8: Production and Costs: Practice Quiz

A young Thomas Edison makes 30 light bulbs a week in his dorm room. The parts for each light bulb cost $2.75. He sells each light bulb for $5.75. General Electric offers Thomas an executive job that pays $65.00 a week. Thomas's weekly economic profit from making light bulbs is equal to: Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. $ __

Explanation Edison has explicit costs of $82.50 (30 × $2.75) for materials. In addition, there is an implicit cost since he cannot take the offer to work as an executive, so he forgoes income of $65.00. This is an implicit cost because it does not involve a payment now or in the future. Economic profit is the difference between revenue (30 × $5.75 = $172.50) and economic cost, which is the sum of explicit and implicit costs ($82.50 + $65.00 = $147.50). Edison makes an economic profit of $25 ($172.50 - $147.50). Answer: 25

A business owner makes 60 items by hand in 45 hours. She could have earned $35 an hour working for someone else. Her total explicit costs are $225. If each item she makes sells for $18, her economic profit equals: Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. $ ___

Explanation The business owner has explicit costs of $225. In addition, there are implicit costs since she does not have the time to work at her regular job and forgoes income of $1,575 (45 hours × $35). These are implicit costs because they do not involve a payment now or in the future. Economic profit is the difference between revenue (60 × $18 = $1,080) and economic cost, which is the sum of explicit and implicit costs ($1,800). The business owner makes a negative economic profit of $-720, which is a loss ($1,080 - $1,800). Answer: -720

The table below shows the weekly cost of producing cowboy hats. Complete the table by filling in the missing values. Instructions: Round your answers to 1 decimal place. Cowboy Hat Production Costs Output | Total Fixed Cost (dollars) | Total Variable Cost (dollars) | Total Cost (dollars) | Average Fixed Cost (dollars) | Average Variable Cost (dollars) | Average Total Cost (dollars) | 0 | $2,000 | $0 | $2,000 | — | — | — | | 10 | ? | 400 | ? | $ ? | $ ? | $240 | | 20 | ? | ? | 2,560 | ? | 28 | 128 | | 30 | ? | 760 | ? | 66.7 | 25.3 | ? | | 40 | ? | ? | 3,000 | ? | ? | 75 | | 50 | ? | 1,300 | ? | ? | 26 | ? |

Explanation Total Fixed Costs (TFC) are constant for all levels of output. When output is 0 units TFC are $2,000. This will remain constant for all levels of output. Total Variable Costs (TVC) are calculated by subtracting TFC from Total Cost (TC). For 20 units of output, subtracting TFC of $2,000 from TC of $2,560 equals TVC of $560. TC is calculated by adding TFC and TVC. For 10 units of output, TFC of $2,000 are added to TVC of $400 for TC equal to $2,400. Average Fixed Cost (AFC) is calculated by dividing TFC (column 2) by Output (column 1). The AFC for 10 units of output is $200.00 ($2,000 / 10 units). Average Variable Cost (AVC) is calculated by dividing TVC (column 3) by Output (column 1). The AVC for 10 units of output is $40.00 ($400 / 10 units). Average Total Cost (ATC) is calculated by dividing TC (column 4) by Output (column 1). The ATC for 30 units of output is $92.00 ($2,760 / 30 units). ATC can also be calculated by adding AFC (column 5) and AVC (column 6). For 30 units of output AFC is $66.70 and AVC is $25.30, the ATC is $92.00. Table Answer: Cowboy Hat Production Costs Output | Total Fixed Cost (dollars) | Total Variable Cost (dollars) | Total Cost (dollars) | Average Fixed Cost (dollars) | Average Variable Cost (dollars) | Average Total Cost (dollars) | 0 | $2,000 | $0 | $2,000 | — | — | — | | 10 | 2,000 | 400 | 2,400 | $ 200 | $ 40 | $240 | | 20 | 2,000 | 560 | 2,560 | 100 | 28 | 128 | | 30 | 2,000 | 760 | 2,760 | 66.7 | 25.3 | 92 | | 40 | 2,000 | 1,000 | 3,000 | 50 | 25 | 75 | | 50 | 2,000 | 1,300 | 3,300 | 40 | 26 | 66 |

The table below shows the monthly cost of producing vintage model cars for collectors. Instructions: Enter your answers as a whole number. Fill in the missing values for total fixed cost, total variable cost, and total cost in the table below. Vintage Model Car Production Costs Output | Total Fixed Cost (dollars) | Total Variable Cost (dollars) | Total Cost (dollars) | 0 | $3,000 | $0 | $3,000 | |100 | ? | 1,200 | ? | | 200 | ? | 1,700 | ? | | 300 | ? | ? | 5,700 | | 400 | ? | 3,700 | ? |

