Chapter 13

The Costs of Production

MULTIPLE CHOICE

. According to the law of supply,

a. the supply curve slopes downward.
b. firms are willing to produce a greater quantity of a good when the price of the good is higher.
c. firms’ production levels are not correlated with the price of a good.
d. none of the above
ANSWER: b. firms are willing to produce a greater quantity of a good when the price of the good is higher.
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. Industrial organization is the study of

a. how industries organize for political advantage.
b. how firms’ decisions regarding prices and quantities depend on the market conditions they face.
c. how labor unions organize workers in industries.
d. how profitable firms are in organized industries.
ANSWER: b. how firms’ decisions regarding prices and quantities depend on the market conditions they face.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Economists normally assume that the goal of a firm is to

(i) sell as much of their product as possible.
(ii) maximize profit.
(iii) minimize cost.
a. (ii) and (iii)
b. (i) and (iii)
c. (ii) only
d. all of the above
ANSWER: c. (ii) only
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. The amount of money that a firm receives from the sale of its output is called
a. total revenue.
b. total gross profit.
c. total net profit.
d. net revenue.
ANSWER: a. total revenue.
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. The amount of money that a firm pays to buy inputs is called

a. variable cost.
b. marginal cost.
c. fixed cost.
d. total cost.
ANSWER: d. total cost.
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. Profit is defined as
 a. net revenue minus depreciation.
b. average revenue minus average total cost.
c. marginal revenue minus marginal cost.
d. total revenue minus total cost.
ANSWER: d. total revenue minus total cost.
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. Profit plus total costs equals

a. total revenue.
b. net profit.
c. capital profit.
d. operational profit.
ANSWER: a. total revenue.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Economists normally assume that the goal of a business is to

(i) make revenue as large as possible.
(ii) make profit as large as possible even if it means collecting less revenue.
(iii) make profit as large as possible even if it means incurring a higher total cost.
a. (i) and (ii)
b. (i) and (iii)
c. (ii) and (iii)
d. none of the above
ANSWER: c. (ii) and (iii)
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. Total revenue equals

a. total output multiplied by sales price of output.
b. total output multiplied by profit.
c. (total output multiplied by sales price) – inventory surplus.
d. (total output multiplied by sales price) – inventory shortage.
ANSWER: a. total output multiplied by sales price of output.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Those things that must be forgone to acquire a good are called

a. competitors.
b. substitutes.
c. opportunity costs.
d. explicit costs.
ANSWER: c. opportunity costs.
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. 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 were sold for a price of $95.
Total revenue for the XYZ corporation would be
a. $30,000.
b. $28,500.
c. $26,125.
d. -$3,875.
ANSWER: c. $26,125
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. Opportunity costs are comprised of

a. explicit costs.
b. implicit costs.
 c. forgone income.
d. all of the above.
ANSWER: d. all of the above.
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. Which of the following would be categorized as an opportunity cost?

(i) wages of workers
(ii) raw material costs
(iii) forgone investment opportunities
a. (i) and (iii)
b. (iii) only
c. (ii) and (iii)
d. all of the above
ANSWER: d. all of the above
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. An example of an explicit cost of production would be

a. the cost of forgone labor earnings for an entrepreneur.
b. the cost of flour for a baker.
c. the lost opportunity to invest in other capital markets when the money is invested in one’s business.
d. none of the above.
ANSWER: b. the cost of flour for a baker.
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. Which of the following is an implicit cost?

(i) A business owner forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm.
(ii) Interest on debt
(iii) Uncollected revenue.
a. (ii) and (iii)
b. (i) and (iii)
c. (i) only
d. All of the above.
ANSWER: c. (i) only
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. An example of an implicit cost of production would be

a. the cost of raw materials for producing bread in a bakery.
b. the cost of a delivery truck in a business that rarely makes deliveries.
c. the income an entrepreneur could have earned working for someone else.
d. all of the above.
ANSWER: c. the income an entrepreneur could have earned working for someone else.
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. Economists are primarily interested in

a. the marginal cost of production in a firm.
b. the accounting profits generated by a firm.
c. how firms make production and pricing decisions.
d. the value of a firm as manifest in stock price.
ANSWER: c. how firms make production and pricing decisions.
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. To an economist, the field of industrial organization answers which of the following questions?
a. How does the difference in the number of firms affect prices and efficiency of market outcomes?
b. Why are consumers subject to the law of demand?
c. Why do firms experience falling marginal product of labor?
 d. Why do firms consider production costs when determining product supply?
ANSWER: a. How does the difference in the number of firms affect prices and efficiency of market outcomes?
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. Accountants are primarily interested in the

a. stock of assets of firms.
b. marginal costs of production of firms.
c. taxes due on capital assets of firms.
d. flow of money into and out of firms.
ANSWER: d. flow of money into and out of firms.
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. Assuming John owns a shoe-shine business, his accountant most likely includes which of the following costs on his
financial statements?
a. cost of shoe polish
b. dividends John’s money was earning in the stock market before John sold his stock and bought a shoe-
shine booth
c. wages John could earn washing windows
d. all of the above
ANSWER: a. cost of shoe polish
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. An important implicit cost of almost every business is

a. the cost of accounting services.
b. the cost of compliance with government regulation.
c. the opportunity cost of financial capital that has been invested in the business.
d. the cost of debt.
ANSWER: c. the opportunity cost of financial capital that has been invested in the business.
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. Which of the following is an implicit cost of owning a business?

(i) forgone savings account interest when personal money is invested in the business.
(ii) interest expense on existing business loans
(iii) damaged or lost inventory.
a. (i) only
b. (ii) only
c. (i) and (ii)
d. all of the above
ANSWER: a. (i) only
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. 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.
ANSWER: c. an implicit cost.
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Use the following information to answer questions 24 and 25.

