Chapter

The Costs of Production

1. Which of the following is an implicit cost?
a. salaries paid to owners who work for the firm
b. interest on money borrowed to finance equipment purchases
c. cash payments for raw materials
d. foregone rent on office space owned and used by the firm

2. Samantha has been working for a law firm and earning an annual salary of $90,000. She decides to
open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for
equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a
secretary/bookkeeper. Samantha will cover her start-up expenses by cashing in a $20,000 certificate
of deposit on which she was earning annual interest of $1,000. Assuming that there are no
additional expenses, Samantha’s annual implicit costs will equal
a. $55,200.
b. $221,400.
c. $91,000.
d. $146,200.

3. Economists assume that the goal of the firm is to maximize

a. total revenue.
b. profits.
c. costs.
d. All of the above are correct.

4. The difference between accounting profit and economic profit relates to

a. the manner in which revenues are defined.
b. how total revenue is calculated.
c. the manner in which costs are defined.
d. the price of the good in the market.

5. In this diagram, the shift in the total product curve represents an increase in the firm’s
a. costs of production.
b. productivity.
c. diseconomies.
d. market share.
6. Which of the following could explain why the total product curve shifted in this diagram?
a. A reduction in capital equipment available to the firm.
b. Labor skills have become rusty and outdated in the firm.
c. The firm has developed new technology in their production facility.
d. The firm is now receiving a higher price for its product.

7. As Al’s Radiator Co. continues to add workers, while keeping the same amount of machinery, some
workers may be underutilized because they have little work to do while waiting in line to use the
machinery. When this occurs, Al’s Radiator Co. encounters
a. economies of scale.
b. diseconomies of scale.
c. increasing marginal returns.
d. diminishing marginal returns.

8. Which of the following costs of publishing a book is a fixed cost?

a. author royalties of 5% per book
b. costs of paper and binding
c. shipping and postage
d. composition, typesetting, and jacket design

9. Which of the following is the best example of a variable cost?

a. monthly payments for hired labor
b. property tax payments
c. monthly rent payments for a warehouse
d. pension payments to retired workers

10. Smith Tire Co. has total fixed costs of $100,000 per year. The firm’s average variable cost is $80 for
10,000 tires. At that level of output, the firm’s average total costs equal
a. $90.
b. $100.
c. $110.
d. $120.

11. Miller Technologies has average variable costs of $6 and average total costs of $10 when it produces
1,000 units of output. The firm’s total fixed costs equal
a. $2,000.
 b. $3,000.
c. $4,000.
d. $5,000.

12. At a firm’s current output level of 200 units per week, it has 10 employees at a weekly wage of $500
each. Raw materials, which are ordered and delivered daily, cost $1,000 per week. The weekly cost
of the firm’s capital is $1,250. Which of the following statements is correct?
Total Variable Cost Total Fixed Cost Total Cost
a. $5,000 $2,250 $7,250
b. $6,000 $1,250 $7,250
c. $1,250 $6,000 $7,250
d. $2,250 $ 500 $2,750

13. If marginal cost is greater than average total cost then

a. profits are increasing.
b. economies of scale are becoming greater.
c. average total cost remains constant.
d. average total cost is increasing.

14. The minimum points of the average variable cost and average total cost curves occur where
a. the marginal cost curve lies below the average variable cost and average total cost curves.
b. the marginal cost curve intersects those curves.
c. wages are the lowest.
d. the slope of total cost is the smallest.

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15. If Franco’s Pizza Parlor knows that the marginal cost of the 500 pizza is $3.00 and that the average
total cost of making 499 pizzas is $3.30, then
a. average costs are rising at Q = 500.
b. average costs are falling at Q = 500.
c. total costs are falling at Q = 500.
d. average variable costs must be falling.

16. When the marginal product of labor falls, the marginal cost of output
a. falls, then rises.
b. becomes negative.
c. rises.
d. remains constant.

17. Which of the following factors is most likely to shift IBM’s total cost and marginal cost curves
downward?
a. a technological advance resulting in increased productivity
b. higher property taxes charged by the municipal government
c. increased wages to attract additional computer operators
d. a reduction in subsidies from the state government

18. Given the cost curve described in the diagrams below, the efficient scale of production occurs at
point
a. A.
b. B.
c. C.
d. D.
19. Economies of scale
a. requires a change in the size of operations and therefore is a long-run consideration.
b. requires a more intensive use of existing plant and therefore is a short-run consideration.
c. means that a doubling of plant size will double output.
d. requires a change in the size of plant and therefore is a short-run consideration.

20. Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart
buys their goods in large quantities and therefore at cheaper prices. Wal-Mart also locates its stores
where land prices are low, usually outside of the community business district. Many customers
shop at Wal-Mart because of low prices and free parking. Local retailers, like the neighborhood
drug store, often go out of business because they lose customers. This story demonstrates that
a. consumers are boycotting local retailers whose prices are relatively higher.
b. there are diseconomies of scale in retail sales.
c. there are economies of scale in retail sales.
d. there are diminishing returns to producing and selling retail goods.

21. Some reasons that firms may experience diseconomies of scale include that
a. the firm is too small to take advantage of specialization.
b. large management structures may be bureaucratic and inefficient.
c. if there are too many employees, the work place becomes crowded and people become less
productive.
d. average fixed costs begin to rise again.

22. A local bagel company plans to keep and maintain its bagel factory, which is estimated to last 25
years. All cost decisions it makes during the 25-year period
a. are short-run decisions.
b. are long-run decisions.
c. involve only maintenance of the factory.
d. are zero, since the cost decisions were made at the beginning of the business.

23. If a firm experiences constant returns to scale at all output levels, then its long-run average total cost
curve would
 a. slope downward.
b. be horizontal.
c. slope upward.
d. slope downward for low output levels and upward for high output levels.

24. Which of the following explains why long-run average cost at first decreases as output increases?
a. diseconomies of scale
b. less-efficient use of inputs
c. fixed costs becoming spread out over more units of output
d. gains from specialization of inputs

25. The total cost to the firm of producing zero units of output is
a. zero in both the short run and the long run.
b. its fixed cost in the short run, zero in the long run.
c. its fixed cost in both the short run and the long run.
d. its variable cost in both the short run and the long run.