Production and Resource Use Practice Problems

If fixed cost is $200,000 and variable cost is $30 per unit over the relevant range of output, when 10,000 units are produced, the average total cost will be:

$50.

In Exhibit 7-6, the total cost of producing 6,000 units of output is:

8,000

What is the shape of the average fixed cost curve for a firm in the short run?

A curve that declines as output expands and approaches the horizontal-axis when output is large.

If average fixed costs equal $60 and average total costs equal $120 when output is 100, the total variable cost must be:

$6,000.

Suppose that a small business takes in monthly revenue of $100,000. Labor, rental, energy, and other purchased input costs are $70,000. The owner/entrepreneur could earn $5,000 per month in another job, and the owner/entrepreneur could get a return of $5,000 each month if she sold her business and invested the net proceeds in a financial asset, such as a treasury bond. Which of the following correctly describes her monthly economic profit?

$70,000.

If a firm has total revenue of $200 million, explicit costs of $190 million, and implicit costs of $30 million, its economic profit is:

-$20 million.

Which of the following statements is true?

-Economic profit equals accounting profit minus implicit costs. -The short run is any period of time in which there is at least one fixed input. -A fixed input is any resource for which the quantity cannot change during the period under consideration. -In the long run there are no fixed costs.

When the price of a cup of coffee falls from $3.00 to $2.50, the quantity demanded increases from 1,000 per month to 1,150 per month. Using the midpoint method, the price elasticity of demand is

0.77

Exhibit 7-1 shows the change in the production of pizzas as more workers are hired. The marginal product of the fifth employee equals:

1

In Exhibit 7-7, by filling in the blanks it can be determined that the total cost of the second unit of output is:

1,800

Which of the following factors of production is not variable in the long run?

All factors of production are variable in the long run.

Which of the following is true about average fixed cost?

Average fixed cost is total fixed cost divided by the quantity of output produced, and it declines steadily as output increases.

A firm raises the price it charges. The firm's total revenue does not change. What can we conclude about the price elasticity of demand?

Demand is unit elastic.

For most firms, the costs of energy and raw materials will be total fixed costs.

False

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

False

Suppose there is a technology to produce Grendels such that there are diseconomies of scale after the first unit is produced. There are both fixed (a physical plant called a lair) and variable (food that grows in lairs) costs of production. Which statement is true?

It is cheaper to make five Grendels by buying five lairs and producing one Grendel in each lair than it is to produce five Grendels in one lair.

Which of the following is true if the total variable cost curve is rising?

Marginal cost is increasing.

Which of the following is true at the point where diminishing returns set in?

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

Which of the following are implicit costs for a typical firm?

Opportunity costs of capital owned and used by the firm.

If the total variable cost curve for a firm is S-shaped, what is the shape of the total cost curve for that firm?

S-shaped.

Which of the following is an example of a fixed input?

The acreage of a farmer's land, machinery, and the size of a firm's plant.

Which of the following best describes marginal cost?

The change in total cost when one additional unit of output is produced.

If total cost is $1,000 when output is zero, and total cost is $1,200 when output is one, and total cost is $1,500 when output is two, then which of the following is true?

The marginal cost of producing the second unit of output is $300.

Unlike implicit costs, explicit costs:

are actual cash payments.

In order for the law of diminishing returns to be present, we must have:

at least one factor of production to be fixed

Which of the following will become smaller and smaller as the firm expands output?

average fixed cost.

When costs that vary with the level of output are divided by the output, you have calculated:

average variable cost

The marginal cost is the:

b and c -change in total cost as the quantity changes by one unit and change in total variable cost as the quantity changes by one unit.

At the point where marginal cost equals average variable cost,

b and c marginal cost is rising and average total cost is at its minimum

When the cost curves have U-shapes, at the point where marginal cost equals average total cost:

b and c marginal cost is rising and average total cost is at its minimum.

Bill is an accountant for a small machine shop. His boss has asked him to calculate the shop's total fixed cost. Which method will get Bill the correct answer?

c and d Determining what the shop would pay for if they produced zero output and Subtracting the total variable costs from the total costs

If the cross elasticity of demand for DVD players and DVDs equals -2, then the products are

complements

The situation in which the marginal product of labor is greater than zero and declining as more labor is hired is called the law of:

diminishing returns.

When total revenue minus total cost is equal to zero, the firm is:

earning a normal profit

The difference between a firm's total revenues and total costs when all explicit and implicit costs are included is the firm's:

economic profit

If both the marginal cost and the average variable cost curves are U-shaped. At the minimum point on the average variable cost curve, the marginal cost must be:

equal to average variable cost

When a total output curve is falling, its corresponding marginal product curve is:

falling.

