Micro: CH13 Costs of Production - Practice problems

Brady Industries has average variable costs of $1 and average total costs of $3 when it produces 500 units of output. The firm's total fixed costs equal a. $2. b. $4. c. $1,000. d. $2,000.

C. $1000 find average fixed cost = average total cost ($3) - average variable cost ($1) so $2 THEN MULTIPLY BY UNITS FOR THE TOTAL

The Wacky Widget company has total fixed costs of $100,000 per year. The firm's average variable cost is $10 for 10,000 widgets. At that level of output, the firm's average total costs equal a. $10 b. $15 c. $20 d. $25

C. $20 fixed cost = 100,000... NEED TO FIND AVERAGE SO/ 10,000 widgets = $10 avg fixed cost average variable cost = 10 x 10,000 = 100,000 ATC = AFC + AVC

Although economists and accountants treat many costs differently, they both treat the cost of capital the same. True or False?

False

Economic profit is greater than or equal to accounting profit? True or False?

False

For a typical firm, fixed costs increase in direct proportion to the increases in output. True or False

False

In the short run, if a firm produces nothing, total costs are zero. True or False

False

When economists speak of a firms costs, they are usually excluding the opportunity costs True or False?

False

Diminishing marginal productivity implies decreasing total product. True or False?

False DMP = When the marginal product of an input declines as the quantity of the input increases

The average-fixed-cost curve is constant. True or False

False *IT SAYS AVERAGE NOT JUST FIXED COST

Economists and accountants both include forgone income as a cost to a small business owner True or False?

False Accountants exclude implicit costs Forgone income = implicit cost

Anna borrows $5,000 from a bank and withdraws $1,000 from her personal savings to start a coffee shop. The interest rate is 5 percent for both the bank loan and her personal savings. Her opportunity cost of capital is $250. True or False?

False Explicit cost = 5000 x 5% = 250 (from loan) Implicit = 1000 x 5% = 50 (from my savings) opportunity cost = what I could've earned on my savings opportunity cost of capital = implicit cost

The graph of the production function plots total cost versus quantity of output. True or False

False Production Function = For a typical firm, fixed costs increase in direct proportion to the increases in output.

A firm's total profit equals its marginal revenue minus its marginal cost True or False?

False Profit = revenue - total cost (expenses)

An example of an explicit cost for the owner of a tattoo parlor would be the wages that she could earn if she worked as a graphic artist for an advertising agency. True or False?

False This is implicit

The typical total-cost curve is U-shaped True or False?

False it get steeper as the amount of the produced rises

Diminishing marginal product exists when the total cost curve becomes horizontal as outputs increases. True or False?

False Diminishing marginal product = the marginal product of an input declines as the quantity of the input increases

The shape of the total-cost curve is unrelated to the shape of the production function. True or False

False, they are opposites Production Function = For a typical firm, fixed costs increase in direct proportion to the increases in output.

A second or third worker may have a higher marginal product than the first worker in certain circumstances True or False?

True

Accountants keep track of the money that flows into and out of firms True or False?

True

Accountants often ignore implicit costs True or False?

True

Accounting profit is greater than or equal to economic profit. True or False?

True

Diminishing marginal product exists when the production function becomes flatter as inputs increase. True or False

True

Economists and accountants usually disagree on the inclusion of implicit costs into the cost analysis of a firm. True or False?

True

If a firm produces nothing, it still incurs its fixed costs. True or False

True

Implicit costs are costs that do not require an outlay of money by the firm True or False?

True

Profit equals total revenue minus total cost True or False?

True

Suppose that a worker can produce 100 units of output in 7 hours. In the 8th hour, he can produce 12 units of output. The worker can produce 112 units of output in 8 hours. True or False

True

The difference between economic profit and accounting profit is that economic profit is calculated based on both implicit and explicit costs whereas accounting profit is calculated based on explicit costs only. True or False?

True

The economic field of industrial organization examines how firms' decisions about prices and quantities depend on the market conditions they face. True or False?

True

The opportunity cost of capital is an implicit cost almost every business incurs. True or False?

True

The shape of the total-cost curve is inversely (opposite) related to the shape of the production function. True or False

True

An example of an explicit cost would be the wages that a business owner pays her employees? True or False?

