Chapter 7

_____ costs are opportunity costs of using resources owned by the firm.

Implicit

The opportunity cost of resources owned by the firm are called _____ _____.

Implicit costs

_____ _____ _____ is the total fixed cost divided by the quantity of output produced.

Average Fixed Cost

Total variable cost divided by the quantity of output produced is called _____ _____ _____.

Average Variable Cost

_____ _____ _____ is the sum of average fixed cost and average variable cost.

Average total cost

_____ _____ _____ _____ is a situation in which the long-run average cost curve does not change as the firm increases output.

Constant returns to scale

The law of _____ returns is the principle that beyond some point the marginal product decreases as additional units of a variable factor are added to a fixed factor.

Diminishing

A situation in which the long-run average cost curve rises as the firm increases output is called _____ _____ _____.

Diseconomies of scale

_____ _____ is equal to total revenue minus both explicit and implicit costs.

Economic Profit

_____ costs are payments to nonowners of a firm for their resources

Explicit

T of F A firm's marginal product of labor curve slopes downward throughout its length.

False

T of F Each short-run average total cost curve is tangent at its lowest point to the long-run average cost curve.

False

T of F Economies of scale exist over all ranges of output for which short-run average total cost exceeds long-run cost.

False

T of F In the short-run, total fixed costs always exceed total variable costs.

False

T of F Suppose a firm earns an accounting profit. This means the firm also earns a positive economic profit.

False

T or F Diseconomies of scale cause the short-run marginal cost curve to slope upwards.

False

T or F In the long run, all costs are fixed costs.

False

T or F In the short-run, total fixed costs always exceed total variable costs.

False

T or F Suppose a firm earns an accounting profit. This means the firm also earns a positive economic profit.

False

T or F The primary cause of diseconomies of scale is scarcity of machinery and capital.

False

After some level of output in the short run, each unit of the variable input yields smaller and smaller marginal product. This principle is called the _____ _____ _____ _____.

Law of diminishing returns

The _____ _____ _____ _____ _____ traces the lowest cost per unit at which a firm can produce any level of output when the firm can build any desired plant size.

Long run average cost curve

______ _____ is the change in total output produced by adding one unit of a variable input, with all other inputs used being held constant.

Marginal Product

The rule that states when marginal cost is below average cost, average cost falls. When marginal cost is above average cost, average cost rises. When marginal cost equals average cost, average cost is at its minimum point is called the _____ _____ _____.

Marginal average rule

The change in total cost when one unit is produced

Marginal cost

_____ _____ is the change in total cost associated with a change in one unit of output.

Marginal cost

_____ _____ is the minimum profit necessary to keep a firm in operation.

Normal Profit

Marginal ____ is the change in total output produced by adding one unit of a variable input, with all other inputs used being held constant.

Product

Economic _____ is the total revenue minus explicit and implicit costs.

Profit

_____ _____ _____ includes costs, such as rent for office space, that cannot vary with the level of output.

Total fixed costs

_____ ______ _____ such as wages, vary as the level of output varies.

Total variable costs

The average _____ costs is the total cost divided by the quantity of output produced

Total

The sum of total fixed cost and total variable cost at each level of output is called _____ _____.

Total Cost

T of F All of a firm's inputs are considered to be variable in the long run.

True

T of F If the total variable cost of producing 5 units of output is $10 and the total variable cost of producing 6 units is $15, the marginal cost of producing a sixth unit is $5.

True

T of F In the long run, all costs are considered variable.

True

T of F Marginal cost is calculated by dividing the change in total cost by the change in total output.

True

T of F Suppose Joe Rich owns his own company and does not pay himself a salary. This means the salary he could have earned in alternative employment is considered an implicit cost for the firm.

True

T or F If marginal product is at a maximum, then marginal cost is at a minimum.

True

If the units of variable input in a production process are 1, 2, 3, 4, and 5, and the corresponding total outputs are 30, 34, 37, 39, and 40, respectively. The marginal product of the fourth unit is: a. 2 b. 1 c. 37 d. 39

a. 2

The marginal cost is the: a. b and c. b. change in total cost as the quantity changes by one unit. c. change in total variable cost as the quantity changes by one unit. d. change in total fixed cost as the quantity changes by one unit. e. same as the fixed cost when average fixed cost is at a minimum.

a. b and c.

Applying a price of labor to the law of diminishing returns generates: a. the law of increasing costs. b. less output as more labor is hired. c. differences in the quality of labor. d. a negatively-sloped labor supply curve. e. specialization and the division of labor.

a. the law of increasing costs.

