
C) reducing the average variable cost and marginal cost of production, but average total cost would be unchanged.
D) reducing the average total cost and average variable cost of production, but marginal cost would be unchanged.

Accepted Answer

An improvement in technology that increases the marginal product of each unit of labor would shift the production function upward, leading to increased output with the same or lower amount of input. This would result in lower average total cost, average variable cost, and marginal cost of production as fixed costs are spread over a larger output. Therefore, reducing the cost per unit of output.

Question 4

Marginal cost is defined as:
A) the change in total cost due to a one unit change in output.
B) total cost divided by output.
C) the change in output due to a one unit change in an input.
D) total product divided by the quantity of input.

Accepted Answer

Marginal cost is the additional cost incurred in producing one more unit of output, and is calculated as the change in total cost due to a one unit change in output.

Question 5

-Refer to Scenario 3. The marginal cost of producing the sixth unit of output is:
A) $33.33 approximate).
B) $55.
C) $200.
D) $250.

Accepted Answer

The answer of 
-Refer to Scenario 3. The marginal cost...

Question 6

Assume a firm is currently producing 100 units of output, total fixed costs are $10,000, and average variable costs are $8. Based on this information we can conclude, with certainty, that the firm's:
A) marginal costs are $8.
B) total variable costs are $8000.
C) average fixed costs are $2.
D) total costs are $10,800.

Accepted Answer

Total costs can be calculated as follows:
Total Costs = Total Fixed Costs + Total Variable Costs
Total Variable Costs = Average Variable Cost x Units of Output
Given that the firm is currently producing 100 units of output, we can calculate the total variable costs as:
Total Variable Costs = $8 x 100 = $800
Therefore, Total Costs = $10,000 + $800 = $10,800. 
Hence, option (D) is the correct answer.

Question 7

Production functions A and B result in the same average total costs of production. However, production function A is twice as capital intensive as production function B. In this case, all else constant:
A) marginal costs will be higher in A than they are in B.
B) marginal costs will be higher in B than they will in A.
C) because total costs are equal, marginal costs will be equal for the two production functions as well.
D) there is no way to say anything about the relative marginal costs of production in the two production functions without additional information.

Accepted Answer

Since production function A is more capital intensive, it means that it requires more capital and less labor compared to production function B. This implies that the marginal product of capital will be lower in A than it is in B, and the marginal product of labor will be higher in A than it is in B. As a result, the marginal cost of production in A will be higher than it is in B, because the marginal cost is the addition to total cost resulting from the production of an additional unit of output, and the additional unit in A will require more capital and less labor than it does in B, making it more expensive. Thus, B is the best choice.

Question 8

-Refer to Scenario 2. The marginal cost of the sixth unit of output is:
A) $1.33.
B) $7.50.
C) $8.00.
D) $45.00.

Accepted Answer

The answer of 
-Refer to Scenario 2. The marginal cost...

Question 9

Which of the following statements concerning the relationships among the firm's total cost functions is false?
A) TC = TFC + TVC
B) TVC = TFC - TC
C) TFC = TC - TVC
D) TC = TFC when output = 0.

Accepted Answer

This statement is false because it should be TVC = TC - TFC, not TFC - TC.

Question 10

Which of the following statements is correct?
A) In the short run, if a firm chooses to produce no output i.e., shut down) its total costs of production will equal its total fixed costs.
B) If a firm decides to shut down, its short-run total costs will equal 0.
C) As a firm increases output in the short run, the change in total costs is equal to the change in total variable costs.
D) A firm minimizes its total costs of production when average variable cost is minimized.

Accepted Answer

The answer of Which of the following statements is correct?
A)...

Question 11

If a firm experiences constant returns to the variable input in the short run,
A) marginal product will be greater than average variable product, but the two will become more equal as output increases.
B) marginal product will be less than average variable product, but the two will become more equal as output increases.
C) marginal product will be greater than average variable product, and the difference between the two will become larger as output increases.
D) marginal product and average variable product will be equal over the range of output in question.

Accepted Answer

Constant returns to the variable input means that the marginal product (MP) of the variable input is constant over the range of output in question. In this case, MP will be equal to average variable product (AVP) over the range of output in question, leading to Choice D as the correct answer.

Question 12

-Refer to Scenario 3. Diminishing marginal returns are incurred when output is increased from:
A) 1 to 2 units of output.
B) 2 to 3 units of output.
C) 3 to 4 units of output.
D) 4 to 5 units of output.

Accepted Answer

Diminishing marginal returns occur when adding an additional factor of production results in a smaller increase in output. In this scenario, the transition from 3 to 4 units of output represents the point where additional inputs lead to less proportional increases in output, indicating diminishing marginal returns.

Question 13

-Refer to Scenario 3. The average variable cost of producing three units of output is:
A) $15.
B) $25.
C) $41.67 approximate).
D) $75.

Accepted Answer

The answer of 
-Refer to Scenario 3. The average variable...

