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BF Tutorial 4 Production and Costs

This document contains a tutorial on production and costs. It includes three parts: true/false questions about concepts like economic profit, accounting profit, diminishing marginal product, and economies of scale. The second part includes short answer questions that define the production function and analyze a table with data on costs of production at a factory. The third part provides multiple choice questions about profit maximization, revenue, costs, and economies of scale.

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Anh Thành
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479 views

BF Tutorial 4 Production and Costs

This document contains a tutorial on production and costs. It includes three parts: true/false questions about concepts like economic profit, accounting profit, diminishing marginal product, and economies of scale. The second part includes short answer questions that define the production function and analyze a table with data on costs of production at a factory. The third part provides multiple choice questions about profit maximization, revenue, costs, and economies of scale.

Uploaded by

Anh Thành
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Tutorial 4: Production and Costs

Part 1: True/ False


1. The difference between economic profit and accounting profit is that economic profit is
calculated based on both implicit and explicit costs whereas accounting profit is
calculated based on explicit costs only.
2. Economic profit is greater than or equal to accounting profit.
3. Diminishing marginal product exists when the production function becomes flatter as
inputs increase.
4. Variable costs equal fixed costs when nothing is produced.
5. Economies of scale often arise because higher production levels allow specialization
among workers.
6. When economists speak of a firm's costs, they are usually excluding the opportunity
costs.
7. The typical total-cost curve is U-shaped.
8. If a firm produces nothing, it still incurs its fixed costs.
9. The shape of the total cost curve is unrelated to the shape of the production function.
10. If long-run average total cost is rising, then the firm is experiencing economies of scale.
Part 2: Short answer
Question 1
The production function depicts a relationship between which two variables? Also, draw a
production function that exhibits diminishing marginal product.
Question 2
Jimmy’s Gigaplots Factory
Quantity Average Average Average
Fixed Variable
of Fixed Variable Total Total Marginal
Cost
Cost Cost Cost
gigaplots Cost Cost Cost
1 $13 $38
2 $28
3 $70
4 $64
5 $110
6 $108
7 $133
8 $185

a. What is the fixed cost of production at Jimmy's Gigaplot factory?


b. What is the variable cost of producing 5 gigaplots at Jimmy's Gigaplot factory?
c. What is the variable cost of producing 8 gigaplots at Jimmy's Gigaplot factory?
d. What is the total cost of producing 7 gigaplots at Jimmy's Gigaplot factory?
e. What is the average variable cost of producing 3 gigaplots at Jimmy's Gigaplot factory?
f. What is the marginal cost of the 8th gigaplot at Jimmy's Gigaplot factory?
Part 3: Multiple choice
1. Economists normally assume that the goal of a firm is to
a. maximize its total revenue.
b. maximize its profit.
c. minimize its explicit costs.
d. minimize its total cost.
2. If Kelsey sells 300 glasses of lemonade at $0.50 each, her total revenues are
a. $150.
b. $299.50.
c. $300.
d. $600.
3. XYZ corporation produced 300 units of output but sold only 275 of the units it produced.
The average cost of production for each unit of output produced was $100. Each of the
275 units sold was sold for a price of $95. Total profit for the XYZ corporation would be
a. -$3,875.
b. $26,125.
c. $28,500.
d. $30,000.
4. Susan used to work as a telemarketer, earning $25,000 per year. She gave up that job to
start a catering business. In calculating the economic profit of her catering business, the
$25,000 income that she gave up is counted as part of the catering firm's
a. total revenue.
b. opportunity costs.
c. explicit costs.
d. marginal costs.
5. An example of an explicit cost of production would be the
a. cost of forgone labor earnings for an entrepreneur.
b. lost opportunity to invest in capital markets when the money is invested in one's
business.
c. lease payments for the land on which a firm’s factory stands.
d. Both a and c are correct.
6. The amount of money that a wheat farmer could have earned if he had planted barley
instead of wheat is
a. an explicit cost.
b. an accounting cost
c. an implicit cost.
d. forgone accounting profit.
7. Kevin quit his $65,000 a year corporate lawyer job to open up his own law practice. In
Kevin's first year in business his total revenue equaled $150,000. Kevin's explicit cost
during the year totaled $85,000. Using the information from Kevin's first year in
business, what is his economic profit?
a. $0
b. $20,000
c. $65,000
d. $85,000
8. Lois is a self-employed pet sitter. She can make 20 “housecalls” per day. She is
considering hiring her sister Dora to work for her. Both she and Dora can visit 35 houses
per day. What is Dora’s marginal product?
a. 55
b. 35
c. 22.5
d. 15
9. When the marginal product of an input declines as the quantity of that input increases, the
production function exhibits
a. increasing marginal product.
b. diminishing marginal product.
c. diminishing total product.
d. Both b and c are correct.
10. Which of the following costs of publishing a book is a fixed cost?
a. author royalties of 5% per book
b. the costs of paper and binding
c. shipping and postage expenses
d. composition, typesetting, and jacket design for the book
11. Which of the following expressions is correct?
a. marginal cost = (change in quantity of output)/(change in total cost)
b. average total cost = (total cost)/(quantity of output)
c. total cost = variable cost + marginal cost
d. average variable cost = (quantity of output)/(total variable cost)
12. At Bert's Bootery, the total cost of producing twenty pairs of boots is $400. The marginal
cost of producing the twenty-first pair of boots is $83. We can conclude that the
a. average variable cost of 21 pairs of boots is $23.
b. average total cost of 21 pairs of boots is $23.
c. average total cost of 21 pairs of boots is $15.09.
d. marginal cost of the 20th pair of boots is $20.
13. When marginal cost is less than average total cost,
a. marginal cost must be falling.
b. average variable cost must be falling.
c. average total cost is falling.
d. average total cost is rising.
14. Economies of scale occur when a firm’s
a. marginal costs are constant as output increases.
b. long-run average total costs are decreasing as output increases.
c. long-run average total costs are increasing as output increases.
d. marginal costs are equal to average total costs for all levels of output.
15. In the long run Firm A incurs total costs of $1,200 when output is 30 units and $1,400
when output is 40 units. Firm A exhibits
a. diseconomies of scale because total cost is rising as output rises.
b. diseconomies of scale because average total cost is rising as output rises.
c. economies of scale because total cost is rising as output rises.
d. economies of scale because average total cost is falling as output rises.

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