Joe wants to start his own business. The business he wants to start will require that he purchase a factory that costs
$300,000. He is planning to use $100,000 of his own money, and borrow an additional $200,000 to finance the
factory purchase. Assume the relevant interest rate is 10 percent.
 . What is the explicit cost of purchasing the factory for the first year of operation?
a. $10,000
b. $20,000
c. $30,000
d. $40,000
ANSWER: b. $20,000
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. What is the opportunity cost of purchasing the factory for the first year of operation?
a. $10,000
b. $20,000
c. $30,000
d. $40,000
ANSWER: c. $30,000
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Economic profit is equal to

a. total revenue minus the opportunity cost of producing goods and services.
b. total revenue minus the accounting cost of producing goods and services.
c. total revenue minus the explicit cost of producing goods and services.
d. average revenue minus the average cost of producing the last unit of a good or service.
ANSWER: a. total revenue minus the opportunity cost of producing goods and services.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Accounting profit is equal to

a. total revenue minus the explicit cost of producing goods and services.
b. total revenue minus the opportunity cost of producing goods and services.
c. average revenue minus the average cost of producing the last unit of a good or service.
d. marginal revenue minus marginal cost.
ANSWER: a. total revenue minus the explicit cost of producing goods and services.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Economic profit is equal to

(i) total revenue – (explicit costs + implicit costs).
(ii) total revenue – opportunity costs.
(iii) accounting profit – implicit costs.
a. (i) only
b. (i) and (ii)
c. (ii) and (iii).
d. all of the above
ANSWER: d. all of the above
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Accounting profit is equal to

(i) economic profit + implicit costs.
(ii) total revenue – implicit costs.
(iii) total revenue – opportunity costs.
a. (i) only
b. (iii) only
c. (i) and (ii)
d. none of the above
ANSWER: a. (i) only
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Accounting profit
 a. will never exceed economic profit.
b. is a better measure of profitability than economic profit.
c. is most often equal to economic profit.
d. is always at least as large as economic profit.
ANSWER: d. is always at least as large as economic profit.
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. A production function is a relationship between

a. inputs and revenue.
b. inputs and costs.
c. inputs and profit.
d. inputs and quantity of output.
ANSWER: d. inputs and quantity of output.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. The marginal product of labor is equal to the (deltaQ/deltaL)

a. increase in labor necessary to generate a one-unit increase in output.
b. increase in output obtained from a one-unit increase in labor.
c. incremental profit associated with a one-unit increase in labor.
d. incremental cost associated with a one-unit increase in labor.
ANSWER: b. increase in output obtained from a one-unit increase in labor.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. The marginal product of labor can be defined as (where Δ denotes "change")

a. Δoutput/Δlabor.
b. Δlabor/Δoutput.
c. Δprofit/Δlabor.
d. Δlabor/Δtotal cost.
ANSWER: a. Δoutput/Δlabor.
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. One would expect to observe diminishing marginal product of labor when

a. workers are discouraged about the lack of help from other workers.
b. crowded office space reduces the productivity of new workers.
c. union workers are told to reduce their work effort in preparation for a new round of collective bargaining
talks.
d. only new workers are trained in using the most productive capital.
ANSWER: b. crowded office space reduces the productivity of new workers.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. Diminishing marginal product of labor occurs when adding another unit of labor
a. increases output, but not by as large a margin as previous units of labor.
b. decreases output.
c. increases output by more than the margin of previously employed labor.
d. none of the above.
ANSWER: a. increases output, but not by as large a margin as previous units of labor.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

The figure below depicts a production function for a firm that produces cookies. Use the figure to answer questions
36 through 38.
 . As the number of workers increases,
a. marginal product increases, but at a decreasing rate.
b. total output increases, but at a decreasing rate.
c. marginal product increases.
d. total output decreases.
ANSWER: b. total output increases, but at a decreasing rate.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. With regard to cookie production, the figure implies

a. decreasing cost of cookie production.
b. increasing marginal product of workers.
c. diminishing marginal product of workers.
d. diminishing marginal cost of cookie production.
ANSWER: c. diminishing marginal product of workers.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. The slope of the total product curve reveals information about the
a. average product of workers.
b. marginal product of workers.
c. total product of workers.
d. fixed product of workers.
ANSWER: b. marginal product of workers.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. Which of the following statements about a production function is true?

a. The slope of the production function measures the average product of labor.
b. The slope of the production function measures average total cost.
c. The slope of a ray from the origin to a point on the production function measures the marginal product of
labor.
d. The slope of the production function measures the marginal product of a worker.
ANSWER: d. The slope of the production function measures the marginal product of a worker.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. To an economist, it is conceivable that the objective that motivates an individual entrepreneur to start a business
arises from
a. an altruistic desire to provide the world with their product.
 b. an innate love for the type of business they start.
c. a desire to make money.
d. all of the above.
ANSWER: d. all of the above.
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. When a firm is making a profit maximizing production decision, which one of the Ten Principles of Economics is
likely to be most important to their decision?
a. Governments can sometimes improve market outcomes.
b. The cost of something is what you give up to get it.
c. A country's standard of living depends on its ability to produce goods and services.
d. Prices rise when the government prints too much money.
ANSWER: b. The cost of something is what you give up to get it.
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. Gordon is a senior majoring in computer network development at Smart State University. While he has been
attending college, Gordon started a computer consulting business to help senior citizens set up their network
connections and teach them how to use e-mail. Gordon charges $25 per hour for his consulting services. Gordon
also works 5 hours a week for the Economics Department to maintain their department Web page. The Economics
Department pays Gordon $20 per hour. From this information we can conclude:
a. Gordon should increase the number of hours he works for the Economics Department to make it
comparable to his consulting business income.
b. If Gordon chooses one hour at the beach with his friends rather than spend one more hour with a consulting
client, the forgone income of $25 is considered a cost of the choice to go to the beach.
c. Gordon is obviously not maximizing his well-being if he continues to work for the Economics Department.
d. If the Economics Department offers Gordon a full-time job he will definitely not take the job offer.
ANSWER: b. If Gordon chooses one hour at the beach with his friends rather than spend one more hour with a consulting
client, the forgone income of $25 is considered a cost of the choice to go to the beach.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

The figure below depicts a total cost function for a firm that produces cookies. Use the figure to answer questions
43 through 46.

