Question 1

Economic profits are:

Accepted Answer

Economic profits take into account both explicit (monetary) costs and implicit (non-monetary) costs. If implicit costs are greater than zero, economic profits will be less than accounting profits.

Question 2

When economies of scale exist,an increase in the level of output will lead to:

Accepted Answer

Economies of scale refer to the cost advantages that a firm can enjoy due to an increase in the level of production or output. As the production volume increases, the average cost per unit decreases. This happens because the fixed costs get spread out over more units, and the variable costs decrease due to the efficiency gains achieved through specialization, mass production, and bulk purchases. Therefore, an increase in the level of output will lead to a decrease in cost per unit, not an increase. However, the total cost may still increase, but at a slower rate than the increase in output, leading to economies of scale. Hence, option A is correct. Option C is only partially correct, as the total cost may increase or decrease depending on the extent to which the decrease in cost per unit offsets the increase in fixed costs. Option B is incorrect, as it contradicts the definition of economies of scale. Option D is also incorrect, as it includes option C, which is not always true.

Question 3

When economies of scale exist:

Accepted Answer

Economies of scale refer to the reduction in cost of production per unit as output increases. This is due to factors such as specialization, division of labor, and investment in better technology. As volume increases, fixed costs are spread across more units, leading to lower per unit costs. Therefore, choice B is the correct answer.

Question 4

Diseconomies of scale are associated with:

Accepted Answer

Diseconomies of scale occur when a company becomes too large, and its long-run average total cost curve begins to slope upward. This is due to factors such as communication breakdowns, increased bureaucracy, and difficulty coordinating activities among departments. As a result, unit costs increase as the organization grows beyond a certain size, which is why the long-run average total cost curve becomes upward sloping.

Question 5

The short-run average total cost curve eventually turns upward to form a U shape because:

Accepted Answer

The short-run average total cost curve turns upward due to diminishing marginal productivity, which increases marginal costs as more units are produced.

Question 6

A firm has $300 million in revenues and explicit costs of $100 million.If its owners have invested $150 million in the company at an opportunity cost of 10 percent a year,the firm's accounting profit is:

Accepted Answer

Accounting profit is calculated as total revenues minus explicit costs. Therefore, the accounting profit is $300 million - $100 million = $200 million. Opportunity costs are not considered in accounting profit.

Question 7

The region of economies of scale is that in which:

Accepted Answer

The region of economies of scale refers to the range of output in which long-run average total cost (LRATC) decreases. This is because in the long run, all inputs are variable, and the firm can adjust its plant size, leading to lower costs per unit of output. Marginal cost may still be increasing in the economies of scale region, but that does not determine whether the firm is in this region.

Question 8

When there are economies of scale in production:

Accepted Answer

Economies of scale refer to when the cost per unit of output decreases as the scale of production increases. This is usually due to spreading fixed costs over a larger output, taking advantage of specialized inputs and more efficient processes. As a result, long-run average total cost declines as output expands.

Question 9

If a firm experiences increasing returns to scale at all levels of output:

Accepted Answer

When a firm experiences increasing returns to scale at all levels of output, it means that as the firm increases its production, its average total cost decreases. This is reflected in the slope of its long-run average total cost curve, which is negative everywhere. Therefore, option C is the correct answer.

Question 10

What denotes the output level where economies of scale are exhausted and constant returns to scale begin?

Accepted Answer

Minimum efficient scale (MES) is the output level where economies of scale are exhausted and constant returns to scale begin. This is the point where the firm is producing at the lowest possible average cost. After reaching MES, any increase in output will result in constant returns to scale or even diseconomies of scale. Therefore, option A is the correct answer.

Question 11

Cassie produces and sells 400 jars of homemade jelly each month for $3 each.Each month,she pays $200 for jars,$150 for ingredients,and uses her own time,with an opportunity cost of $300.Her economic profits each month are:

Accepted Answer

Economic profit is calculated as total revenue minus total costs (including opportunity costs). Cassie's total revenue is 400 jars * $3 = $1200. Her total costs are $200 (jars) + $150 (ingredients) + $300 (opportunity cost) = $650. Therefore, her economic profit is $1200 - $650 = $550.

Question 12

Economies of scale:

Accepted Answer

Economies of scale pertain to the long run as they refer to the cost advantages that a business can exploit by expanding their scale of production, leading to a reduction in average costs over time.

Question 13

When economies of scale exist,a decrease in the level of output will lead to:

Accepted Answer

When economies of scale exist, a decrease in the level of output will lead to an increase in cost per unit. This is because fixed costs, such as rent, do not change when output is reduced, but they are spread over fewer units, causing the cost per unit to increase.

