Econ Ch. 7

The total cost (TC) of producing computer software diskettes (Q) is given as TC = 200 + 5Q. What is the average total cost?

5 + (200/Q)

The total cost (TC) of producing software diskettes (Q) is given as: TC = 200 + 5Q. What is the variable cost?

5Q

Constantine purchases 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share, he will have "bought high & sold low". Constantine's decision:

is in correct because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held of sold.

Generally, economies of scope are present when

joint output is greater from a single firm producing two goods than could be achieved by two different firms each producing a single product (assuming equivalent production inputs in both situations).

The key assumption required for us to use a linear variable cost function of the form VC = bq is that:

marginal cost must be constant and equal to b.

For a given pair of production outputs, the degree of economies of scope:

may increase or decrease with output.

The total cost of producing a given level of output is

minimized when the ratio of marginal product to input price is equal for all inputs.

Economies of scope refer to

multiproduct firms

For any given level of output: A) marginal cost must be greater than average cost B) average variable cost must be greater than average fixed cost. C) average fixed cost must be greater than average variable cost. D) fixed cost must be greater than variable cost E) none of the above is necessarily correct

E) NONE OF THE ABOVE IS NECESSARILY CORRECT

In the short run, suppose average total of cost is a straight line and marginal cost is positive and constant. Then, we know that fixed costs must:

Equal zero

Prospective sunk costs

are relevant to economic decision-making

A cubic cost function implies:

a U-shaped average cost curve

A firm's expansion path is

a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices.

The total cost (TC) of producing computer software diskettes (Q) is given as TC = 200 + 5Q. What is the marginal cost?

5

Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate if $20 per hour & the rental cost of capital is $25 per hour, the slope of the isocost curve will be:

-4/5

Suppose the price of labor (PL) is $10 and the price of capital (PK) is $20. What is the equation of the isocost line corresponding to a total cost of $100?

100 = 10L + 20K

We typically think of labor as a variable cost, even in the very short run. However, some labor cost may be fixed. Which of the following items represents an example of a fixed labor cost?

A salaried manager who has a 3 year employment contract

The total cost (TC) of producing computer software diskettes (Q) is given as TC = 200 + 5Q. What is the average fixed cost?

A) 500 B) 5Q C) 5 D) 5 + (200/Q) E) none of the above NONE OF THE ABOVE

Which of the following business combinations likely exhibit economies of scope?

A) Banking services for individuals and banking services for other business. B) Retail clothing stores and electronic (internet) clothing stores. C)Hospitals that perform heart surgery and hospitals that perform cosmetic surgery. ALL OF THE ABOVE

Which of the following situations is NOT possible?

A) SAC & LAC are both increasing for some output levels. B) SAC is increasing but LAC is decreasing for some output levels. C) SAC is decreasing but LAC is increasing for some output levels. D) SAC and LAC are both decreasing for some output levels. ALL ARE POSSIBLE.

At the optimum combination of two inputs,

ALL: The slopes of the isoquant and isocost curves are equal. Costs are minimized for the production of a given output. The marginal rate of technical substitution equals the ratio of input prices.

Which of the following costs always declines as output increases?

Average fixed cost

In the short run, suppose average total cost is a straight line and marginal cost is positive and constant. Then we know that:

Average total cost is positive & constant and average total cost equals marginal cost

Use the following two statements to answer this question: I. The average cost curve and average variable cost curve reach their minima at the same level of output. II. The average cost curve and marginal cost curve reach their minima at the same level of output.

BOTH ARE FALSE.

Consider the following statements: I. Increases in the rate of income tax decrease the opportunity cost of attending college. II. The introduction of distance learning, which enables students to watch lectures at home, decreases the opportunity cost of attending college".

Both are true

Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery?

Bubba adds grilled chicken sandwiches to the menu.

Carolyn knows average total cost and average variable cost for a given level of output. Which of the following costs can she not determine given this information?

Carolyn can determine all of the above costs given the information provided.

Which of the following is NOT a reason for average costs to fall according to the learning curve?

Competing firms leave the industry as the learning firm becomes more efficient

Use the following two statements to answer this question: I. Increasing returns to scale cause economies of scale. II. Economies of scale cause increasing returns to scale.

I - TRUE II - FALSE

Consider the following statements when answering this question. I. As Boeing's production fell 10% to 100 planes last year, learning by doing cannot account for this year's changes in long run-average costs. II. Failure to take into account the effects of learning by doing will lead to overestimates of the cost-output elasticity.

I. FALSE II. TRUE

Consider the following statements when answering this question: I. Whenever a firm's average variable costs are falling as output rises, marginal costs must be falling too. II. Whenever a firm's average total costs are rising as output rises, average variable costs must be rising too.

I. FALSE II. TRUE

An isocost line reveals the:

Input combinations that can be purchases with a given outlay of funds.

A learning curve may be expressed as a relationship between the labor per unit (L) and the total number of units produced (N). Which of the following learning curves exhibits a faster reduction in cost of production due to learning (1) L = 10 +N-1 or (2) L= 10 + N-0.5?