. Which of the following is true of the underlying production function?

(i) Diminishing marginal product for all levels of input usage.
(ii) Total output increases, but at a decreasing rate.
(iii) The slope of the production function decreases as quantity of inputs increase.
 a. (i) only
b. (ii) and (iii)
c. (i) and (iii)
d. all of the above
ANSWER: d. all of the above
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. The changing slope of the total cost curve reflects

a. decreasing marginal product.
b. increasing marginal product.
c. decreasing average cost.
d. increasing fixed cost.
ANSWER: a. decreasing marginal product.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. Which of the statements below best captures information about the underlying production function?
a. Output increases at an increasing rate with additional units of input.
b. Output increases at a decreasing rate with additional units of input.
c. Output decreases at a decreasing rate with additional units of input.
d. Output decreases at an increasing rate with additional units of input.
ANSWER: b. Output increases at a decreasing rate with additional units of input.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. Which of the statements below is most consistent with the shape of the total cost curve?
a. Producing additional cookies is equally costly, regardless of how many cookies are already being produced.
b. Producing additional cookies becomes increasingly costly only when the number of cookies already being
produced is large.
c. Producing an additional cookie is always more costly than producing the previous cookie.
d. Total production of cookies decreases with additional units of input.
ANSWER: c. Producing an additional cookie is always more costly than producing the previous cookie.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. Which of the following costs do not vary with the amount of output a firm produces?
a. marginal costs and average fixed costs
b. total fixed costs
c. average fixed costs
d. total fixed costs and average fixed costs
ANSWER: b. total fixed costs
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. An example of a fixed cost would be

(i) rent paid on the factory.
(ii) raw materials supplied at a government regulated price.
(iii) machine maintenance.
a. (i) only
b. (i) and (ii)
c. (ii) and (iii)
d. all of the above
ANSWER: a. (i) only
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Fixed costs can be defined as costs that

a. are incurred only when production is large enough.
b. are unaffected by production.
c. vary inversely with production.
 d. vary at a fixed rate with production.
ANSWER: b. are unaffected by production.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Suppose Jan is starting up a small lemonade stand business. Variable costs for Jan’s lemonade stand would include
a. lemonade mix.
b. cost of building the lemonade stand.
c. cost of hiring an artist to design a logo for her sign.
d. all of the above
ANSWER: a. lemonade mix.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. If a firm produces nothing, which of the following costs will be zero?

a. variable cost
b. total cost
c. average cost
d. opportunity cost
ANSWER: a. variable cost
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. One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is
that in the short run,
a. output is not variable.
b. the size of the factory is fixed.
c. the number of workers used to produce the firm's product is fixed.
d. there are no fixed costs.
ANSWER: b. the size of the factory is fixed.
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. The cost to produce the typical unit of output is the firm’s

a. average total cost.
b. variable cost.
c. fixed cost.
d. marginal cost.
ANSWER: a. average total cost.
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. Average total cost is equal to

a. average fixed cost + average variable cost.
b. total cost – total quantity of output.
c. average variable cost + total fixed cost.
d. average variable cost × total quantity of output.
ANSWER: a. average fixed cost + average variable cost.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. As the quantity produced increases,

a. average fixed cost decreases.
b. fixed cost increases.
c. variable cost always decreases.
d. none of the above
ANSWER: a. average fixed cost decreases.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The amount that total cost rises when the firm produces one additional unit is called
a. marginal cost.
 b. average cost.
c. fixed cost.
d. variable cost.
ANSWER: a. marginal cost.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The cost to produce an additional unit of output is the firm’s

a. variable cost.
b. average variable cost.
c. marginal cost.
d. productivity offset.
ANSWER: c. marginal cost.
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. Average total cost equals

a. change in total costs / change in quantity produced.
b. (fixed costs + variable costs) / change in quantity produced.
c. change in total costs / quantity produced.
d. (fixed costs + variable costs) / quantity produced.
ANSWER: d. (fixed costs + variable costs) / quantity produced.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Total costs divided by quantity produced is

a. average total cost.
b. marginal cost.
c. marginal fixed cost.
d. none of the above.
ANSWER: a. average total cost.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Marginal cost equals

(i) the average fixed cost of the current unit.
(ii) change in total costs divided by change in quantity produced.
(iii) change in variable costs divided by change in quantity produced.
a. (i) and (ii)
b. (ii) and (iii)
c. (ii) only
d. all of the above
ANSWER: b. (ii) and (iii)
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Total costs divided by change in quantity produced is

a. average total cost.
b. marginal cost.
c. average variable cost.
d. none of the above.
ANSWER: d. none of the above.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Marginal cost equals

a. total cost divided by total quantity.
b. the slope of the total cost curve.
c. total output divided by the change in total cost.
d. none of the above.
ANSWER: b. the slope of the total cost curve.
 TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Average total cost tells us

a. the cost of a typical unit of output, if total cost is divided evenly over all the units produced.
b. the cost of the last unit of output, if total cost does not include a fixed cost component.
c. the variable cost of a firm that is producing at least one unit of output.
d. the total cost of the first unit of output, if total cost is divided evenly over all the units produced.
ANSWER: a. the cost of a typical unit of output, if total cost is divided evenly over all the units produced.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Marginal cost tells us

a. the marginal increment to profitability when price is constant.
b. the value of all resources used in a production process.
c. the amount total cost rises when output rises by one unit.
d. the amount fixed cost rises when output rises by one unit.
ANSWER: c. the amount total cost rises when output rises by one unit.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

For questions 65 through 68, assume that a given firm experiences decreasing marginal product of labor with the
addition of each worker regardless of the current output level.

