Question 1

Marginal cost equals:

Accepted Answer

Marginal cost is the change in total cost divided by the change in total output.

Question 2

Short run refers to a period of time during which:

Accepted Answer

In the short run, some factors of production (such as capital) are fixed while others (such as labor) are variable. The producer cannot easily change the level of output, but can make adjustments using the variable factors.

Question 3

When more and more units of a variable factor are combined with constant amount of fixed factor,such that the variable factor becomes abundant compared to the fixed factor,the output will eventually:

Accepted Answer

This is the law of diminishing marginal returns. As more and more units of a variable factor are combined with a constant amount of fixed factor, the additional output produced by each additional unit of the variable factor will eventually decrease, resulting in an increase at a diminishing rate. Eventually, the marginal product of the variable factor may even become negative, leading to a decrease in total output.

Question 4

Diminishing marginal returns means that as you combine more units of a variable resource with a set of fixed resources:

Accepted Answer

Diminishing marginal returns occur when the marginal physical product of each additional unit of the variable resource decreases with an increase in the fixed resources. This means that the production increases with the addition of each variable resource, but the rate of increase or marginal physical product decreases as we add more units of the resource. Therefore, the correct answer is option B, where the marginal physical product decreases.

Question 5

Fixed costs are costs paid for:

Accepted Answer

Fixed costs are expenses that do not vary with the level of production or output, such as rent, salaries, and insurance.

Question 6

Which of the following reflects the correct relationship between average total cost (ATC) and marginal cost (MC)?

Accepted Answer

When MC is below ATC, it pulls ATC down. This means that ATC is falling. Therefore, choice C is the correct answer.

Question 7

If labor is the only variable input,an increase in the quantity of labor:

Accepted Answer

Initially, as more labor is added, the output increases at an increasing rate due to the division of labor and specialization. However, as the quantity of labor increases, the marginal product of additional labor decreases, causing the output to increase at a decreasing rate. This is known as the law of diminishing marginal returns.

Question 8

Assume that one laborer produces 6 units of output,two laborers produce 14 units,three laborers 22 units,four laborers 24 units,and five laborers 25 units.Diminishing returns set in when the firm hires:

Accepted Answer

Diminishing returns set in when the addition of a unit of input (labor) leads to a smaller increase in output than the previous unit of input added. In this case, we see that the marginal product of labor (the additional output produced by one more unit of input) increases up to the third laborer, at which point it starts to decrease. Therefore, the best choice is D, or the fourth laborer, as this is where diminishing returns set in. Any additional labor hired beyond this point would result in a smaller increase in output, and potentially even a decrease in output.

Question 9

If a firm is experiencing diminishing returns,then:

Accepted Answer

Diminishing returns refers to a situation where each additional unit of the variable resource (such as labor or capital) leads to a relatively smaller increase in output. This means that the marginal physical product of the variable resource is decreasing. Option A is incorrect because the quality of the variable resource is not necessarily related to diminishing returns. Option B is incorrect because diseconomies of scale refer to a situation where the firm's long-run average total cost is increasing as the scale of production increases, which is different from diminishing returns. Option D is incorrect because average physical product refers to the output per unit of input, which may or may not be affected by diminishing returns. Option E is incorrect because total physical product refers to the total amount of output produced, which may or may not be affected by diminishing returns.

Question 10

The law of diminishing returns applies:

Accepted Answer

The law of diminishing returns applies in the short run because in the short run, some inputs, called fixed inputs, remain fixed. As more variable inputs, such as labor, are added, the marginal product of labor will eventually decrease, leading to diminishing returns. In the long run, all inputs are variable, so the law of diminishing returns applies but is not specifically related to fixed inputs.

Question 11

Marginal fixed cost:

Accepted Answer

Marginal fixed cost is always zero because fixed costs do not change with the level of output. Therefore, the change in fixed cost when output changes is zero.

Question 12

If average variable cost is falling,then:

Accepted Answer

When average variable cost is falling, marginal cost must be below average variable cost, as it pulls the average down.

Question 13

"As I add more workers to the factory line,the additional output produced by each additional worker seems to decline.Eventually,the workers just get in each others' way." This statement by a factory supervisor refers to:

Accepted Answer

The supervisor's statement refers to the concept of diminishing marginal returns, which states that as more units of a variable input (in this case, workers) are added to a fixed input (the factory line), the marginal product of the variable input will eventually decrease, leading to less additional output produced by each additional unit of the variable input. Eventually, the added workers may even start to get in the way of each other, leading to lower total output.

Question 14

After hiring a new employee,a manager finds that the total output has increased.When the manager hires another employee however,he realizes that although the total production has increased,the increment is less than the previous case.This is the result of:

Accepted Answer

This is due to the concept of diminishing marginal returns, which states that as more units of a variable input (such as hiring more employees) are added to a fixed input (such as machinery or infrastructure), the marginal product of the variable input will eventually decrease. In this case, the manager experienced an increase in output with the first new employee, but the increase was not as significant with the second employee due to diminishing returns.

Question 15

If the total cost of producing 2 pounds of cheese is $6 and the total cost of producing 4 pounds of cheese is $8,then:

Accepted Answer

The average total cost for 2 pounds is $3 per pound ($6/2), and for 4 pounds, it is $2 per pound ($8/4). Since the average total cost decreases as production increases, the average total cost is declining.

Question 16

At its minimum point,the average-total-cost curve is intersected by the:

Accepted Answer

At its minimum point, the average total cost curve is intersected by the marginal cost curve. This is because when marginal cost is below average total cost, it pulls the average down, and when it is above, it pulls the average up. The intersection point represents the minimum average total cost.

Question 17

When average total cost is minimum,it is:

Accepted Answer

When the average total cost is at a minimum, it means that the additional cost incurred to produce one more unit, which is the marginal cost, is equal to the average total cost. Therefore, the answer is D, as it states that the average total cost is equal to the marginal cost.

Question 18

Suppose that the total fixed cost of producing five sailboats is $4,000,total variable cost is $4,000,and the total cost of producing six sailboats is $10,000.The marginal cost of the sixth sailboat is:

Accepted Answer

The marginal cost of producing the sixth sailboat is the additional cost incurred by producing one more sailboat, which is calculated by subtracting the total cost of producing five sailboats from the total cost of producing six sailboats. The total cost of producing five sailboats is the sum of total fixed cost ($4,000) and total variable cost ($4,000), which equals $8,000. The total cost of producing six sailboats is $10,000. Therefore, the marginal cost of the sixth sailboat is $10,000 - $8,000 = $2,000.

Question 19

If an average cost curve is U-shaped,then:

Accepted Answer

A U-shaped average cost curve indicates that costs per unit decrease initially, reach a minimum point, and then increase as output continues to rise.

Question 20

Average total cost is calculated by dividing:

Accepted Answer

Average total cost is calculated by dividing the total cost by the total output. This gives an average cost per unit of output.

Quiz 7: Supply: The Costs of Doing Business