Total fixed cost are costs that are fixed with respect to: a. the rate of output. b. time. c. technology. d. the minimum wage or price supports.

a. the rate of output.

The lowest point on the average total cost curve is: a. where it intersects the marginal cost curve b. where it intersects the average variable cost curve c. where it intersects the average fixed cost curve d. where marginal product is maximized

a. where it intersects the marginal cost curve

A farm can produce 10,000 bushels of wheat per year with 5 workers and 13,000 bushels with 6 workers. The marginal product of the sixth worker for this farm is: a. 10,000 bushels b. 3,000 bushels c. 500 bushels d. 23,000 bushels

b. 3,000 bushels

A firm can produce 450 gallons of milk per day with 4 workers and 500 gallons per day with 5 workers. The marginal product of the fifth worker expressed in gallons per worker per day, is: a. 35 b. 50 c. 70 d. 350

b. 50

Suppose the fixed cost of building a nuclear power plant is $1 billion. Suppose also that the only variable cost is the labor of Homer Simpson, and he earns $10 per hour. If the plant generates 1,000 kilowatts each hour, and has already generated 1 billion kilowatts, what can you say about the marginal cost of the next kilowatt? a. b and e. b. The marginal cost is equal to $.01. c. The marginal cost is equal to $1.01. d. The marginal cost is rising. e. The marginal cost is falling.

b. The marginal cost is equal to $.01.

In the long run, a firm might experience rising per-unit cost due to: a. economies of scale. b. diseconomies of scale. c. the law of supply. d. the law of diminishing marginal returns.

b. diseconomies of scale.

An economist left his $100,000 a year teaching position to work full-time in his own consulting business. In the first year, he had total revenue of $200,000 and business expenses of $150,000. He made a(n): a. implicit profit b. economic loss c. economic profit d. accounting loss but not an economic loss e. zero economic profit

b. economic loss

Long-run economies of scale exist over the range of output for which the long-run average cost curve: a. is constant. b. is falling. c. is rising. d. does not exist.

b. is falling.

During the course of a week, McDonald's has enough time to hire or layoff workers, but it does not have enough time to expand its kitchen or add an additional seating area. In this situation, McDonald's: a. has no fixed costs. b. is in the short run. c. suffers an economic loss. d. earns a large profit.

b. is in the short run.

If a firm enlarges its factory size and realizes higher average costs (per unit) of production then: a. it has experienced economics of scale b. it has experienced diseconomics of scale c. is has experienced constant returns to scale d. the long-run average cost curve slopes downward e. the long-run average cost curve shifts upward

b. it has experienced diseconomics of scale

If a firm enlarges its factory size and realizes higher average (per unit) costs of production then: a. it has experienced economies of scale. b. it has experienced diseconomies of scale. c. it has experienced constant returns to scale. d. the long-run average cost curve slopes downward. e. the long-run average cost curve shifts upward.

b. it has experienced diseconomies of scale.

A farm is able to produce 5,000 bushels of peaches per season on 100 acres. Assume it adds one more acre and is able to produce 6,000 bushels per season. The marginal product of the additional acre of land for this farm is: a. 6,000 bushels per acre per year. b. 5,000 bushels per acre per year. c. 1,000 bushels per acre per year. d. 11,000 bushels per acre per year.

c. 1,000 bushels per acre per year.

Which of the following is an implication of the law of diminishing returns? a. Total output will decline as more workers are hired. b. In the long run, average total cost will eventually decline as output is expanded. c. In the short run, expansion of output will eventually lead to increases in marginal cost and average total cost. d. A doubling of all inputs will lead to more than a doubling of output.

c. In the short run, expansion of output will eventually lead to increases in marginal cost and average total cost.

Which of the following is true at the point where diminishing returns set in? a. Both marginal product and marginal cost are at a maximum. b. Both marginal product and marginal cost are at a minimum. c. Marginal product is at a maximum and marginal cost at a minimum. d. Marginal product is at a minimum and marginal cost at a maximum.

c. Marginal product is at a maximum and marginal cost at a minimum.

Which of the following statements is true? a. TC = TFC - TVC b. AVC = TC/Q c. TFC = TC - TVC d. MC equals the change in ATC divided by the change in Q

c. TFC = TC - TVC

Economies of scale imply that within some range one can increase the size of operation and: a. total cost will decrease. b. fixed cost will decrease. c. average total cost will decrease. d. average total cost will increase. e. average variable cost will decrease.

c. average total cost will decrease.