Question 14

Marginal cost is defined as the change in ________ cost when output changes by one unit. In the short run, marginal cost can also be measured by the change in_________ cost when output changes by one unit.
A) total; fixed
B) variable; fixed
C) fixed; variable
D) total; variable

Accepted Answer

Marginal cost is a measure of the change in total variable costs for a given change in output. In the short run, fixed costs are constant and marginal cost can only be affected by changes in variable costs, which are a function of changes in output. Therefore, the best choice is D - total and variable costs.

Question 15

So long as a firm is enjoying increasing marginal returns, a one unit increase in output will cause marginal costs to_________ and total costs to_________ .
A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease

Accepted Answer

When a firm is experiencing increasing marginal returns, it means that each additional unit of output produced leads to a decrease in the marginal cost (the cost of producing one more unit of output). This is because the fixed costs (such as rent and equipment) are being spread out over a larger quantity of output, reducing the per-unit cost.

However, while marginal costs decrease with increasing marginal returns, total costs will increase due to the fixed cost component. Therefore, a one unit increase in output will cause marginal costs to decrease, but total costs to increase. So, option B is the correct answer.

Question 16

Which of the following statements is true of the relationship among the average cost functions?
A) ATC = AFC - AVC
B) AVC = AFC + ATC
C) AFC = ATC + AVC
D) AFC = ATC - AVC

Accepted Answer

The relationship between average cost functions can be represented as follows:
ATC = AFC + AVC or
ATC = (TFC/Q) + (TVC/Q)
Here, TFC refers to total fixed cost, TVC refers to total variable cost, and Q refers to the quantity produced.
By rearranging the above equation, we get:
AFC = (TFC/Q) and
AVC = (TVC/Q)
By substituting these values in the first equation, we get:
ATC = AFC + AVC
By subtracting AVC from both sides, we get:
ATC - AVC = AFC
Therefore, the correct statement is AFC = ATC - AVC, which is option D.

Question 17

-Refer to Scenario 3. The average total cost of 5 units of output is
A) $8.
B) $10.
C) $29.
D) $39.

Accepted Answer

The answer of 
-Refer to Scenario 3. The average total...

Question 18

Which of the following is true of the relationship between the marginal cost function and the average total cost and average variable cost functions?
A) If MC is greater than ATC and AVC, then ATC and AVC will increase.
B) The ATC and AVC curves intersect the MC curve at minimum MC.
C) The MC curve, ATC curve, and AVC curve all intersect at the same point.
D) At each level of output, MC is equal to difference between AVC and ATC.

Accepted Answer

When the marginal cost (MC) is greater than both the average total cost (ATC) and the average variable cost (AVC), it means the cost of producing an additional unit is higher than the current average costs. This will pull the averages up, causing both ATC and AVC to increase.

Question 19

-Refer to Scenario 2. The average fixed cost of 2 units of output is:
A) $8.00.
B) $8.50.
C) $12.00.
D) $20.50.

Accepted Answer

The answer of 
-Refer to Scenario 2. The average fixed...

Question 20

For a particular production function, over the range of output where marginal product rises as units of the variable input are added to the fixed input, marginal cost will be:
A) increasing.
B) constant.
C) decreasing.
D) cannot be determined without additional information.

Accepted Answer

According to the law of diminishing marginal returns, as more units of variable input are added to a fixed input, the marginal product of the variable input will eventually decrease. However, over the range where marginal product is increasing, the additional units of variable input are adding more output than the previous units. This means that the marginal cost of each additional unit of output is decreasing, leading to a downward sloping marginal cost curve. Therefore, the answer is (C) decreasing.

Quiz 5: Production and Cost Analysis in the Short Run

If a firm experiences constant returns to the variable input in the short run,

-Refer to Scenario 2. Diminishing marginal returns starts to occur between units:

Assume there is an improvement in technology that increases the marginal product of each unit of labor. This would have the effect of:

Marginal cost is defined as:

-Refer to Scenario 3. The marginal cost of producing the sixth unit of output is:

Assume a firm is currently producing 100 units of output, total fixed costs are $10,000, and average variable costs are $8. Based on this information we can conclude, with certainty, that the firm's:

Production functions A and B result in the same average total costs of production. However, production function A is twice as capital intensive as production function B. In this case, all else constant:

-Refer to Scenario 2. The marginal cost of the sixth unit of output is:

Which of the following statements concerning the relationships among the firm's total cost functions is false?

Which of the following statements is correct?

If a firm experiences constant returns to the variable input in the short run,

-Refer to Scenario 3. Diminishing marginal returns are incurred when output is increased from:

-Refer to Scenario 3. The average variable cost of producing three units of output is:

Marginal cost is defined as the change in cost when output changes by one unit. In the short run, marginal cost can also be measured by the change in_ cost when output changes by one unit.

So long as a firm is enjoying increasing marginal returns, a one unit increase in output will cause marginal costs to_ and total costs to_ .

Which of the following statements is true of the relationship among the average cost functions?

-Refer to Scenario 3. The average total cost of 5 units of output is

Which of the following is true of the relationship between the marginal cost function and the average total cost and average variable cost functions?

-Refer to Scenario 2. The average fixed cost of 2 units of output is:

For a particular production function, over the range of output where marginal product rises as units of the variable input are added to the fixed input, marginal cost will be: