Question 1

Angel Rodriguez pulls up in his 24-foot panel truck in front of Sezz Medi Brick Oven Pizza in Upper Manhattan. Even though it's the middle of the summer, he's delivering- firewood. He says even though fuel costs have doubled in the past year, it's still worth the premium he gets delivering ash and cherry to the captive and growing market in NYC. How would an increase in Angel's salary affect short run costs?

Accepted Answer

An increase in Angel's salary would increase short run variable costs because his salary is a variable cost.

Question 2

When a firm is experiencing diseconomies of scale

Accepted Answer

Diseconomies of scale occur when a firm's long-run average costs increase as it produces more output, which is represented by a positive slope in the LRAC curve.

Question 3

Minneapolis business Rogue Chocolatier sells specialty chocolate bars with a high cocoa content. Most chocolate companies use already processed chocolate to craft their sweets. But Rogue buys raw cocoa beans, and roasts and grinds them until they're in a liquid state and then runs the chocolate through a big squat machine with rollers. Which statement is TRUE for Rogue?

Accepted Answer

Raw cocoa beans are the main ingredient in chocolate, and the machine is used to process the beans into chocolate. The amount of cocoa beans used and the amount of time the machine is used are both variable factors of production, as they can be changed to produce different amounts of chocolate.

Question 4

Minneapolis business Rogue Chocolatier sells specialty chocolate bars with a high cocoa content. The price of cocoa beans shot up 44 percent in 2008. How did this affect Rogue's short run costs?

Accepted Answer

The increase in the price of cocoa beans, a key ingredient, would raise the variable costs for Rogue Chocolatier in the short run.

Question 5

Minneapolis business Rogue Chocolatier sells specialty chocolate bars with a high cocoa content. Rogue can produce 15 chocolate bars per day with one employee, 29 with 2, 35 with 3 and 40 with 4 employees. Which statement is TRUE?

Accepted Answer

The answer of Minneapolis business Rogue Chocolatier sells specialty chocolate...

Question 6

Angel Rodriguez pulls up in his 24-foot panel truck in front of Sezz Medi Brick Oven Pizza in Upper Manhattan. Even though it's the middle of the summer, he's delivering- firewood. He says even though fuel costs have doubled in the past year, it's still worth the premium he gets delivering ash and cherry to the captive and growing market in NYC. How would a decrease in gasoline prices affect Angel's short run costs?

Accepted Answer

A decrease in gasoline prices would reduce Angel's fuel expenses, which are part of his variable costs, thus decreasing his short run total costs.

Question 7

Angel Rodriguez pulls up in his 24-foot panel truck in front of Sezz Medi Brick Oven Pizza in Upper Manhattan. Even though it's the middle of the summer, he's delivering- firewood. He says even though fuel costs have doubled in the past year, it's still worth the premium he gets delivering ash and cherry to the captive and growing market in NYC. How does the doubling of fuel costs affect Angel's short run costs?

Accepted Answer

The doubling of fuel costs would increase Angel's short run variable costs because fuel is a variable cost that changes with the level of output or delivery trips.

Question 8

Minneapolis business Rogue Chocolatier sells specialty chocolate bars with a high cocoa content. Rogue can produce 15 chocolate bars per day with one employee, 35 with 2, 50 with 3 and 55 with 4 employees. Which statement is TRUE?

Accepted Answer

The marginal product initially increases from 15 to 20 (from 1 to 2 employees) and then decreases from 20 to 15 (from 2 to 3 employees) and further to 5 (from 3 to 4 employees).

Question 9

In 2008, Precision Pattern Interiors, which makes high-end aircraft interiors, began a $1 million renovation of a building at the Hutchinson Air Base Industrial Tract south of Yoder, Kansas. The company also planned to add some $400,000 in new equipment and triple its Yoder work force. Which of Precision Pattern Interiors' decisions is a long run decision?

Accepted Answer

In economics, a long-run decision involves changes in all factors of production, including capital and labor. The renovation and equipment purchases indicate a long-term investment in capital, while workforce expansion indicates a long-term change in labor.

Question 10

Health care costs rose more than 10 percent in 2011, according to a survey of insurers by Aon Consulting Worldwide. If the increase in costs solely comes from increased prices for MRI and X-ray machines, then for the health care industry

Accepted Answer

Fixed costs are increasing because the increase in costs is solely due to increased prices for MRI and X-ray machines, which are fixed costs.

Question 11

For the past 15 years the American public has wanted to buy big trucks. The Big Three automakers delivered, investing billions in plants that build gas guzzlers. Now, when customers walk into showrooms, gas mileage is on their mind. Retooling the industry will take years. Mike Quincy says the industry is "like a huge aircraft carrier. It doesn't stop on a dime. It doesn't turn on a dime." What does Mike mean?

Accepted Answer

The analogy of the industry being like a "huge aircraft carrier" suggests that changes in the industry take a long time to implement, indicating a long decision time frame to adapt to new market demands.

Question 12

What is the difference between the short run and the long run?

Accepted Answer

The answer of What is the difference between the short...

Question 13

Angel Rodriguez pulls up in his 24-foot panel truck in front of Sezz Medi Brick Oven Pizza in Upper Manhattan. Even though it's the middle of the summer, he's delivering- firewood. He says even though fuel costs have doubled in the past year, it's still worth the premium he gets delivering ash and cherry to the captive and growing market in NYC. Which of the following statements is TRUE about short run costs for Angel?

Accepted Answer

In the short run, the truck is a fixed cost because it is a capital investment that does not change with the level of output. Gasoline is a variable cost because it varies with the amount of driving Angel does for deliveries.

Question 14

Health care costs rose more than 10 percent in 2011, according to a survey of insurers by Aon Consulting Worldwide. Which of the following would be a variable cost in a hospital?

Accepted Answer

Nurses' salaries can vary depending on the number of patients and the level of care required, making them a variable cost.

Question 15

Health care costs rose more than 10 percent in 2011, according to a survey of insurers by Aon Consulting Worldwide. If the increase in costs solely comes from increased wages to nurses and doctors, then for the health care industry

Accepted Answer

Variable costs are increasing because wages for nurses and doctors are considered variable costs, which fluctuate with the level of services provided.

Question 16

Minneapolis business Rogue Chocolatier sells specialty chocolate bars with a high cocoa content. If Rogue's average total cost decreases as the business increases plant size, then Rogue experiences

Accepted Answer

Economies of scale occur when a firm's average total cost decreases as it increases production or plant size, due to factors like spreading fixed costs over more units or operational efficiencies.

Question 17

In 2008, Precision Pattern Interiors, which makes high-end aircraft interiors, began a $1 million renovation of a building at the Hutchinson Air Base Industrial Tract south of Yoder, Kansas. The company also planned to add some $400,000 in new equipment and triple its Yoder work force. Which of Precision Pattern Interiors' decisions is a short run decision?

Accepted Answer

In the short run, firms can adjust labor but not capital. Tripling the workforce is a labor adjustment, making it a short run decision.

Question 18

Health care costs rose more than 10 percent in 2011, according to a survey of insurers by Aon Consulting Worldwide. Which of the following would be a fixed cost in a hospital?

Accepted Answer

An MRI machine is a fixed cost because it is a long-term investment and does not vary with the number of patients treated.

Question 19

In 2008, Precision Pattern Interiors, which makes high-end aircraft interiors, began a $1 million renovation of a building at the Hutchinson Air Base Industrial Tract south of Yoder, Kansas. The company also planned to add some $400,000 in new equipment and triple its Yoder work force. Why would the long run decisions be riskier than the short run decisions?

Accepted Answer

Long run decisions are riskier because they involve commitments that last for a long time, making it difficult to reverse or change them if circumstances change.

Question 20

For the past 15 years the American public has wanted to buy big trucks. The Big Three automakers delivered, investing billions in plants that build gas guzzlers. Now, when customers walk into showrooms, gas mileage is on their mind. Retooling the industry will take years, so in the meantime GM, Ford and Chrysler are tweaking their existing models. They're changing tires, adjusting transmissions and exhaust valves in hopes of getting one or maybe two more miles per gallon. Which of the decisions by the Big Three to gain gas mileage is a short run decision?

Accepted Answer

All of these decisions are short run decisions because they involve minor modifications to existing models rather than significant overhauls or investments in new technology, which would be long-term decisions.

Quiz 11: Output and Costs