Which of the following would be considered an implicit cost?

foregone rent on assets owned by the firm

Demand price elasticity measures:

how consumers change their purchases in response to a change in the price of a product

The cross elasticity between computers and software is

negative because they are complements

The amount of money that could have been made by renting a piece of land to be used for building an office building instead of using the land for employee parking is a(n):

implicit cost.

Economic profit equals accounting profit minus:

implicit costs

Payments to nonowners of a firm are called:

implicit costs.

The short run is a period of time:

in which a firm uses at least one fixed input

Exhibit 7-1 shows the change in the short run production of pizzas as more workers are hired. The table shows marginal product increasing between the 0 to 2 hired workers. A possible reason for this increased marginal product is:

increased division of labor as additional workers are hired.

If the price elasticity of demand for razors is 0.32, the demand for razors is

inelastic.

The minimum point on the marginal cost curve corresponds to the:

inflection point on the total variable cost curve.

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:

is in the short run.

The income elasticity of demand for foreign travel

is likely to be larger than the income elasticity of demand for food.

Economic profit is:

less than accounting profit if implicit costs are greater than zero.

Which of the following is an implicit cost of going to college?

lost income

The cross price elasticity of demand between rifles and bullets is likely to be:

negative, because the goods are complements.

By filling in the blanks in Exhibit 7-8, the average total cost of producing 5 pizzas is shown to be equal to:

not $12, $160

In Exhibit 7-10, the average variable cost of producing 2 cases of books is:

not $150 per case

By filling in the blanks in Exhibit 7-12, the AFC of 3 pizzas is shown to be equal to:

not $40

By filling in the blanks in Exhibit 7-12, the ATC of 4 pizzas is shown to be equal to:

not $78

The ____ is the situation in which the marginal product of labor is greater than zero and declining as more labor is hired.

not law of diminishing supply, law of demand

In Exhibit 7-13, AFC is shown by the graph labeled:

not lll

Which of the following is true if the total cost curve is rising?

not marginal cost is decreasing, total fixed cost is decreasing

In the short run, a firm will eventually experience rising per-unit costs because of:

not the law of supply.

Which statement about the total variable cost curve is true?

not the total variable cost curve is increasing but at a decreasing rate.

As shown in Exhibit 7-9, the total cost of producing 5 units is:

not zero

Marginal cost is defined as the increase in total cost resulting from an increase in:

one unit of output.

Implicit costs are best thought of as:

opportunity costs.

The total fixed cost remains constant as which of the following varies?

output in a given period of time

If beef and pork are substitutes for consumers, the cross elasticity of demand between the two products must be

positive

If the quantity of concert tickets sold decreases by 10 percent when the price increases by 5 percent, the price elasticity of demand over this range of the demand curve is:

price elastic.

Which of the following is most likely to be a fixed cost for a business?

property taxes on the firm's buildings

Elasticity measures how "sensitive" consumers are by measuring their change in ____ as the price of the product changes.

quantity demanded

An economist estimates that .67 is the price elasticity of demand for disposable diapers. This suggests that disposable diaper producers could:

raise the price of disposable diapers to raise more revenue.

Another word for elasticity is:

responsiveness

Moving downward along a linear (straight-line) downward sloping demand curve, the

slope is constant

You are more sensitive to a change in price if you

spend a lot of your income on the good

Marginal cost is best defined as:

the amount added to total cost when one more unit of output is produced

Based on data in the table above, use the midpoint method to determine the cross elasticity of demand for ice cream and cake.

the cross elasticity is -0.75

As a fishing firm hires its first, second, and third workers, it could find that marginal product actually rises. The reason for this is:

the division of labor creates greater productivity.

By filling in the blanks in Exhibit 7-12, the marginal cost of the third pizza is shown to be equal to:

$10

A firm has $200 million in total revenue and explicit costs of $190 million. If its owners have invested $100 million in the company at an opportunity cost of 10 percent interest per year, the firm's accounting profit is:

$10 million.

By filling in the blanks in Exhibit 7-8, the total cost of producing 5 pizzas is shown to be equal to:

$160

Suppose a firm has an output of 10,000 cans and a total fixed cost of $2,000. At an output of 5,000 the difference between the total cost and the total variable cost is:

$2,000.

In the short run, if average variable cost equals $50, average total cost equals $75, and output equals 100, the total fixed cost must be:

$2,500.