True because the firm has to lay out this money

If Darren sells 300 glasses of iced tea at $0.50 each, his total revenues are a. a. $150. b. $299.50. c. $300. d. $600.

a. $150 300 x 0.50

Daphne sells 300 glasses of lemonade at $0.50 each. Her total costs are $125. Her profits are a. $25. b. $124.50. c. $125. d. $150.

a. $25. revenue = 0.50 x 300 = 150 total cost (given) = 125 150 - 125 = $25

Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when four units of output are produced, the total cost is $175, and the average variable cost is $33.75. What would the average fixed cost be if ten units were produced a. $4 b. $10 c. $40 d. $135

a. $4 AVC 33.75 VC = 33.75*4 = 135 TC - VC = FC 175 - 135 = 40 AFC = FC/Q 40/10 = AFC of 4 AFC = always declines as output rises

Trevor's Tire Company produced and sold 500 tires. The average cost of production per unit was $50. Each tire sold for a price of $65. Trevor's Tire Company's total profits are production per tire was $50. Each tire a. $7,500. b. $25,000. c. $32,500. d. $67,500.

a. $7,500. Profit is difference between cost and revenue so take $15 profit x the quantity 500

Economists normally assume that the goal of a firm is to (i)profits as large as possible, even if it means reducing output (ii) profits as large as possible, even if it means incurring a higher total cost (iii) revenues as large as possible, even if it reduces profits a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii), and (iii)

a. (i) and (ii) only cant be (iii) because we always assume they want a high profit

When a firm is making a profit-maximizing production decision, which of the following principles of economics is likely to be most important to the firm's decision? a. The cost of something is what you give up to get it. b. A country's standard of living depends on its ability to produce goods and services. c. Prices rise when the government prints too much money. d. Governments can sometimes improve market outcomes.

a. The cost of something is what you give up to get it.

A firm produces 400 units of output at a total cost of $1200. If total variable costs are $1000, a. average fixed cost is 50 cents. b. average variable cost is $2. c. average total cost is $2.50. d. average total cost is 50 cents.

a. average fixed cost is 50 cents TC - VC = FC 1200 - 1000 = 200 FC/Q = AFC 200/400 = 0.50 AVC = 1000/400 = 2.5, WRONG ATC = 1200/400 = 3, WRONG

Total revenue equals a. price x quantity b. price/quantity c. (price x quantity) - total cost d. output - input

a. price x quantity

The amount of money that a firm pays to buy inputs is called a. total cost. b. variable cost. c. marginal cost. d. fixed cost.

a. total cost. variable costs = vary with the amount of quantity of output produced

Analyzing the behavior of the firm enhances our understanding of a. what decisions lie behind the market supply curve b. how consumers allocate their income to purchase scare resources c. how financial institutions set interest rates d. whether resources are allocated fairly

a. what decisions lie behind the market supply curve

If Tanya sells 200 glasses of fruit punch at $0.50 each, her total revenues are a. $100. b. $199.50. c. $200. d. $400

a.$100 200 x 0.50 = $100

Cindy's Car Wash has average variable costs of $2 and average total costs of $3 when it produces 100 units of output (car washes). The firm's total variable cost is a. $100 b. $200 c. $300 d. $500

b. $200 TVC = AVC X Q

Trevor's Tire Company produced and sold 500 tires. The average cost of production per unit was $50. Each tire sold for a price of $65. Trevor's Tire Company's total costs are a. $7,500. b. $25,000. c. $32,500. d. $67,500

b. $25,000. Only asking for total cost so $50 x 500 = $25,000

Flying Elvis Copter Rides Quantity Total C Fixed C Variable C Marginal C AFC AVC ATC 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R What is the value of H? a. $0 b. $50 c. $220 d. $270

b. $50

Flying Elvis Copter Rides Quantity Total C Fixed C Variable C Marginal C AFC AVC ATC 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R What is the value of A? (fixed cost at the quantity of 1 a. $25 b. $50 c. $100 d. $200

b. $50 fixed costs are always the same so it must be B

Flying Elvis Copter Rides Quantity Total C Fixed C Variable C Marginal C AFC AVC ATC 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R What is the value of D? a. $25 b. $50 c. $100 d. $200

b. $50 AFC = FC/Q X = 50/1 = 50

Cody builds mailboxes. If he charges $20 for each mailbox, his total revenue will be a. $1,000 if he sells 100 mailboxes. b. $500 if he sells 25 mailboxes. c. $20 regardless of how many mailboxes he sells. d. $200 if he sells 5 mailboxes.