. Average total cost will be

a. U-shaped.
b. always rising.
c. always falling.
d. constant.
ANSWER: a. U-shaped.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Average fixed cost will be

a. U-shaped.
b. always rising.
c. always falling.
d. constant.
ANSWER: c. always falling.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Average variable cost will be

a. U-shaped.
b. always rising.
c. always falling.
d. constant.
ANSWER: b. always rising.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Marginal cost will be

a. U-shaped.
b. always rising.
c. always falling.
d. constant.
ANSWER: b. always rising.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

Use the figure below to answer question 69.

 . Which of the above marginal cost curves reflects the existence of diminishing marginal product?
a. A
b. B
c. C
d. D
ANSWER: a. A
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. If marginal cost is rising

a. marginal product must be rising.
b. marginal product must be falling.
c. average variable cost must be falling.
d. average fixed cost must be rising.
ANSWER: b. marginal product must be falling.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Diminishing marginal product suggests that the marginal

a. product of an extra worker is less than the previous worker’s marginal product.
b. cost of an extra worker is less than the previous worker’s marginal cost.
c. product of an extra worker is greater than the previous worker’s marginal product.
d. cost of an extra worker is unchanged.
ANSWER: a. product of an extra worker is less than the previous worker’s marginal product.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Diminishing marginal product suggests that

a. marginal cost is downward sloping.
b. additional units of output are more expensive.
c. the firm is at full capacity.
d. all of the above
ANSWER: b. additional units of output are more expensive.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The average fixed cost curve

a. declines as long as it is above marginal cost.
b. declines as long as it is below marginal cost.
c. always declines with increased levels of output.
d. always rises with increased levels of output.
ANSWER: c. always declines with increased levels of output.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Diminishing marginal product causes the average variable cost curve to

a. rise.
b. fall.
c. rise until it equals the total cost curve.
d. level out.
ANSWER: a. rise.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Average total cost is very high when a small amount of output is produced because
a. of diminishing marginal product .
b. variable costs are spread over only a few units of output.
c. average fixed cost is large.
d. all of the above.
ANSWER: c. average fixed cost is large.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Average total cost necessarily rises due to

(i) rising marginal cost.
(ii) increasing marginal product.
(iii) decreasing marginal cost.
a. (i) only
b. (i) and (ii)
c. (ii) only
d. none of the above
ANSWER: d. none of the above
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The efficient scale of the firm is the quantity of output that

a. maximizes marginal product.
b. minimizes average total cost.
c. minimizes average fixed cost.
d. minimizes average variable cost.
ANSWER: b. minimizes average total cost.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. When marginal cost is less than average total cost,

a. marginal cost must be falling.
b. average total cost is falling.
c. average total cost is rising.
d. average variable cost must be falling.
ANSWER: b. average total cost is falling.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. When marginal cost exceeds average total cost,

a. average fixed cost must be falling.
b. average fixed cost must be rising.
c. average total cost must be rising.
d. average total cost is falling.
ANSWER: c. average total cost must be rising.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The average total cost curve is increasing when

 a. marginal cost is increasing.
b. marginal cost is decreasing.
c. marginal cost is less than average total cost.
d. marginal cost is greater than average total cost.
ANSWER: d. marginal cost is greater than average total cost.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Johnny is a sophomore in college and has a 1.5 cumulative grade point average (GPA). Johnny’s cumulative GPA
will fall even further next semester if he performs worse than
(i) he did last semester.
(ii) his cumulative GPA.
(iii) ever.
a. (i) and (ii)
b. (i) and (iii)
c. (ii) and (iii)
d. all of the above
ANSWER: c. (ii) and (iii)
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Johnny is a sophomore in college and has a 1.5 cumulative grade point average (GPA). Johnny’s cumulative GPA
will be better next semester if
(i) he performs better than he did last semester.
(ii) he performs better than his cumulative GPA.
(iii) he gives an average performance.
a. (i) only
b. (ii) only
c. (i) and (iii)
d. all of the above
ANSWER: b. (ii) only
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Marginal cost is equal to average total cost when

a. marginal cost is at its minimum.
b. average total cost is at its minimum.
c. average variable cost is falling.
d. average fixed cost is rising.
ANSWER: b. average total cost is at its minimum.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The marginal cost curve crosses the average total cost curve at
a. the efficient scale.
b. economies of scale.
c. diseconomies of scale.
d. maximum ATC.
ANSWER: a. the efficient scale.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. If marginal cost is below average total cost, average total cost

a. is falling.
b. is rising.
c. is constant.
d. may rise or fall depending on the size of fixed costs.
ANSWER: a. is falling.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y
 . At all levels of production beyond the point where the marginal cost curve crosses the average variable cost curve,
average variable cost
a. falls.
b. remains unaffected.
c. rises.
d. All of the above are possible, it depends on the shape of the marginal cost curve.
ANSWER: c. rises.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Diminishing marginal product occurs

a. immediately after the first worker is hired.
b. after the marginal cost curve crosses the average total cost curve.
c. at different times for different firms.
d. when average variable cost begins to fall.
ANSWER: c. at different times for different firms.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

Use the figure below to answer question 88.