Question 14

A firm which owns its own equipment and is earning positive economic profits

Accepted Answer

When a firm earns positive economic profits, it means that its revenues exceed both its explicit and implicit costs. Since implicit costs, such as opportunity costs, are not reflected in accounting profits, earning positive economic profits implies that the firm is also earning positive accounting profits. Additionally, owning its own equipment suggests that the firm is not incurring rental or lease expenses, which would further increase its accounting profits. Therefore, option A is the correct choice.

Question 15

You operate a factory that produces beach towels.Your current level of output equals 2,000 towels per week.Your weekly variable cost equals $8,000.If your total cost each week equals $9,000,it follows that:

Accepted Answer

To find the average variable cost (AVC) per towel, we need to divide the total variable cost (TVC) by the level of output.

TVC = $8,000 because it is given that the weekly variable cost equals $8,000.

Total cost (TC) = $9,000.

To find the fixed cost (FC), we need to subtract TVC from TC.

FC = TC - TVC = $9,000 - $8,000 = $1,000

Now, we can use the formula for the average total cost (ATC) per towel:

ATC = TC/Q = (FC + TVC)/Q

AVC = TVC/Q

Given that the level of output (Q) equals 2,000 towels per week, we can find the AVC:

AVC = $8,000/2,000 = $4

Therefore, the average variable cost of production equals $4 per towel.

Question 16

You operate a factory that produces beach towels.Your current level of output equals 2,000 towels per week.Your weekly variable cost equals $8,000.If your total cost each week equals $9,000,it follows that:

Accepted Answer

Average variable cost = Total variable cost / Output = $8,000 / 2,000 = $4 per towel
Average total cost = Total cost / Output = $9,000 / 2,000 = $4.50 per towel

Question 17

Constant returns to scale indicate that a firm is experiencing:

Accepted Answer

Constant returns to scale means that as output (scale) expands, the increase in inputs used results in a proportional increase in outputs produced. This leads to a stable per unit cost of production, neither increasing nor decreasing.

Question 18

A firm has $350 million in revenues and explicit costs of $150 million.If its owners have invested $150 million in the company at an opportunity cost of 10 percent a year,the firm's economic profit is:

Accepted Answer

The economic profit can be calculated as:
Economic profit = Total revenue - Explicit costs - Implicit costs
where Implicit costs = Opportunity cost of using owners' capital = $150 million * 10% = $15 million
Substituting the values, we get:
Economic profit = $350 million - $150 million - $15 million = $185 million
Therefore, the answer is choice C, $185 million.

Question 19

When there are diseconomies of scale in production:

Accepted Answer

Diseconomies of scale occur when the cost per unit increases as output expands. This is often due to the difficulties in coordinating and managing a large production process, causing inefficiencies and higher costs. Therefore, long-run average total cost increases as output expands.

Question 20

Which of the following is an implicit cost to Mondo Manufacturing,Inc.?

Accepted Answer

Implicit costs are non-monetary opportunity costs. Depreciation charges represent the loss of value of owned assets, which is an implicit cost as it reflects the opportunity cost of using the assets rather than selling or leasing them.

Quiz 11: The Firm: Production and Costs

Economic profits are:

When economies of scale exist,an increase in the level of output will lead to:

When economies of scale exist:

Diseconomies of scale are associated with:

The short-run average total cost curve eventually turns upward to form a U shape because:

A firm has $300 million in revenues and explicit costs of $100 million.If its owners have invested $150 million in the company at an opportunity cost of 10 percent a year,the firm's accounting profit is:

The region of economies of scale is that in which:

When there are economies of scale in production:

If a firm experiences increasing returns to scale at all levels of output:

What denotes the output level where economies of scale are exhausted and constant returns to scale begin?

Cassie produces and sells 400 jars of homemade jelly each month for $3 each.Each month,she pays $200 for jars,$150 for ingredients,and uses her own time,with an opportunity cost of $300.Her economic profits each month are:

Economies of scale:

When economies of scale exist,a decrease in the level of output will lead to:

A firm which owns its own equipment and is earning positive economic profits

You operate a factory that produces beach towels.Your current level of output equals 2,000 towels per week.Your weekly variable cost equals $8,000.If your total cost each week equals $9,000,it follows that:

You operate a factory that produces beach towels.Your current level of output equals 2,000 towels per week.Your weekly variable cost equals $8,000.If your total cost each week equals $9,000,it follows that:

Constant returns to scale indicate that a firm is experiencing:

A firm has $350 million in revenues and explicit costs of $150 million.If its owners have invested $150 million in the company at an opportunity cost of 10 percent a year,the firm's economic profit is:

When there are diseconomies of scale in production:

Which of the following is an implicit cost to Mondo Manufacturing,Inc.?