Assume both the marginal cost and the average variable cost curves are U-shaped. At the minimum point on the average variable cost curve, marginal cost must be: a. greater than average variable cost. b. less than average variable cost. c. equal to average variable cost. d. at its minimum.

c. equal to average variable cost

Payments to nonowners of a firm are called: a. implicit costs b. indirect costs c. explicit costs d. economic costs

c. explicit costs

Long-run economies of scale exist when the long-run average cost curve: a. rises. b. remains constant. c. falls d. does not exist

c. falls

The ____ is the situation in which the marginal product of labor is greater than zero and declining as more labor is hired. a. law of demand b. law of diminishing supply c. law of diminishing returns d. law of returns to scale

c. law of diminishing returns

The ______ is the situation in which the marginal product of labor is greater than zero and declining as more labor is hired. a. law of demand b. law of diminishing supply c. law of diminishing returns d. law of returns to scale

c. law of diminishing returns

Normal profit is defined as a(n): a. implicit profit b. opportunity profit c. the minimum profit necessary to keep a firm in business d. all of the above are correct

c. the minimum profit necessary to keep a firm in business

Which of the following statements is false? a. TC = TFC + TVC b. AVC = ATC - AFC c. AFE = TFC/Q d. MC equals change in ATC divided by the change in Q e. ATC = TC/Q

d. MC equals change in ATC divided by the change in Q

When costs that vary with the level of output are divided by the output, you have calculated: a. total changing cost. b. total fixed cost. c. average fixed cost. d. average variable cost.

d. average variable cost.

When long-run average cost decreases as output increases, the firm experiences _____ _____ _____.

economies of scale

Economies of scale can be caused by all of the following except: a. price discounts for large scale purchases. b. labor specialization. c. use of more productive equipment. d. increases in the firm's average total cost. e. more cost-efficient methods of marketing.

d. increases in the firm's average total cost.

Normal profit is defined as a(n): a. foregone percent rate of return. b. opportunity profit. c. implicit profit. d. minimum necessary to keep a firm in operation.

d. minimum necessary to keep a firm in operation.

Implicit costs are best thought of as: a. variable costs. b. marginal costs. c. accounting costs. d. opportunity costs. e. sunk costs.

d. opportunity costs.

Which of the following statements is true? a. Economic profit equals accounting profit minus implicit costs. b. The short run is any period of time in which there is at least one fixed input. c. A fixed input is any resource for which the quantity cannot change during the period under consideration. d. In the long run there are no fixed costs. e. All of the above answers are correct.

e. All of the above answers are correct

Which of the following is not an explicit cost? a. Salaries. b. Sales Taxes c. Utilities, such as gas and eletricity d. Insurance e. The firm owner's time

e. The firm owner's time

Which of the following statements is true? a. The law of diminishing returns states that beyond some point the marginal product of a variable resource continues to rise. b. The marginal product is the change in total output by adding one additional unit of a fixed input. c. Fixed costs are costs which vary with the output level. d. When marginal productivity of a variable input is falling then marginal costs of production must be rising. e. When marginal cost is below average cost, average cost rises; when marginal cost is above average cost, average cost falls.

e. d. When marginal productivity of a variable input is falling then marginal costs of production must be rising.

An economist left her $100,000-a-year teaching position to work full-time in her own consulting business. In the first year, she had total revenue of $200,000 and business expenses of $100,000. She made a(n): a. economic profit. b. economic loss. c. implicit profit. d. accounting loss but not an economic loss. e. zero economic profit.

e. zero economic profit.

Payments to nonowners of a firm for their resources are called _____ _____.

explicit costs

The average ____ cost is the total fixed cost divided by the quantity of output produced.

fixed

A resource for which the quantity cannot change.

fixed input

Any resource for which the quantity cannot change during the period of time under consideration is called _____ _____.

fixed input

A period of time so long that all inputs are variable is called a(n) _____ _____.

long run

A(n) _____ _____ is the relationship between output and inputs.

production function

A period of time in which at least one input is fixed

short run

The _____ _____ is a time period during which a firm cannot alter some input such as factory size.

short run

The sum of total fixed cost and total variable cost

total cost

The average _____ cost is the total variable cost divided by the quantity of output produced.

variable

Any resource for which the quantity can change during the period of time under consideration is called _____ _____.

variable input