. Which of the following can be inferred from the figure above?

(i) Marginal costs vary for different levels of output.
(ii) Diminishing marginal product does not occur directly after the first worker.
(iii) Marginal product of the second worker exceeds that of the first.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. all of the above
ANSWER: d. all of the above
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

The set of lines below reflect information about the cost structure of a firm. Use the figure to answer questions 89
through 95.
 . Which of the lines is most likely to represent average total cost?
a. A
b. B
c. C
d. D
ANSWER: b. B
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

. Which of the lines is most likely to represent average fixed cost?

a. A
b. B
c. C
d. D
ANSWER: d. D
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

. Which of the lines is most likely to represent average variable cost?

a. A
b. B
c. C
d. D
ANSWER: c. C
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

. Which of the lines is most likely to represent marginal cost?

a. A
b. B
c. C
d. D
ANSWER: a. A
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

. This particular firm is necessarily experiencing increasing marginal product when

a. line A is falling.
b. line B is falling.
c. line C is falling.
 d. line D is falling.
ANSWER: a. line A is falling.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

. This particular firm is necessarily experiencing diminishing marginal product when

(i) line A is rising.
(ii) line B is rising.
(iii) line C is rising.
a. (i) only
b. (iii) only
c. (i) and (ii)
d. all of the above
ANSWER: d. all of the above
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

. Line A is necessarily U-shaped because of

a. diminishing marginal product.
b. increasing marginal product.
c. the fact that decreasing marginal product follows increasing marginal product.
d. the fact that increasing marginal product follows decreasing marginal product.
ANSWER: c. the fact that decreasing marginal product follows increasing marginal product.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

. When a factory is operating in the short run,

a. total cost and variable cost are usually the same.
b. average fixed cost rises as output increases.
c. it cannot adjust the quantity of fixed inputs.
d. it cannot alter variable costs.
ANSWER: c. it cannot adjust the quantity of fixed inputs.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. In the long run,

a. all inputs are considered to be variable.
b. variable inputs change to fixed inputs.
c. some inputs, such as plant and machinery, remain fixed.
d. variable inputs are rarely used.
ANSWER: a. all inputs are considered to be variable.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

The figure below depicts average total cost functions for a firm that produces automobiles. Use the figure to answer
questions 98 through 103.
 . Which of the curves is most likely to characterize the short-run average total cost curve of the biggest factory?
a. ATCA
b. ATCB
c. ATCC
d. ATCD
ANSWER: c. ATCC
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. Which curve represents the long-run average total cost?

a. ATCA
b. ATCB
c. ATCC
d. ATCD
ANSWER: d. ATCD
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. In the long run, the firm can operate on which of the following average total cost curves?
a. ATCA
b. ATCB
c. ATCC
d. any of the above
ANSWER: d. any of the above
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. Assuming the firm is currently operating on ATCB, what options does it have if it wants to change its level of
automobile production over the next couple of weeks?
a. It can operate at any level of output as long as it stays on ATCB.
b. It can operate at any level of output between points M and N.
c. It can operate at any level of output, as long as it stays on ATCD.
d. The firm has no options. It cannot change output level in the short run.
ANSWER: a. It can operate at any level of output as long as it stays on ATCB.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y
 . This firm experiences economies of scale at what output levels?
a. output levels above N
b. output levels between M and N
c. output levels below M
d. all of the above, if the firm is operating in the long run
ANSWER: c. output levels below M
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. At levels of output above point N the firm experiences

a. economies of scale.
b. diseconomies of scale.
c. economic profit.
d. accounting profit.
ANSWER: b. diseconomies of scale.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. The long-run average total cost curve

a. is flatter than the short-run average total cost curve.
b. is not U-shaped.
c. is always decreasing as output increases.
d. is always increasing as output increases.
ANSWER: a. is flatter than the short-run average total cost curve.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. The length of the short run

a. can never exceed 3 years.
b. can never exceed 1 year.
c. is always less than 6 months.
d. is different for different types of firms.
ANSWER: d. is different for different types of firms.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. Economies of scale occur when

a. long-run average total costs rise as output increases.
b. average fixed costs are falling.
c. long-run average total costs fall as output increases.
d. average fixed costs are constant.
ANSWER: c. long-run average total costs fall as output increases.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. Diseconomies of scale occur when

a. long-run average total costs rise as output increases.
b. long-run average total costs fall as output increases.
c. average fixed costs are falling.
d. average fixed costs are constant.
ANSWER: a. long-run average total costs rise as output increases.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. Constant returns to scale occur when

a. long-run average total costs are constant as output increases.
b. marginal product of labor is falling.
c. the firm's long-run average cost curve is falling as output increases.
d. the firm's long-run average cost curve is rising as output increases.
ANSWER: a. long-run average total costs are constant as output increases.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y
 . Specialization among workers occurs when
a. each worker is allowed to perfect one particular task.
b. each worker is responsible for a number of different tasks.
c. quality management allows workers to switch from one task to another.
d. all of the above
ANSWER: a. each worker is allowed to perfect one particular task.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. A U-shaped long-run average total cost curve can be explained by firms increasing their size
(i) to take advantage of greater specialization.
(ii) to avoid coordination problems.
(iii) to avoid fixed costs.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) only
d. all of the above
ANSWER: c. (i) only
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. If a firm wants to capitalize on economies of scale, it may be able to do so by

a. giving its employees a limited task that they can master.
b. employing a larger number of workers.
c. producing a larger quantity of output.
d. all of the above.
ANSWER: d. all of the above.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. In reference to setting the production level, a firm’s cost curves

a. dictate what decisions the firm will make.
b. have no bearing on what decisions the firm will make.
c. by themselves do not tell us what decisions the firm will make.
d. none of the above
ANSWER: c. by themselves do not tell us what decisions the firm will make.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. Economies of scale arise when

a. workers are able to specialize in a particular task.
b. an economy is self-sufficient in production.
c. individuals in a society are self-sufficient.
d. fixed costs are large relative to variable costs.
ANSWER: a. workers are able to specialize in a particular task.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