Learning curve (1)

A variable cost function of the firm: VC = 23 + Q + 7Q2 implies a marginal cost curve that is

Linear

The cost output elasticity can be written and calculated as

MC/AC

When there are economies of scale

MC<AC, so cost-output elasticity is less than 1.

Which of the following is NOT an expression for the cost minimizing combination of inputs?

MRTS = MPL/MPK

Incremental cost is the same concept as _____ cost

Marginal

Two small airlines provide shuttle service between Las Vega & Reno. The services are alike in every respect except that Fly Right bought its airplane for $500,000, while Fly by Night rents its plane for $30,000 a year. If Fly Right were to go out of business, it would be able to rent its plane to another airline for $30,000. Which airline has the lower costs?

Neither, the costs are identical.

Fixed costs are fixed with respect to changes in

Output

Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000 and the interest rate is 10%. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all his expenses) if he farms the land this year. What should he do?

Sell to ABC Corp

Which of the following is true of cost curves?

The MC curve goes through the minimum of both AVC curve and the ATC curve.

With its current levels of input use a firm's MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis) This implies:

The marginal product of labor is 3 times the marginal product of capital.

The difference between the economic & accounting costs of a firm are

The opportunity costs of the factors of production that the firm owns.

A firm's short-run average cost curve is U-shaped. Which of these conclusions can be reached regarding the firm's returns to scale?

The short-run average cost curve reveals nothing regarding returns to scale.

The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced.

The total cost to produce 100 cookies is: $25.00 Total cost to produce 50 cookies: $20 For 100 cookies, the average total cost is: FALLING Which piece of information would not be helping in calculating the marginal cost of the 75th unit of output? The firm's fixed cost

Which of the following is true regarding the relationship between returns to scale & economies of scope?

There is no definite relationship between returns to scale & economies of scope.

Which always increases as output increases?

Total cost & variable cost

In 1985, Alice paid $20,000 for an option to purchase ten acres of land. By paying the $20,000, she bought the right to buy land for $100,000 in 1992. When she acquired the option in 1985, the land was worth $120,000. In 1992, it is worth $110,000. Should Alice exercise the option and pay $100,000 for the land.

Yes.

In a short-run production process, the marginal cost is rising and average total cost is falling as output increased. Thus marginal cost is

below average total cost

A firm produces leather handbags & leather shoes. If there are economies of scope, the product transformation curve between handbags and shoes will be

bowed outward (concave)

A Cobb- Douglas production function:

can exhibit constant, increasing,or decreasing returns to scale

Two firms, each producing different goods, can achieve a greater output that one firm producing both goods with the same inputs. We can conclude that the production process involves

diseconomies of scope

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e. one pilot for each plane). The expansion path for this business will:

follow the 45-degree line form the origin.

The presence of a learning curve may induce a decision maker in a startup firm to choose

high levels of output to shift the average cost curve down over time.

The scale of economies index (SCI) is equal to:

one minus the cost -output elasticity

When an isocost line is just tangent to an isoquant, we know that

output is being produced at a minimum cost

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e. one pilot for each plane). If the wage rate paid to the pilots increases relative to the rental rate of capital for the airplanes, then:

the optimal capital-labor ratio should decrease

A firm wants to minimize the total cost producing 100 tons of dynamite. The firm uses two factors or production, chemicals & labor. The combination of chemicals and labor that minimizes production costs will be found where:

the production of an additional unit of dynamite costs the same regardless of whether chemicals or labor are used.

A plant uses machinery and waste water to produce steel. The owner of the plant wants to maintain an output of 10,000 tons a day, even though the government has just imposed a $100 per gallon tax on using waste water. The reduction in the amount of waste water that results from the imposition of this tax depends on

the ratio of the marginal product of waste water to the marginal product of machinery.

The equation below gives the degree of economies of scope (SC): SC = (C(Q1) + C(Q2) - C(Q1,Q2))/C(Q1,Q2)

there a diseconomies of scope

At every output level, a firm's short run average cost (SAC) equals or exceeds its long-run average cost (LAC) because

there are at least as many possibilities for substitution between factors of production in the long run as in the short run

The cost output elasticity equals 1.4. This implies that:

there are diseconomies of scale.

At the current level of ouput, long- run marginal cost is $50 and long-run average cost if $75. This implies that:

there are economies of scale.

Jim left his previous job as a sales manager and started his own sales consulting business. He previously earned $70,000 per year, but no he pays himself $25,000 per year while he is building the new business. What is the economic cost of the time he contributes to the new business?

$45,000 per year 70,000 - 25,000

The total cost (TC) of producing computer software diskettes (Q) is given as TC = 200 + 5Q. What is the fixed cost?

200

A group of friends recently started manufacturing specialty t-shirts. The business has grown rapidly, with monthly production up from 50 to 250 in the first 6 months. During the same period, average production cost has been cut in half. The firm's long-run average cost curve over this range of output.

A) is downward sloping B) is upward sloping C) is horizontal MAY BE ANY OF THE ABOVE

In the long run, which of the following is considered a variable cost?