b. $500 if he sells 25 mailboxes. 25 x $20 = $500

Worker Marginal Product 1 3 2 5 3 8 4 10 5 7 6 4 7 2 Bobby pays all his workers the same wage, and labor is his only variable cost. From this information we can conclude that Bobby's average variable cost decreases a. as output rises from 0 to 10, but rises after that. b. as output rises from 0 to 26, but rises after that. c. as output rises from 0 to 33, but increases after that. d. continually as output rises.

b. as output rises from 0 to 26, but rises after that As marginal product decreases = marginal cost increases Variable cost = costs that vary with the quantity of output produced Marginal product = change in quantity/ change in labor

A firm produces 400 units of output at a total cost of $1,200. If fixed costs are $200, a. Average fixed cost is $2 b. average variable cost is $2.50 c. average total cost is $4 d. average total cost $5

b. average variable cost is $2.50 VC/Q = AVC 1000/400 = 2.50 TC -FC = VC 1200- 200= 1000 AFC = 200/400 = 0.50 ATC = 1200/400 = 3

A firm produces 300 units of output at a total cost of $1000, if fixed costs are 100, a. average fixed cost is $10. b. average variable cost is $3. c. average total cost is $4. d. average total cost is $5

b. average variable cost is $3. VC = TC - FC 1000 - 100 = 900 AVC = VC/Q 900/300 = $3 ATC = TC/Q 1000/300 = 3.3 AFC = FC/Q wrong 100/300 = 0.33 wrong

Which field of economics studies how the number of firms affects the prices in the market and the efficiency of market outcomes? a. macroeconomics b. industrial organization c. labor economics d. monetary economics

b. industrial organization

Economists normally assume that the goal of a firm is to a. maximize its total revenue. b. maximize its profit. c. minimize its explicit costs. d. minimize its total cost.

b. maximize its profit.

Profit is defined as a. net revenue minus depreciation. b. total revenue minus total cost. c. average revenue minus average total cost. d. marginal revenue minus marginal cost.

b. total revenue minus total cost.

Flying Elvis Copter Rides Quantity Total C Fixed C Variable C Marginal C AFC AVC ATC 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R What is the value of C? a. $25 b. $50 c. $100 d. $200

c. $100 $100/1 = $100 Marginal cost = change in total cost/change in quantity

Flying Elvis Copter Rides Quantity Total C Fixed C Variable C Marginal C AFC AVC ATC 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R What is the value of B? a. $25 b. $50 c. $100 d. $200

c. $100 VC = TC - FC X = 150 - 50 = 100

Flying Elvis Copter Rides Quantity Total C Fixed C Variable C Marginal C AFC AVC ATC 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R What is the value of E? a. $25 b. $50 c. $100 d. $200

c. $100 AVC = VC/Q X = 100/1 = 100

Flying Elvis Copter Rides Quantity Total C Fixed C Variable C Marginal C AFC AVC ATC 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R What is the value of F? a. $50 b. $100 c. $150 d. $200

c. $150 ATC = TC/Q OR sum of VC & FC both = $150

Flying Elvis Copter Rides Quantity Total C Fixed C Variable C Marginal C AFC AVC ATC 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R What is the value of I? a. $110 b. $120 c. $220 d. $270

c. $220 VC = TC - FC 270 - 50 = $220

The Big Box corporation produced and sold 500 units of output. The average cost of production per unit was $50. Each unit sold for a price of $65. The Big Box corporation's total revenues are a. $7,500. b. $25,000. c. $32,500. d. $67,500.

c. $32,500. total revenue = total profit + total cost $65 x 500 = $32,500 (sale price of product x amount sold) this is total revenue $50 x 500 = $25,000 (avg total cost x amount sold) $15 x 500 = 7,500 (profit so 65 - 50 x amount sold) $25,000 + 7500 = 32,000