Use the following information to answer questions 114 through 120

Measures of Cost for ABC Inc. Widget Factory

Quantity Fixed Variable Total

of Widgets Costs Costs Costs
0 $10
1 $1
2 $3 $13
3 $6 $16
4 $10
5 $25
6 $10 $21
 . The average fixed cost of producing 5 widgets is
a. $2.00.
b. $3.00.
c. $5.00.
d. none of the above.
ANSWER: a. $2.00.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The average variable cost of producing 3 widgets is

a. $2.00
b. $3.00
c. $3.33
d. $5.33
ANSWER: a. $2.00
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The average total cost of producing 4 widgets is

a. $2.00.
b. $2.50.
c. $4.00.
d. $5.00.
ANSWER: d. $5.00.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The marginal cost of producing the sixth widget is

a. $1.00.
b. $3.50.
c. $6.00.
d. Cannot be determined.
ANSWER: c. $6.00.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. What is the variable cost of producing zero widgets?

a. $0.00
b. $1.00
c. $10.00
d. $10.00
ANSWER: a. $0.00
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. What is the marginal cost of producing the first widget?

a. It can't be determined from the information given.
b. $1.00
c. $10.00
d. $11.00
ANSWER: b. $1.00
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. What is the variable cost of producing 5 widgets?

a. $10.00
b. $15.00
c. $25.00
d. It can't be determined from the information given.
ANSWER: b. $15.00
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y
 Use the following information to answer questions 121 through 125.

Adrian's Premium Boxing Service subcontracts with a chocolate manufacturer to box premium chocolates for their
mail order catalogue business. She rents a small room for $150 a week in the downtown business district that serves
as her factory. She can hire workers for $275 a week.

Number of Output (Boxes of Premium Marginal Product

Workers Chocolates Produced per Week) of Labor Cost of Cost of Total Cost
Factory Workers of Inputs
0 0

1 330 150 275 425

2 630

3 150 825 975

4 890

5 950 60 1,375

6 10 1,800

. What is the marginal product of the fourth worker?

a. 40
b. 110
c. 260
d. 275
ANSWER: b. 110
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. What is the total cost associated with making 890 boxes of premium chocolates per week?
a. 975
b. 1,100
c. 1,250
d. 1,375
ANSWER: c. 1,250
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. During the week of July 4th, Adrian doesn't box any chocolates. What are her costs during the week?
a. 0
b. 75
c. 150
d. 425
ANSWER: c. 150
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 2 RANDOM:Y

. One week, Adrian exactly breaks even. If her revenue for the week is $1,525, how many boxes of
chocolate did she produce?
a. 5
b. 60
c. 950
d. 1,375
ANSWER: c. 950
 TYPE: M KEY1:D SECTION:1 OBJECTIVE: 2 RANDOM:Y

. Adrian has received an order for 3000 boxes of chocolates for next week. If she expects that the trend in the
marginal product of labor will continue in the same direction, it is most likely that her best decision will be to
a. hire about 12 new workers and hope she can satisfy the order.
b. commit to meeting the order and then take three weeks to complete the job.
c. not commit to meeting the order until she can move to a larger room and hire more workers to box the
chocolates.
d. close her business until she is able to hire more productive workers.
ANSWER: c. not commit to meeting the order until she can move to a larger room and hire more workers to box the
chocolates.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

Use the following information to answer questions 126 through 131.

Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled children
in public school districts. The owner rents several small rooms in an office building in the suburbs for $600 a month
and has leased computer equipment that costs $480 a month.

Output (Instructional
Modules per month) Average Average Average Marginal
Fixed Variable Total Fixed Cost Variable Total Cost Cost
Cost Cost Cost Cost
0 1,080

1 1,080 400 1,480 400

2 965 450

3 1,350 2,430

4 1,900 475

5 2,500 216

6 4,280 700

7 4,100

8 5,400 135

9 7,300

10 10,880 980

. What is the marginal cost of creating the tenth instructional module in a given month?
a. $108
b. $155
c. $1,080
d. $2,500
ANSWER: d. $2,500
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. What is the average variable cost for the month if 6 instructional modules are produced?
a. $180.00
b. $533.33
 c. $700.00
d. $713.33
ANSWER: b. $533.33
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. What is the average fixed cost for the month if 10 instructional modules are produced?
a. $108
b. $250
c. $980
d. $1,080
ANSWER: a. $108
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. How many instructional modules are produced when marginal cost is $1,900?
a. 4
b. 7
c. 9
d. 10
ANSWER: c. 9
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. One month, Teacher's Helper produced 18 instructional modules. What was the average fixed cost for that month?
a. Can't tell from the information given.
b. 60
c. 108
d. 811
ANSWER: b. 60
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. At what level of output will average variable cost equal average total cost?
a. when marginal cost equals average variable cost
b. There is not a level of output where this occurs, as long as fixed costs are positive.
c. when marginal cost equals average total cost
d. This holds true for all levels of output in which average variable cost is falling.
ANSWER: b. There is not a level of output where this occurs, as long as fixed costs are positive.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

Use the following information to answer questions 132 through 135.

Tony is a wheat farmer, but also spends part of his day teaching guitar lessons. Due to the popularity of his local
country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also
maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends
10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300
worth of wheat.