A firm estimates that when output is 10, its total costs are $900. It also finds that when output is 11, its total costs are $920. The marginal cost of the eleventh unit of output is:

$20

As shown in Exhibit 7-9, the total cost of producing 4 units is:

$227

A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000, for food and $2,000 for gas and electricity. What are his implicit costs?

$26,000.

Which of the following is an explicit cost?

The wages paid to workers.

Which of the following best describes average variable cost?

Total variable cost divided by the quantity of output produced

A firm's average fixed cost curve can never be U-shaped, even if its other average cost curves are U-shaped.

True

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

True

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

True or False: Economic profit equals accounting profit minus implicit costs.

True

True or False: If a firm's average variable cost curve is rising, its marginal cost must exceed its average variable cost.

True

True or False: In the long run, all costs are considered variable.

True

True or false: Marginal cost is calculated by dividing the change in total cost by the change in total output.

True.

Which of the following explains most accurately why the firm's short-run marginal cost curve will eventually rise?

When diminishing marginal returns set in, it will take ever-larger quantities of the variable resources to produce an additional unit of output.

Which of the following statements is true?

When marginal productivity of a variable input is falling then marginal costs of production must...

Which of the following must be true if average total cost is rising?

marginal cost must be greater than average total cost

A bus is mostly filled with passengers and ready to travel from Los Angeles to San Francisco. At the last minute, a person comes running up to the bus and takes a seat. The change in the bus company's total cost as a result of transporting one more passenger on this trip is called:

marginal cost.

The change in total cost that results from the production of one additional unit is called:

marginal cost.

The increase in total output that results from a unit increase in one unit of a variable input is equal to the input's:

marginal product.

Normal profit is defined as a(n):

minimum necessary to keep a firm in operation.

A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What are his explicit costs?

not $26,000, $66,000, $78,000

Sam quits his job as an airline pilot and opens his own pilot training school. He was earning $40,000 as a pilot. He withdraws $10,000 from his savings where he was earning 6 percent interest and uses the money in his new business. He uses a building he owns as a hanger and could rent it out for $5,000 per year. He rents a computer for $1,200, buys office supplies for $500, rents an airplane for $6,000, pays $1,300 for fuel and maintenance, and hires one worker for $30,000. Sam's total revenue from pilot training classes this year equaled $90,400. Sam's explicit costs this year equals:

$39,000

Sam quits his job as an airline pilot and opens his own pilot training school. He was earning $40,000 as a pilot. He withdraws $10,000 from his savings where he was earning 6 percent interest and uses the money in his new business. He uses a building he owns as a hanger and could rent it out for $5,000 per year. He rents a computer for $1,200, buys office supplies for $500, rents an airplane for $6,000, pays $1,300 for fuel and maintenance, and hires one worker for $30,000. Sam's total revenue from pilot training classes equaled $90,400. Sam's implicit costs for this year are equal to:

$39,000.

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:

1,000 bushels per acre per year

As shown in Exhibit 7-3, the marginal product of labor for the last worker hired when 2 workers are employed per day is:

100

Suppose the price of a DVD rose from $15 to $17 and the quantity demanded decreased from 1,000 per month to 900 per month. Using the midpoint formula, the ________ percent change in price lead to a ________ percent change in the quantity demanded.

12.5; 10.5

A farm is able to produce 10,000 bushels of peanuts per season on 10 acres. Assume it adds one more acre and is able to produce 12,000 bushels per season. The marginal product of the additional acre of land for this farm is:

2,000 bushels per acre per year.

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:

3,000 bushels.

A farm is able to produce 9,000 pints of strawberries per season on 10 acres. It adds one more acre and is able to produce 12,000 pints per season. The marginal product of land for this farm is:

3,000 pints per acre per year.

When income increases from $30,000 a year to $40,000 a year, the quantity demanded of weekend vacations by Sara increases from 2 a year to 5 a year. For Sara, the income elasticity of demand of weekend vacations is ________ and weekend vacations are ________ good.

3; a normal

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:

50.

If two workers can produce 22 units of output, and the addition of a third worker increases output to 30 units, the marginal product of the third worker is:

8 units

Paul's Plumbing is a small business that employs 12 people. Which of the following is most likely to be a fixed cost for Paul's Plumbing?

The tax and insurance payments on the property owed by the firm.

Suppose a publisher faces the following costs of producing 10,000 newspapers each month: $5,500 cost of labor; $2,200 monthly mortgage payment; $250 cost of electricity to run the printing presses; $800 for ink and paper; and $200 in city property taxes (based on the value of the building and land). Its total variable costs are:

not $6,300.

