Question 1

As output increases, average cost decreases continually because

Accepted Answer

As output increases, the fixed costs are spread over more units, which leads to a decrease in average fixed cost per unit. This is known as economies of scale. However, the other options do not lead to a continual decrease in average cost.

Question 2

A sales rep is paid a commission on each product sold. The commission is:

Accepted Answer

The commission paid on each product sold is a variable cost because it varies directly with the number of products sold.

Question 3

A college "marketing club" printed 1,000 "We're Number 1" bumper stickers for sale at $3.00 each as a fund-raiser. Its fixed costs were $500, and the variable cost for each sticker was $.50. The club's average cost was:

Accepted Answer

The average cost is calculated by adding the total fixed costs to the total variable costs and then dividing by the number of units produced. Here, the total cost is $500 (fixed) + $500 (variable for 1,000 stickers at $0.50 each) = $1,000. Dividing by 1,000 stickers gives an average cost of $1.00 per sticker.

Question 4

Average cost is obtained by dividing:

Accepted Answer

Average cost is obtained by dividing total cost by the related quantity. This is because average cost represents the total cost per unit of output.

Question 5

"Average-cost pricing":

Accepted Answer

Average-cost pricing can result in a firm charging too high or too low a price, which can reduce its profitability. It doesn't consider demand, so if actual sales are much higher than expected, the firm may face losses. There is no assumption that the firm will sell a larger quantity than the year before. Therefore, option B is the correct choice.

Question 6

Which of the following is an example of a variable cost for a producer?

Accepted Answer

Packaging materials are considered a variable cost because the amount used is directly proportional to the number of products produced. As production increases, the cost of packaging materials will also increase. Depreciation, managers' salaries, rent, and property taxes are examples of fixed costs because they do not vary based on the level of production.

Question 7

Which of the following costs do not change with an increase in output?

Accepted Answer

Total fixed cost is the cost that remains constant regardless of the level of output.

Question 8

Total variable cost:

Accepted Answer

Total variable cost is zero when no output is produced (A), and it is the sum of expenses that vary with output (B). Variable costs do not decrease with increased production, so C is incorrect.

Question 9

Which of the following would NOT be included in a producer's total fixed cost?

Accepted Answer

Total fixed cost refers to the costs that do not vary with changes in the level of output, such as rent, property taxes, insurance, and depreciation. Component parts, on the other hand, are typically considered variable costs because they will vary with changes in the quantity of output produced.

Question 10

Which of the following would NOT be included in a firm's total variable cost?

Accepted Answer

Total variable cost includes expenses that vary with the level of production, such as outgoing freight, packaging materials, expenses for parts, and sales commissions. Depreciation on buildings is a fixed cost that does not vary with production levels and would not be included in total variable cost.

Question 11

The big problem with average-cost pricing is that:

Accepted Answer

Average-cost pricing simply divides total costs by the quantity produced to determine the price per unit. This approach ignores the firm's demand curve and the price sensitivity of consumers. As a result, the firm may end up charging too much or too little for its products, leading to lost sales or lower profits.

Question 12

Henry has classified the following items under variable costs. Which item has he classified incorrectly?

Accepted Answer

Property taxes are a fixed cost as they do not vary with the level of production or sales.

Question 13

Total fixed cost:

Accepted Answer

Total fixed cost refers to those costs that do not change with changes in the quantity produced. It remains the same even if the production increases or decreases. It includes expenses like rent, salaries, insurance, etc.

Question 14

The total fixed costs are $10,000, and the average variable cost per unit is $3. For a production volume of 10,000 units, the average cost per unit is

Accepted Answer

The formula for calculating average cost per unit is:
Average Cost per unit = (Total Fixed Cost + Total Variable Cost) / Number of Units Produced
Total variable cost = Average variable cost per unit * Number of units produced
Total fixed cost = $10,000
Average variable cost per unit = $3
Number of units produced = 10,000
Total variable cost = $3 * 10,000 = $30,000
Average cost per unit = ($10,000 + $30,000) / 10,000 = $4

Question 15

At zero output, total variable cost is

Accepted Answer

At zero output, total variable costs are zero because variable costs change with the level of output. If there is no output, there are no variable costs incurred. Fixed costs, on the other hand, are incurred regardless of the level of output.

Question 16

When a firm's average variable cost is constant--no matter how much is produced--then the firm's:

Accepted Answer

The answer of When a firm's average variable cost is...

Question 17

Which of the following costs decrease with increase in output?

Accepted Answer

The answer of Which of the following costs decrease with...

Question 18

Total fixed cost

Accepted Answer

Total fixed costs are expenses that do not vary with changes in production volume, meaning they will remain the same even if production stops temporarily.

Question 19

Which of the following is an example of a fixed cost?

Accepted Answer

Depreciation is a fixed cost because it is a non-cash expense that remains constant regardless of the level of production or sales. The other options listed are variable costs that typically fluctuate with changes in production or sales levels.

Question 20

Average-cost pricing may lead to losses because there are a variety of costs-and each changes

Accepted Answer

Average-cost pricing assumes that costs change in a similar way as output changes, but in reality, different costs (such as variable costs and fixed costs) change in different ways as output changes. Therefore, using average-cost pricing may result in underpricing and ultimately lead to losses.

Quiz 18: Price Setting in the Business World