. What is the total opportunity cost Farmer Tony incurred for his spring day in the field planting wheat?
a. 130
b. 250
c. 300
d. 380
ANSWER: d. 380
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Tony’s accountant would most likely figure the total cost of his wheat planting to equal
a. 130.
 b. 250.
c. 300.
d. 380.
ANSWER: a. 130.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Tony’s accounting profit equals

a. -80.
b. 130.
c. 170.
d. 300.
ANSWER: c. 170.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Tony’s economic profit equals

a. -80.
b. 130.
c. 170.
d. 300.
ANSWER: a. -80.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

Use the following information to answer questions 136 through 138

Farmer Jack is a watermelon farmer. If Jack plants no seeds on his farm, he gets no harvest. If he plants 1 bag of
seeds, he gets 30 watermelons. If he plants 2 bags of seeds, he gets 50 watermelons. If he plants 3 bags of seeds he
gets 60 watermelons. A bag of seeds costs $100, and seeds are his only costs.

. Which of the following statements is(are) true?

(i) Farmer Jack experiences decreasing marginal product.
(ii) Farmer Jack’s total cost curve is linear.
(iii) Farmer Jack’s production function is nonlinear.
a. (i) only
b. (i) and (ii)
c. (ii) only
d. (i) and (iii)
ANSWER: d. (i) and (iii)
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. Which of the following statements is(are) true of Jack’s marginal cost?

(i) His marginal cost curve is U-shaped.
(ii) His marginal cost increases with increased watermelon output.
(iii) His marginal cost reflects diminishing marginal product.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. all of the above
ANSWER: b. (ii) and (iii)
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. Jack’s production function will

a. increase at a decreasing rate.
b. increase at an increasing rate.
c. decrease at a decreasing rate.
d. decrease at an increasing rate.
ANSWER: a. increase at a decreasing rate.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. Harry's Hotdogs is a small street vendor business owned by Harry Huggins. Harry is trying to get a better
understanding of his costs by categorizing them as fixed or variable. Which of the following costs are most likely to
be considered fixed costs?
a. hotdog buns
b. mustard
c. cost of bookkeeping services
d. wages paid to workers that sell hotdogs
ANSWER: c. cost of bookkeeping services
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 2 RANDOM:Y

. Harry Potter is a small street vendor service who contracts to produce and sell molded plastic souvenirs (key chains,
commemorative plastic coins, plastic animals, etc.) at small, county carnivals. As owner of the firm, Harry must
decide how much of each product to produce. The key element of this decision is
a. the fixed cost of production.
b. the cost of his selling booth.
c. how costs will vary as he changes the level of production.
d. the cost of bookkeeping services.
ANSWER: c. how costs will vary as he changes the level of production.
TYPE: M KEY1: D SECTION 3 OBJECTIVE: 2 RANDOM: Y

. Harry's Hotdogs is a small street vendor business owned by Harry Huggins. If Harry makes 10 hotdogs in his first
hour of business and incurs a total cost of $16.50, his average total cost per hotdog is
a. $1.65.
b. $6.50.
c. It is impossible to determine without specific information on fixed cost.
d. It is impossible to determine without specific information on variable cost.
ANSWER: a. $1.65.
TYPE: M KEY1: D SECTION 3 OBJECTIVE: 2 RANDOM: Y

. When a firm is able to put idle equipment resources to use by hiring another worker,
a. variable costs will fall.
b. variable costs will rise.
c. fixed costs will fall.
d. fixed costs and variable costs will rise.
ANSWER: b. variable costs will rise.
TYPE: M KEY1: D SECTION 3 OBJECTIVE: 2 RANDOM: Y

. Thirsty Thelma owns and operates a small lemonade stand. When Thelma is producing a small quantity of
lemonade she has few workers and her equipment is not being fully utilized. Because she can easily put her idle
resources to use,
a. the marginal cost of an extra worker is large.
b. the marginal product of an extra worker is small.
c. the marginal cost of one more glass of lemonade is small.
d. her lemonade stand is likely to be crowded with workers.
ANSWER: c. the marginal cost of one more glass of lemonade is small.
TYPE: M KEY1: D SECTION 3 OBJECTIVE: 2 RANDOM: Y

. When a firm is operating at an efficient scale, average total cost will

a. fall as output is increased.
b. fall as output is decreased.
c. be at its maximum.
d. none of the above
ANSWER: d. none of the above
TYPE: M KEY1: D SECTION 3 OBJECTIVE: 4 RANDOM: Y

. One of the most important properties of cost curves is that

a. the average fixed cost must eventually rise.
b. the average total cost curve first rises, then falls with increased output.
c. the marginal cost eventually rises with the quantity of output.
d. for most producers , the average total cost curve must never cross the marginal cost curve.
ANSWER: c. the marginal cost eventually rises with the quantity of output.
TYPE: M KEY1: D SECTION 3 OBJECTIVE: 4 RANDOM: Y

TRUE/FALSE

. Examination of the costs of production is unnecessary to the field of industrial organization.

ANSWER: F.
TYPE: T KEY1:D SECTION: 1 OBJECTIVE: 1 RANDOM:Y

. Economists normally assume that people start their own businesses to help society maximize its income.
ANSWER: F.
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. When economists speak of a firm’s costs, they are usually excluding the opportunity costs.
ANSWER: F.
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Economists and accountants usually disagree on the inclusion of implicit costs into the cost analysis of a firm.
ANSWER: T.
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Accountants keep track of the money that flows into and out of firms.
ANSWER: T.
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Accountants often ignore implicit costs.

