Chapter 13. The Costs of Production.

1. According to your text, the firm's objective is to

a. maximize sales. Incorrect. This does not account for the level of costs.

b. maximize profits. Correct. This is the value of the firm's income less its costs.

c. maximize total revenues. Incorrect. This does not take into account the level of costs.

d. maximize returns to stockholder. Incorrect. This leaves out funds for investment and replacement of capital.

2. Which of the following would be an implicit cost to the firm?

a. The firm must hire workers at $11 per hour.Incorrect. This is an explicit cost that must be paid in money.

b. The firm must pay $4,000 per month in interest on money borrowed to build a new plant.Incorrect. This is an explicit cost that must be paid in money.

c. The firm must pay $500 per month in telephone bills.Incorrect. This is an explicit cost that must be paid in money.

d. The firm's owner has given up earning $75,000 per year at another job in order to run the firm.Correct. This is not a cost that would be paid to someone as a monetary cost.

3. Diminishing marginal product refers to the fact that

a. the marginal product of an input decreases as the quantity of the input increases.Correct. The slope of the total product curve is downward sloping as input levels rise.

b. the marginal product of an input increases as the quantity of the input increases.Incorrect. The slope of the total product curve is downward sloping as input levels rise.

c. the marginal product of an input does not change as the quantity of the input increases.Incorrect. The slope of the total product curve is downward sloping as input levels rise.

d. output will increase at an increasing rate as more inputs are hired.Incorrect. The slope of the total product curve is downward sloping as input levels rise.

4. Which of the following is correct?

a. When marginal cost is greater than average cost, average cost is falling.Incorrect. If the marginal is above the average, the average will be rising.

b. When marginal cost is less than average cost, average cost is increasing.Incorrect. If the marginal is less than the average, the average will be falling.

c. When average cost is at its maximum, marginal cost is equal to average cost.Incorrect. The average cost curve does not have a maximum point.

d. When average cost is at its minimum, marginal cost is equal to average cost.Correct. The marginal value of a U-shaped function always intersects at the minimum.

5. Given the information in the table on the production of beach umbrellas, the marginal cost of producing the third beach umbrella is

Output Total Cost 0 $10,0001 $10,050 2 $10,075 3 $10,1004 $10,150 5 $10,250 6 $10,400

a. $3,366.66. Incorrect. The level of total cost rises from 10,075 to 10,100 when output rises from 2 to 3.

b. $33.33. Incorrect. The level of total cost rises from 10,075 to 10,100 when output rises from 2 to 3.

c. $50. Incorrect. The level of total cost rises from 10,075 to 10,100 when output rises from 2 to 3.

d. $25. Correct. The level of total cost rises from 10,075 to 10,100 when output rises from 2 to 3.

6. Explicit costs are:

a. costs that require no outlay of money by the firm.Incorrect. Explicit means costs that require an actual payment of money by one party to another.

b. costs that increase as production increases.Incorrect. Explicit means costs that require an actual payment of money by one party to another.

c. costs that decrease as production increases.Incorrect. Explicit means costs that require an actual payment of money by one party to another.

d. costs that require an outlay of money by the firm.Correct. Explicit means costs that require an actual payment of money by one party to another.

7. The shape of the production function in the figure indicates that

a. there is constant marginal product.Incorrect. A constant product would be illustrated by a horizontal function.

b. there is increasing marginal product.Incorrect. Increasing marginal product would be illustrated by a function with increasing slope.

c. there is decreasing marginal product.Correct. Decreasing slope means that next additional output is less than the previous additional output.

d. marginal product first decreases and then increases.Incorrect. The slope of the curve is continuously decreasing.

.

8. When marginal cost is above average variable cost,

a. average variable cost must be rising.Correct. When a marginal is above an average, the average must be rising.

b. average variable cost must be falling.Incorrect. When a marginal is above an average, the average must be rising.

c. average variable cost may be rising or falling.Incorrect. When a marginal is above an average, the average must be rising.

d. average fixed cost must be rising.Incorrect. Average fixed cost falls continuously as output rises.

9. As output increases, we know that

a. fixed costs decline.Incorrect. Fixed costs do not change as output changes.

b. average fixed costs decline.Correct. Because total fixed costs do not change, the average must fall as output increases.

c. total costs decline.Incorrect. Total costs must increase as output increases.

d. average variable costs decline.Incorrect. Average variable costs decline and then begin to increase.

10. Suppose you are given the following information concerning Penny's Donut Parlor. What is Penny's total cost of producing 5 donuts?

Quantity of Donuts Total Variable Cost Total Fixed Cost 0 0 0.20 1 0.10 0.20 2 0.25 0.20 3 0.45 0.20 4 0.70 0.20 5 1.00 0.20

a.

$0.20. Incorrect. Total costs equal total variable costs ($1.00) plus fixed costs ($0.20).

b. $1.00. Incorrect. Total costs equal total variable costs ($1.00) plus fixed costs ($0.20).

c. $1.20. Correct. Total costs equal total variable costs ($1.00) plus fixed costs ($0.20).

d. $1.70. Incorrect. Total costs equal total variable costs ($1.00) plus fixed costs ($0.20).

11. When a firm's long-run average cost curve exhibits economies of scale,

a. the long-run average cost curve is horizontal.Incorrect. The long-run average cost curve must be downward sloping.

b. the long-run average cost curve is downward sloping.Correct. "Economies" is a term that means lower per unit costs.

c. the long-run average cost curve is upward sloping.Incorrect. The long-run average cost curve must be downward sloping.

d. the long-run average cost equals the short-run average cost for all levels of output.Incorrect. This is true whether or not there are economies of scale.

12. A firm's economic profit is equal to

a. revenue less explicit costs.Incorrect. Economic profits must cover implicit costs as well as explicit costs.

b. revenue less implicit costs.Incorrect. Economic profits must cover implicit costs as well as explicit costs.

c. revenue less money costs.Incorrect. Economic profits must cover implicit costs as well as explicit costs.

d. revenue less total opportunity costs.Correct. Economic profits must cover implicit costs as well as explicit costs.

13. A firm has $300 million in revenues and explicit costs of $100 million. Its owners have invested $100 million in the company. This could have been invested at 10 percent per year. The firm's economic profit is:

a. $400 million. Incorrect. Total revenues equal $300 million and total economic costs equal $110 million (explicit plus implicit).

b. $190 million. Correct. Total economic costs include the 10% interest on capital invested in the firm plus the $100 million of explicit costs.

c. $80 million. Incorrect. Total revenues equal $300 million and total economic costs equal $110 million (explicit plus implicit).

d. zero. Incorrect. Total revenues equal $300 million and total economic costs equal $110 million (explicit plus implicit).

14. If a firm has revenues of $150 million, explicit costs of $70 million, and implicit costs of $20 million, its accounting profit is

a. $80 million. Correct. Accounting profits include only explicit costs in the profits calculation.

b. $70 million. Incorrect. Accounting profits ($80 million) would equal revenues of $150 million minus only explicit costs of $70 million.

c. $50 million. Incorrect. Accounting profits ($80 million) would equal revenues of $150 million minus only explicit costs of $70 million.

d. $40 million. Incorrect. Accounting profits ($80 million) would equal revenues of $150 million minus only explicit costs of $70 million.

15. If a producer's long-run average cost rises as its scale of operations increases, the producer is experiencing

a. diminishing returns. Incorrect. This refers to the changes in one variable as output rises.

b. diseconomies of scale. Correct. The term "diseconomies" refers to increasing per unit costs as the size of the firm increases.

c. economies of scale. Incorrect. Economies from scale would mean lower per unit average costs.

d. rising input costs.Incorrect. Diseconomies of scale refer to rising costs due to administrative expenses.

16. Profit equals

a. price times quantity.Incorrect. Price times quantity would yield total revenue.

b. price minus average cost.Incorrect. Profits must equal one total variable minus another total variable.

c. total revenue minus average cost.Incorrect. Profits must equal one total variable minus another total variable

d. total revenue minus total cost.Correct. Profits must equal one total variable minus another total variable.

17. Which of the following is an explicit cost for Cutting Edge Computers?

a.The computer chips it buys from Intel.Correct. This is the only cost that must be paid by one party to another.

b. The income its owner could have earned at another firm if she were not running Cutting Edge.Incorrect. This is only an implicit cost not a monetary payment.

c. The interest income sacrificed when Cutting Edge's owner took $100,000 out of her savings to start the company.Incorrect. This is only an implicit cost not a monetary payment.

d. The rental income the owner could have earned if she had rented out the building in which Cutting Edge is located.Incorrect. This is only an implicit cost not a monetary payment.

18. The shape of the production function

a. reflects the fact that average fixed costs decline as output is increased.Incorrect. The production function has a positive slope for some range and then a negative slope.

b. reflects the fact that diminishing marginal product will set in at some point.Correct. The curve slopes upward and then changes to slope downward.

c. is the result of the fact that in the long run all costs are variable.Incorrect. The shape of the production function is due to the law of diminishing returns.

d. is the result of the fact that in the long run all resources can be varied.Incorrect. The shape of the production function is due to the law of diminishing returns.

19. Which of the following is not a variable cost in the short run?

a. raw materialsIncorrect. This cost will change as the level of output changes.

b. a new wing on the plantCorrect. This cost does not change as output changes.

c. hourly laborIncorrect. This cost will change as the level of output changes.

d. energy costsIncorrect. This cost will change as the level of output changes.

20. In the diagram, the curve labeled A represents

a. marginal cost.Incorrect. The average fixed cost curve is the only curve that slopes downward continuously.

b. average total cost. Incorrect. The average fixed cost curve is the only curve that slopes downward continuously.

c. average variable cost. Incorrect. The average fixed cost curve is the only curve that slopes downward continuously.

d. average fixed cost. Correct. This is the only curve that slopes downward continuously.

21. When a cost varies in the short run as output is changed, the cost is defined as a (an)

a. variable cost. Correct. This is the only total cost that changes as the level of the output changes.

b. accounting cost. Incorrect. This is not a cost that is directly tied to the level of output.

c. economic cost.

Incorrect. This is not a cost that is directly tied to the level of output.

d. normal cost. Incorrect. This is not a cost that is directly tied to the level of output.

22. Diseconomies of scale can best be explained by

a. coordination problems. Correct. This could be explained also as communication and administration costs.

b. the law of diminishing returns. Incorrect. This affects the level of variable costs.

c. declining input prices. Incorrect. This is a short-run cost not a long run cost.

d. declining demand. Incorrect. This would not directly affect the level of costs.

23. In the long run, a firm can produce 50 units of output at a total cost of $18,000 or 100 units at a total cost of $30,000. Over this range of output, the firm is experiencing

a. declining average fixed cost. Incorrect. There are no fixed costs in the long run.

b. diseconomies of scale. Incorrect. The average cost is lower at 100 units than at 50 units.

c. economies of scale. Correct. The average cost is lower at 100 units than at 50 units.

d. constant returns to scale. Incorrect. The average cost is lower at 100 units than at 50 units.

24. You are given the following information concerning Vera's Violins. Total revenues are $4 million, total explicit costs are $3 million, and total implicit costs are $1 million. Vera's economic profit is

a. $4 million. Incorrect. Total economic costs are $4 million that include the $3 million in explicit costs and $1 million in implicit costs. With revenues of $4 million, profits are $0.

b. $3 million. Incorrect. Total economic costs are $4 million that include the $3 million in explicit costs and $1 million in implicit costs. With revenues of $4 million, profits are $0.

c. $1 million.Incorrect. Total economic costs are $4 million that include the $3 million in explicit costs and $1 million in implicit costs. With revenues of $4 million, profits are $0.

d. $0. Correct. Total economic costs are $4 million that include the $3 million in explicit costs and $1 million in implicit costs. With revenues of $4 million, profits are $0.

25. Given the information in the table, what are total explicit costs?

Monthly costs and revenues:

Wage and salary payments $20,000

Supplies and utilities $12,000

Forgone building rental income $15,000

Total revenue $40,000

a. $20,000. Incorrect. Explicit costs include the wage costs and supply costs.

b. $12,000. Incorrect. Explicit costs include the wage costs and supply costs.

c. $32,000. Correct. This is the sum of the only explicit costs, wages and supplies.

d. $47,000. Incorrect. Explicit costs include the wage costs and supply costs.

26. In the diagram, if the firm is operating at point C on its long-run average total cost curve, it is experiencing

a. economies of scale. Incorrect. Rising long-run average costs reflect diseconomies of scale.

b. constant returns to scale. Incorrect. Rising long-run average costs reflect diseconomies of scale.

c. diseconomies of scale. Correct. Diseconomies refer to the rising per unit long-run average costs.

d. increasing marginal product. Incorrect. Rising long-run average costs reflect diseconomies of scale.

27. A production function shows the relation between the

a. quantity of inputs and the quantity of output.Correct. It is a relationship between resources used and goods produced.

b. quantity of output and costs.Incorrect. Production functions show the relationship between real variables not monetary ones like costs.

c. quantity of inputs and costs. Incorrect. Production functions show the relationship between real variables not monetary ones like costs.

d. quantity of variable inputs and the quantity of fixed inputs.Incorrect. A production function must also include the output of goods produced.

28. A firm's accounting profit is equal to the difference between its revenues and its

a. variable costs. Incorrect. Fixed costs must be included as well.

b. fixed costs. Incorrect. Variable costs must be included as well.

c. explicit costs. Correct. These are the only costs that reflect monetary payments.

d.

implicit costs. Incorrect. Only monetary payment costs are reflected in accounting profits.

29. If a firm has revenues of $100 million, explicit costs of $5 million, and implicit costs of $20 million, its accounting profit is

a. $95 million. Correct. Accounting profits would only involve explicit costs of $5 million deducted from the $100 million in revenues.

b. $80 million. Incorrect. Accounting profits would only involve explicit costs of $5 million deducted from the $100 million in revenues.

c. $75 million. Incorrect. Accounting profits would only involve explicit costs of $5 million deducted from the $100 million in revenues.

d. -$10 million. Incorrect. Accounting profits would only involve explicit costs of $5 million deducted from the $100 million in revenues.