A firm has $200 million in total revenue and explicit costs of $190 million. Suppose its owners have invested $100 million in the company at an opportunity cost of 10 percent interest rate per year. The firm's economic profit is:

not $80 million.

Suppose that the quantity of apples sold increases by 30 percent after the price of pears increases by 15 percent. What is the coefficient of cross elasticity of demand?

not 0.2

During the short run, a firm has enough time to adjust:

not A

If a good has a price elasticity of demand coefficient less than one, then:

not A

Two friends, Diane and Sam, own and run a bar. Diane tends bar on Monday, Wednesday, and Friday and receives a wage in addition to tips. Sam tends bar on Tuesday, Thursday, and Saturday and receives only tips. Which of the following represents an implicit cost of operating the bar?

not A

Which statement about price elasticity of demand along a linear demand curve is true?

not A

Paul's Plumbing is a small business that employs 12 people. Which of the following is the best example of an implicit cost incurred by this firm?

not A, B

If the price elasticity of demand for gasoline equals 0.3, then an increase in the price of a gallon of gasoline from $3.70 to $3.90

not A, D

If a 1 percent increase in the price of X increases the quantity demanded of Y by 2 percent, then X and Y are

not B

When marginal cost is below average total cost:

not B

Bill lives in Montana and likes to grow zucchini. He applies fertilizer to his crops twice during the growing season and notices that the second layer of fertilizer increases his crop, but not as much as the first layer. What economic concept best explains this observation?

not C

Suppose that when output is 20, marginal cost is $20, and average total cost is $30. Then which of the following is most likely to be true?

not C

Exhibit 7-1 shows the change in the short-run production of pizzas as more workers are hired. The table shows the marginal product of the labor input is decreasing with the hiring of the third worker. A possible reason for this diminishing marginal product is:

not D

Exhibit 7-2 shows the labor, energy, and materials cost of making various quantities of pizzas. The table shows that the energy cost of making pizzas will:

not D

Normal profit is a term for:

not D

The income elasticity of demand is

not D

Which of the following is correct? i. All linear demand curves have a constant slope and a constant price elasticity of demand. ii. The price elasticity of demand changes while moving along a downward-sloping linear demand curve. iii. The magnitude of the slope of all linear demand curves is equal to the price elasticity of demand.

not D

Which of the following statements is true?

not MC equals the change in ATC divided by the change in Q

Which of the following is most likely to be true of economic and accounting profits?

not accounting profits minus economic profits equal zero.

Barbara owns a small shop where dresses are made. At the end of a given month, she has 250 dresses. Her expenses for the month are $1,000 for rent, $6,000 for wages, $1,500 for fabric and thread, and $500 for electricity. Her total variable costs for the month are:

not c and e.

When the percentage change in the quantity demanded is less than the percentage change in price, then demand is

not irrelevant

The total fixed cost curve:

remains constant regardless of output.

Explicit costs would include:

rent

The short run is a time period such that:

the existing firms in the market do not have sufficient time to increase the size of their existing...

Marginal product measures the change in:

the firm's output brought about by employing one additional unit of input

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?

the marginal cost is equal to $.01

The law of diminishing marginal returns implies that, in the short run:

the marginal product of the variable input must eventually decrease.

Which of the following is an example of a fixed cost for a fishing company?

the monthly loan payment on the boat

Implicit costs are:

the opportunity costs of using resources owned by the entrepreneur in his/her own business.

The primary source of scale diseconomies appears to be:

the organizational difficulties of managing an ever larger enterprise.

Which of the following best describes the law of diminishing returns?

the principle that beyond some point the marginal product decreases as additional units of a variable factor (ex: labor) are added to a fixed factor (ex: restaurant kitchen)

If the demand for cigarettes is highly inelastic, this indicates that:

the quantity of cigarettes purchased by consumers is not very responsive to a change in the price of cigarettes

Total fixed cost are costs that are fixed with respect to:

the rate of output.

Which of the following best describes a production function?

the relationship between the maximum amounts of output a firm can produce and various quantities of input

Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys their goods in large quantities and therefore at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices and free parking. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that

there are economies of scale in retail sales.

The average fixed cost of a firm equal:

total cost minus total variable cost divided by output

Which of the following describes a situation in which demand must be elastic?

total revenue decreases by more than 15 percent when the price of corn dogs rises by 15 percent

Economic profit is:

total revenues minus total costs

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):

zero economic profit.

Suppose the demand for peaches sold from one roadside stand in Georgia is perfectly elastic. As a result, a 7 percent increase in the price charged by the owner of this stand leads to

zero peaches sold by this stand