ANSWER: T.
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Economists and accountants both include forgone income as a cost to a small business owner.
ANSWER: F.
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. Although economists and accountants treat many costs differently, they both treat cost of capital the same.
ANSWER: F.
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. The fact that many decisions are fixed in the short run but variable in the long run has little impact on the firm's cost
curves.
ANSWER: F.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. In the long run, a factory is usually considered a fixed input.

ANSWER: F.
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y
. When trying to understand the decisionmaking process of different firms, economists assume that people think at the
margin.
ANSWER: T.
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. The shape of the total cost curve is unrelated to the shape of the production function.
ANSWER: F.
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. Diminishing marginal product exists when the total-cost curve becomes flatter as outputs increases.
ANSWER: F.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Diminishing marginal product exists when the production function becomes flatter as inputs increase.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Several related measures of cost can be derived from a firm’s total cost.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Fixed costs are incurred even when a firm does not produce anything.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Variable costs usually change as the firm alters the quantity of output produced.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Variable costs equal fixed costs when nothing is produced.

ANSWER: F.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The cost of producing an additional unit of a good is not the same as the average cost of the good.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Average variable cost is equal to total variable cost divided by quantity of output.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y PAGE: 14

. The average total cost curve is unaffected by diminishing marginal product.

ANSWER: F.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The average total cost curve reflects the shape of both the average fixed cost and average variable cost curves.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. If the marginal cost curve is rising, so is the average total cost curve.
ANSWER: F.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. The marginal cost curve bisects the average total cost curve at the minimum point of the average total cost curve.
ANSWER: T.
 TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. A second or third worker may have a higher marginal product than the first worker in certain circumstances.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

. Assume Jack received all As in his classes last semester. If Jack gets all Cs in his classes this semester, his GPA may
or may not fall.
ANSWER: T
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

. Fixed costs are those costs that remain fixed no matter how long the time horizon is.
ANSWER: F.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. Diseconomies of scale often arise because higher production levels allow specialization among workers.
ANSWER: F.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. In some cases, specialization allows larger factories to produce goods at a lower average cost than smaller factories.
ANSWER: T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. The use of specialization to achieve economies of scale is one reason modern societies are as prosperous as they are.
ANSWER: T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. Average total cost and marginal cost are merely ways to express information that is already contained in a firm's
total cost.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. Average total cost reveals how much total cost will change as the firm alters its level of production.
ANSWER: F.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 2 RANDOM:Y

. The shape of the marginal cost curve tells a producer something about the marginal product of her workers.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. When average total cost rises if a producer either increases or decreases production, then the firm is said to be
operating at efficient scale.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

. As a firm moves along its long-run average cost curve, it is adjusting the size of its factory to the quantity of
production.
ANSWER: T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. Because of the greater flexibility that firms have in the long run, all short-run cost curves lie on or above the long-
run curve.
ANSWER: T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y
. There is general agreement among economists that the long-run time period exceeds one year.
ANSWER: F.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. The adage "Jack of all trades, master of none," helps explain why some firms experience economies of scale.
ANSWER: T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. Adam Smith's example of the pin factory demonstrates that economies of scale result from specialization.
ANSWER: T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 5 RANDOM:Y

. Implicit costs are costs that do not require an outlay of money by the firm.
ANSWER: T.
TYPE: T KEY1:D SECTION:5 OBJECTIVE: 1 RANDOM:Y

SHORT ANSWER

. What are opportunity costs? How do explicit and implicit costs relate to opportunity costs?
ANSWER: The opportunity cost of an item refers to all those things that must be forgone to acquire that item. Both
explicit and implicit costs are included as opportunity costs.
TYPE: S KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. A key difference between accountants and economists is their different treatment of the cost of capital. Does this
cause an accountant’s estimate of total costs to be higher or lower than an economist’s estimate? Explain.
ANSWER: An accountant would not include the forgone interest income that the money could have earned elsewhere if it
had not been invested in the business. Therefore, an accountant’s estimate of total cost will be less than an
economist’s.
TYPE: S KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

. The production function depicts a relationship between which two variables? Also, draw a production function that
exhibits diminishing marginal product.
ANSWER: It depicts a relationship between output and a given input. The graph should show output increasing, but at a
decreasing rate as inputs increase.
TYPE: S KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve?
Explain or draw a graph.
ANSWER: The total cost curve will increase at an increasing rate, or in other words, the total cost curve gets steeper as the
amount produced rises.
TYPE: S KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

. What effect, if any, does diminishing marginal product have on the shape of the marginal cost curve?
ANSWER: Diminishing marginal product causes the marginal cost curve to rise.
TYPE: S KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

. Bob Edwards owns a bagel shop. Bob hires an economist who assesses the shape of the bagel shop’s average total
cost curve as a function of the number of bagels produced. The results indicate a U-shaped average total cost curve.
Bob’s economist explains that ATC is U-shaped for two reasons, the first being the existence of diminishing
marginal product, which causes it to rise. What would the second reason be? Assume that the marginal cost curve is
linear. (Hint: The second reason relates to average fixed cost)
ANSWER: Average fixed cost always declines as output rises because fixed cost is getting spread over a larger number of
units, thus causing the average total cost curve to fall.
TYPE: S KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y
. If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the average total cost
curve is rising, what is necessarily true of the marginal cost curve?
ANSWER: When average total cost curve is falling it is necessarily above the marginal cost curve. If the average
total cost curve is rising, it is necessarily below the marginal cost curve.
TYPE: S KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y

. According to the mathematical laws that govern the relationship between average total cost and marginal cost, where
must these two curves intersect?
ANSWER: The two curves will cross at the minimum point on the average total cost curve.
TYPE: S KEY1:D SECTION:3 OBJECTIVE: 4 RANDOM:Y