Economists normally assume that the goal of a firm is to (i)sell as much of its product as possible. (ii)set the price of the product as high as possible. (iii) maximize profit. a. (i) and (ii) only b. (ii) and (iii) only c. (iii) only d. (i), (ii), and (iii)

c. (iii) only

Which of the following statements is NOT correct? a. Fixed costs are constant. b. Variable costs change as output changes. c. Average fixed costs are constant. d. Average total costs are typically U-shaped.

c. Average fixed costs are constant. C cannot be correct because although fixed costs are constant the average fixed cost is average total cost - average variable costs... which are not constant

A student might describe information about the costs of production as a. exciting and fresh b. unimportant for understanding market structure c. dry and technical d. vibrant and enthralling

c. dry and technical

Economists in the field of industrial organization study how a. central banking policies affect financial markets b. firms demand for labor and individuals supply of labor affect resource markets c. firms decisions about prices and quantities depend on market conditions d. externalities and public goods affect the environment

c. firms decisions about prices and quantities depend on market conditions

To an economist, the field of industrial organization answers which of the following questions? a. why are consumers subject to the law of demand? b. why do firms experience diminishing marginal products of inputs c. how does the number of firms affect prices and the efficiency of market outcomes d. why do firms consider production costs when determining product supply?

c. how does the number of firms affect prices and the efficiency of market outcomes

Total cost is the a. amount a firm receives for the sale of its output. b. fixed cost less variable cost. c. market value of the inputs a firm uses in production. d. quantity of output minus the quantity of inputs used to make a good.

c. market value of the inputs a firm uses in production. EX: sugar, metal

Economists assume that the typical person who starts her own business does so with the intention of a.donating the profits from her business to charity. b.capturing the highest number of sales in her industry. c. maximizing profits. d. minimizing costs.

c. maximizing profits.

The amount of money that a firm receives from the sale of its output is called a. total gross profit b. total net profit c. total revenue d. net revenue

c. total revenue profit is = total revenue - total cost

A certain firm manufactures and sells computer chips. Last year it sold 2 million chips at a price of $10 per chip. For last year, the firm's a. accounting profit was $20 million. b. economic profit was $20 million. c. total revenue was $20 million. d. explicit costs was $20 million.

c. total revenue was $20 million. revenue is what they sold it for x the quantity

A certain firm produces and sells potato chips. Last year it sold 3 million bags of chips at a price of $3 per bag. For last year, the firm's a. accounting profit was $9 million. b. economic profit was $9 million. c. total revenue was $9 million. d. explicit costs was $9 million.

c. total revenue was $9 million. 3,000,000 x 3 = $9 million

Question 52 Flying Elvis Copter Rides ?????????? Quantity Total C Fixed C Variable C Marginal C AFC AVC ATC 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R What is the value of G? a. $30 b. $120 c. $220 d. $270

d. $270 TC + margianal cost, marginal cost is given (120) and my previous total cost was $150 so $270

An entrepreneur's motivation to start a business arises from a. an innate love for the type of business that he or she starts. b. a desire to earn a profit. c. an altruistic desire to provide the world with a good product. d. All of the above could be correct.

d. All of the above could be correct.

Variable cost divided by the change in quantity produced is a. average variable cost. b. marginal cost. c. average total cost. d. None of the above is correct.

d. None of the above is correct. *it says change

Variable cost divided by quantity produced is a. average total cost. b. marginal cost. c. profit. d. None of the above is correct.

d. None of the above is correct. variable cost/ quantity = average variable cost

A student might describe information about the costs of production as a. dry and technical b. boring c. crucial to understanding firms and market structures d. all of the above are correct

d. all of the above are correct

Industrial organization is the study of how a. labor unions organize workers in industries b. profitable firms are in organized industries c. industries organize for political advantage d. firms decisions regarding prices and quantities depend on the market conditions they face

d. firms decisions regarding prices and quantities depend on the market conditions they face industrial org = firms decisions about prices and market conditions

Which of the following can be added to profit to obtain total revenue? a. net profit b. capital profit c. operational profit d. total cost

d. total cost total revenue is opposite profit total revenue = profit + total costs profit = total revenue - total cost