Explanation Total Fixed Costs (TFC) are constant for all levels of output. When output is 0, TFC are $3,000. TFC will be $3,000 for all levels of output. Total Variable Cost (TVC) can be calculated by subtracting TFC from Total Costs (TC). For output level 300, TFC of $3,000 are subtracted from TC of $5,700 to get a TVC of $2,700. The sum of TFC and TVC is a firm's TC. When output is 100, $3,000 and $1,200 are added to get TC of $4,200. Repeat for all TC values. Table Answer: Vintage Model Car Production Costs Output | Total Fixed Cost (dollars) | Total Variable Cost (dollars) | Total Cost (dollars) | 0 | $3,000 | $0 | $3,000 | |100 | 3,000 | 1,200 | 4,200 | | 200 | 3,000 | 1,700 | 4,700 | | 300 | 3,000 | 2,700 | 5,700 | | 400 | 3,000 | 3,700 | 6,700 |

The table below presents the average and marginal cost of producing cheeseburgers per hour at a roadside diner. Cheeseburger Production Costs Quantity(burgers per hour) | Average Variable Cost (dollars) | Average Total Cost (dollars)| Marginal Cost (dollars) | 0 | — | — | — | | 10 | $1.00 | $6.60 | $1.00 | | 20 | 0.70 | 3.50 | 0.40 | | 30 | 0.70 | 2.57 | 0.70 | | 40 | 0.78 | 2.18 | 1.00 | | 50 | 0.88 | 2.00 | 1.30 | | 60 | 1.07 | 2.00 | 2.00 | | 70 | 1.34 | 2.14 | 3.00 | | 80 | 1.74 | 2.44 | 4.50 | | 90 | 2.23 | 2.86 | 6.20 | | 100 | 2.81 | 3.37 | 8.00 | a. When moving from producing a quantity of 40 cheeseburgers per hour to 50 cheeseburgers per hour, the average total cost of production is _______ and the marginal cost of cheeseburger production is ______. b. When moving from producing a quantity of 60 cheeseburgers per hour to 70 cheeseburgers per hour, the average variable cost of production is ______ and the average total cost of cheeseburger production is ______ .

Explanation a. Choose the row that is associated with a quantity of 50. Then look at the cell in this row for the average total cost column and compare it to the previous row's value. Again, choose the row that is associated with a quantity of 50. Then look at the cell in this row for the marginal cost column and compare it to the previous row's value. Blank 1: falling Blank 2: rising b. Choose the row that is associated with a quantity of 70. Then look at the cell in this row for the average variable cost column and compare it to the previous row's value. Again, choose the row that is associated with a quantity of 70. Then look at the cell in this row for the average total cost column and compare it to the previous row's value. Marginal cost will equal average variable cost and average total cost at their respective minimums. Blank 1: rising Blank 2: rising

The figure below shows the average and marginal cost curves for producing cheeseburgers per hour. Graph Image a. At a quantity of 25 cheeseburgers per hour, the average total cost of production is _______ and the marginal cost of cheeseburger production is ______. b. At a quantity of 35 cheeseburgers per hour, the average variable cost of production is ______ and the average total cost of cheeseburger production is __ _ _______.

Explanation a. Finding the quantity 25 on the horizontal axis, go straight up until you reach the average total cost curve (green curve). You will see that the curve at this point has a falling slope. Again, choose the quantity of 25 on the horizontal axis and go straight up until you reach the marginal cost curve (red curve). You will see that the curve at this point has a rising slope. Blank 1: falling Blank 2: rising b. Choose quantity 35 on the horizontal axis and go straight up until you reach the average variable cost curve (orange curve). You will see that the curve at this point has a rising slope. Again, choose the quantity 35 on the horizontal axis and go straight up until you reach the average total cost curve (green curve). You will see that the curve at this point is at a minimum. Marginal cost will equal average variable cost and average total cost at their respective minimums. Blank 1: rising Blank 2: at a minimum

The table below shows Crystal's total cost of producing different quantities of tie-dyed t-shirts for a local arts festival. Instructions: Enter your answers as a whole number. a. Complete the marginal cost column in the table. Tie-Dyed T-Shirt Production Costs Output | Total Cost (dollars) | Marginal Cost (dollars) | 0 | $15 | — | | 1 | 20 | $ ? | | 2 | 23 | ? | | 3 | 25 | ? | | 4 | 29 | ? | | 5 | 34 | ? | | 6 | 43 | ? | b. What is the total cost of producing 5 tie-dyed t-shirts? $ __ c. What is the marginal cost of producing the 5th tie-dyed t-shirt? $ _