30. A firm's owners have invested $100 million in the company. This money could have been invested at 20 percent per year. The firm's implicit cost is

a. $100 million.

Incorrect. $20 million is the 20% interest on the $100 million that was foregone by the firm's owners.

b. $80 million. Incorrect. $20 million is the 20% interest on the $100 million that was foregone by the firm's owners.

c. $20 million. Correct. This is the 20% interest on the $100 million that was foregone by the firm's owners.

d. zero. Incorrect. $20 million is the 20% interest on the $100 million that was foregone by the firm's owners.

31. Fixed costs are costs that

a. do not vary with the quantity of output.Correct. Fixed costs do not reflect the use of variable inputs.

b. do not vary with time.Incorrect. Fixed costs do not change as output or variable inputs change.

c. do not vary with technology.Incorrect. Fixed costs do not change as output or variable inputs change.

d. do not vary with the minimum wage or price supports.

Incorrect. Fixed costs do not change as output or variable inputs change.

32. In the long run, as a firm moves along its average total cost curve:

a. it is varying the size of its fixed costs.Incorrect. In the long run, even plant size can change. There are no fixed costs.

b. it is varying the size of its plant.Correct. In the long run, even plant size can change. There are no fixed costs.

c. diminishing marginal product disappears.Incorrect. Diminishing marginal product is a short-run factor.

d. variable costs become fixed costs.Incorrect. In the long run, even plant size can change. There are no fixed costs.

33. Economists generally assume that the goal of firms is to

a. maximize the quantity sold.Incorrect. This does not include the level of costs.

b. maximize total revenue.Incorrect. This does not include the level of costs.

c. maximize profit. Correct. This is the income variable to a business firm.

d. remain union-free.

Incorrect. Firms can make maximum profits even if unions are present.

34. An explicit cost is NOT

a. the dollar payment required to obtain a good or service.Incorrect. This represents a cost that requires a monetary payment.

b. an out-of-pocket cost.Incorrect. This represents a cost that requires a monetary payment.

c. a contractually agreed upon amount for a good or service.Incorrect. This represents a cost that requires a monetary payment.

d. the income the owner of a firm could have earned at another job instead of running the firm.Correct. Explicit costs are not opportunity costs that represent foregone income.

35. Average variable cost

a. is a constant function.Incorrect. Average variable cost has a U-shape to reflect diminishing returns.

b. first decreases as output increases and then increases as output increases.Correct. This reflects the law of eventually diminishing marginal returns.

c. declines to zero as output increases.Incorrect. Average variable cost has a U-shape to reflect diminishing returns.

d. decreases as output increases, but never reaches zero.Incorrect. Average variable cost has a U-shape to reflect diminishing returns.

36. Explicit costs:

a. are the opportunity costs of using one's resources.Incorrect. This represents an income amount that is foregone.

b. are money payments made by a firm to secure the use of resources.Correct. This is a monetary payment made by one party to another.

c. are costs incurred when the firm uses the resources that it owns.Incorrect. This represents an income amount that is foregone.

d. are not represented by any contractual agreements.Incorrect. Explicit costs are often written into contracts to pay.

37. If marginal cost is less than average total cost,

a. average total cost is rising.Incorrect. When a marginal is below an average, the average must be falling.

b. the marginal product of labor must be rising.Incorrect. Marginal cost could be rising even if it is below average total cost.

c. the firm should cease production.Incorrect. There is nothing known about revenues.

d. average total cost is falling.Correct. When a marginal is below an average, the average must be falling.

38. The marginal cost curve intersects the average total cost curve where

a. average total cost is at its lowest value.Correct. The marginal must cut a U-shaped curve at its minimum.

b. marginal cost is at its lowest value.Incorrect. The marginal cost will be rising at this point.

c. marginal cost is at its highest value.Incorrect. The marginal cost will be rising at this point.

d. average cost is continuing to rise.Incorrect. The marginal must cut a U-shaped curve at its minimum.

39. Marginal cost is

a. the change in total cost that occurs when output changes.Correct. "Marginal" means the additional cost that occurs as one more unit is produced.

b. the price at which the last unit of output can be sold.Incorrect. The price would influence revenue not costs.

c. the change in average fixed cost that occurs when output changes.Incorrect. Marginal cost must reflect changes in total variable costs.

d. the increase in total cost associated with an increase in the price of an input.Incorrect. "Marginal" means the additional cost that occurs as one more good is produced.

40. Economies of scale explain why

a. average fixed cost declines in the short run.Incorrect. Economies of scale refer to long-run change is plant size.

b. marginal product rises in the short run.Incorrect. Economies of scale refer to long-run change is plant size.

c. marginal cost rises in the short run.Incorrect. Economies of scale refer to long-run change is plant size.

d. average cost declines in the long run. Correct. Economies of scale refer to long-run change is plant size.