ALL: expenditures for wages, research & development, raw materials, capital machinery & equipment.

Which of the following statements is true regarding the differences between economic and accounting costs?

Accounting costs include only explicit costs.

Consider the following statements when answering this question I. With convex isoquants, a firm's expansion path cannot be negatively sloped. II. If a firm uses only two factors of production, one of whose marginal product becomes negative when its use exceeds a certain level, then a cost minimizing firm's expansion path will have vertical or horizontal segments.

BOTH TRUE

Consider the following statements when answering this question: I. A firm's marginal cost curve does not depend on the level of fixed costs. II. As output increases the difference between a firm's average total cost & average variable cost curves cannot rise.

BOTH TRUE

Consider the following statements when answering this question: I. The marginal cost curve intersects the average total cost and average variable cost curves at their minimum values. II. When a firm has positive fixed cost, the output level associated with minimum average variable costs is less than the output associated with minimum average total costs.

BOTH TRUE.

Consider the following statements when answering this question: I. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then the marginal costs of production are constant too. II. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then the short-run average total costs cannot rise as output rises.

BOTH TRUE.

Use the following two statements to answer this question: I. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output. II. The marginal cost of given of output is the slope of the line that is a tangent to the variable cost curve at that level of output.

BOTH TRUE.

Use the following two statements to answer this question: I. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output. II. The marginal cost of a given level of output is the slope of the line that is tangent to the total cost curve at that level of output.

BOTH TRUE.

A firm employes 100 workers at a wage rate of $10 per hour, and 50 units of capital at rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm

Could reduce the cost of producing its current output level by employing more labor or less capital.

Assume that a firm's production process is subject to increasing returns to scale over a broad range of outputs. Long-run average costs over this output tend to

Decline

Which of the following relationships is NOT valid? A) rising marginal cost implies that average total cost is also rising. B) when marginal cost is below average total cost, the latter is falling. C) when marginal cost is above average variable cost, AVC is rising. D) none of the above

A) rising marginal cost implies that average total cost is also rising

Use the following two statements to answer this question: I. A growing firm's average cost of production will decline over time if output continually expands and economies of scale are present. II. A firm's average cost of production can decline over time if learning occurs as cumulative output increases

BOTH ARE TRUE

An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in the river. Use the following two statements to answer this question: I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent. II. The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees.

BOTH ARE TRUE.

Which of the following statements uses the concept of opportunity costs in decision making? I. "Because my secretary's time has already been paid for, my cost of taking on an additional project is lower than it otherwise would be." II. "Since NASA is running under budget this year, the cost of another space shuttle launch is lower than it otherwise would be."

BOTH FALSE.

Consider the following statement when answering this question: I. A technology with increasing returns to scale will generate a long-run average cost curve that has economies of scale. II. Diminishing returns determines the slope of the short-run marginal cost curve, whereas returns to scale determines the slope of the long-run marginal cost curve.

BOTH TRUE

Consider the following statements when answering this question: I. Investment in new technology generates learning by doing. II. Economies of scale cannot shift the long-run average cost curve down, whereas learning by doing can.

I FALSE II TRUE

Consider the following statements when answering this question: I. If the marginal product of labor falls whenever more labor is used, and labor is the only factor of production used by the firm, than at every output level the firm's short-run average variable cost exceeds marginal cost. II. If labor obeys the law of diminishing returns, and is the only factor of production used by the firm, then at every output level short-run average variable costs exceed marginal costs.

I TRUE II FALSE

Use the following statements to answer this question: I. The long run average cost (LAC) curve is the envelope of the short-run average cost (SAC) curves. II. The long run marginal cost (LMC) curve is the envelope of the short run marginal cost (SMC) curves.

I. TRUE II. FALSE

Use the following statements to answer this question: I. The scale economies index is positive if the cost output elasticity that is greater than one. II. A negative scale of economies index indicates the presence of diseconomies of scale

II TRUE I FALSE

Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making? I. "Even though I hate my MBA classes, I can't quit because I've spent so much money on tuition". II. "To break into the market for soap, our firm needs to spend $10 million on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account."

II only

If a factory has a short-run capacity constraint (e.g. an auto plant can only produce 800 cars per day at maximum capacity), the marginal cost of production becomes_____ at the capacity constraint.

Infinite

In order for a taxicab to be operated in New York City, it must have a medallion on its hood. Medallions are expensive, but can be resold, and therefore are an example of:

a fixed cost

To model the input decision for a production system, we plot labor on the horizontal axis and capital on the vertical axis. In the short run labor is a variable input and capital is fixed. The short run expansion path for this production system is:

a horizontal line

When a product transformation curve for a firm is bowed inward, there are ______ in

diseconomies of scope

The cost output elasticity is used to measure:

economies of scale

The cost-output elasticity is used to measure

economies of scale

When a product transformation curve is bowed outward, there are ____ in production.

economies of scope

The learning curve is graphically represented as a plot of:

labor per unit on the vertical axis and total number of units produced on the horizontal axis.