Explanation a. Marginal cost shows by how much total cost increases when output increases by one. For example, when output increases from 3 to 4, total cost increases by $4, from $25 to $29. Thus, the marginal cost for an output quantity of 4 is $4. The other cells in the table can be calculated accordingly. Table Answer: Tie-Dyed T-Shirt Production Costs Output | Total Cost (dollars) | Marginal Cost (dollars) | 0 | $15 | — | | 1 | 20 | $ 5 | | 2 | 23 | 3 | | 3 | 25 | 2 | | 4 | 29 | 4 | | 5 | 34 | 5 | | 6 | 43 | 9 | b, c. In the table, choose the row related to an output level of 5. Then read out the cell values of this row for the total cost ($34) and marginal cost ($5) columns. b. Answer: 34 c. Answer: 5

Barney decides to quit his job as a corporate accountant, which pays $15,000 a month, and goes into business for himself as a certified public accountant. He runs his business from his converted garage apartment, which he could rent out for $315 a month if he wasn't using it as a home office. He must purchase office supplies worth $60 a month, and his monthly electricity bill has increased by $40 now that he is working out of his home office. After six months of working from home, Barney has earned an average of $17,000 per month. Instructions: Enter your answers as a whole number. a. What are Barney's average monthly accounting profits? $ _____ b. What are Barney's average monthly economic profits? $ _____

Explanation a. Office supplies ($60) and electricity ($40) are considered explicit costs because they involve a payment. Therefore, explicit costs are $100 ($60 + $40). Accounting profit is the difference between revenue ($17,000) and explicit costs ($100). Answer: 16,900 b. In addition, there are implicit costs. Barney works out of his garage apartment and cannot rent his garage apartment. He also does not have the time to work at his regular job. Therefore, he forgoes rent ($315) and income ($15,000). These are implicit costs because they do not involve a payment now or in the future ($315 + $15,000). Economic profit is the difference between revenue ($17,000) and economic cost, which is the sum of explicit and implicit costs ($15,415). Therefore, economic profit is $1,585 ($17,000 - $15,415). Answer: 1,585

a. Production is in the short run if multiple choice ◉ the time period is less than 1 year. ◉ the time period is less than 3 months. ◉ at least one output is fixed. ◉ at least one input is fixed. b. In the long run multiple choice ◉ all inputs to production are variable. ◉ one output will be variable, but the others are fixed. ◉ management will only be able to fire workers who are hourly, not salary. ◉ the firm must be in operation for at least 1 year. c. In the long run, the average total cost curve is determined by multiple choice ◉ the minimum of all short-run average variable cost curves at each output level. ◉ the minimum short-run average total cost curves at each output level. ◉ differences in the number of workers employed. ◉ differences in the number of hours a firm operates per day. d. Typical long-run average total cost curves multiple choice ◉ decrease over all levels of output. ◉ increase over all levels of output. ◉ become negative for high levels of output. ◉ have a U-shape.

Explanation a. The short run in production is not determined by a length of time, but rather any time period in which one or more of the inputs to production are fixed. Typically the plant capacity or factory is the input that is fixed in the short run while the number of workers and tools are variable. Answer: at least one input is fixed. b. In the long run, all inputs to production become variable. Answer: all inputs to production are variable. c. In the long run, the average total cost curve is determined by minimizing costs. Using a set of short-run average total cost curves, we can determine the long-run average cost curve by finding the minimum average total cost for each quantity of output. Answer: the minimum short-run average total cost curves at each output level. d. Most long-run average total cost curves have a U-shape. Answer: have a U-shape.

Marcel leases a garage. He must pay $500 every week for his lease regardless of how many cars he fixes. The number of cars he fixes each week depends on how many mechanics he hires. The table below summarizes his cost information. Instructions: Enter your answers as a whole number. a. Fill in the missing values for total fixed cost, total variable cost, and total cost in the table below. Marcel's Production Costs Output | Total Fixed Cost (dollars) | Total Variable Cost (dollars) | Total Cost (dollars) | 0 | $500 | $0 | $500 | | 10 | 500 | 500 | ? | | 20 | ? | 1,000 | ? | | 30 | ? | 1,500 | ? | | 40 | ? | ? | 2,500 | | 50 | ? | ? | 3,000 | b. Graph the total fixed cost, total variable cost, and total cost curves from the data in the table. Instructions: Use the tools provided "Total Fixed Cost," "Total Var. Cost," and "Total Cost" to plot each curve. Plot each point for all curves (6 points each curve, total of 18 points).

Explanation a. Fixed costs: Costs that do not change with the amount of output produced. Variable costs: costs that change with the amount of output produced, increasing as production increases and decreasing as production decreases. Total cost: The sum of fixed and variable costs of production. The equation sets below can help complete the table: TC = TFC + TVC TFC are constant, it does not matter the number of cars fixed the total fixed cost remains the same. Total fixed cost can also be calculated as: TFC = TC - TVC Total variable cost (TVC) can be calculated: TVC = TC - TFC Table Answer: Marcel's Production Costs Output | Total Fixed Cost (dollars) | Total Variable Cost (dollars) | Total Cost (dollars) | 0 | $500 | $0 | $500 | | 10 | 500 | 500 | 1,000 | | 20 | 500 | 1,000 | 1,500 | | 30 | 500 | 1,500 | 2,000 | | 40 | 500 | 2,000 | 2,500 | | 50 | 500 | 2,500 | 3,000 | b. Total Fixed Cost: (10, 500), (20, 500), (30, 500), (40, 500), (50, 500) Total Var. Cost: (0, 0), (10, 500), (20, 1,000), (30, 1,500), (40, 2,000), (50, 2,500) Total Cost: (0, 500), (10, 1,000), (20, 1,500), (30, 2,000), (40, 2,500), (50, 3,000)

Barney decides to quit his job as a corporate accountant, which pays $11,000 a month, and goes into business for himself as a certified public accountant. He runs his business from his converted garage apartment, which he could rent out for $305 a month if he wasn't using it as a home office. He must purchase office supplies worth $70 a month, and his monthly electricity bill has increased by $50 now that he is working out of his home office. After six months of working from home, Barney has earned an average of $19,000 per month. Instructions: Enter your answers as a whole number. a. What are Barney's monthly explicit costs? $ ___ b. What are Barney's monthly implicit costs? $ _____ c. What are Barney's monthly economic costs? $ _____

Explanation a. Office supplies ($70) and electricity ($50) are considered explicit costs because they involve a payment. Therefore, explicit costs are $120 ($70 + $50). Answer: 120 b. In addition, there are implicit costs. Barney works out of his garage apartment and cannot rent his apartment. He also does not have the time to work at his regular job. Therefore, he forgoes rent ($305) and income ($11,000). These are implicit costs because they do not involve a payment now or in the future ($305 + $11,000). Answer: 11,305 c. Economic costs consider both implicit and explicit costs ($11,305 + $120). Answer: 11,425

Which of the following costs is an explicit cost for you? multiple choice ◉ You raise cattle on your family-owned farm even though you could sell your land to a developer. ◉ You spend your time running your own business even though a large corporation offered you a generous contract. ◉ You hire a worker who could have received the same wage working for your competitor. ◉ You decide to use an extra room for your business that you could have rented out to your neighbor.

You hire a worker who could have received the same wage working for your competitor. Explanation Hiring a worker is a cost, and paying his or her wage involves a payment. Consequently, it is considered an explicit cost. Forgoing rent or income from a job or the opportunity to sell land are also costs, but they don't involve a payment. They are considered implicit costs.

A firm finds that whether it produces 30,000 vases or 40,000 vases, its average total cost is $180. This observed pattern might be explained by multiple choice ◉ economies of scale. ◉ diminishing marginal productivity. ◉ diseconomies of scale. ◉ constant returns to scale.

constant returns to scale. Explanation In this case, the average total cost of production remains constant at $180 while production increases by 33 percent. This represents constant returns to scale, and is graphically the flat portion of the long-run average total cost curve.

The upward-sloping portion of the long-run average cost curve is a result of multiple choice ◉ economies of scale. ◉ constant returns to scale. ◉ diseconomies of scale. ◉ increasing marginal productivity.

diseconomies of scale. Explanation In the long run, if average total cost increases as output (or firm size) increases, the firm is experiencing diseconomies of scale. When a firm experiences diseconomies of scale, marginal productivity is decreasing.

The downward-sloping portion of the long-run average cost curve is a result of multiple choice ◉ economies of scale. ◉ constant returns to scale. ◉ diseconomies of scale. ◉ decreasing marginal productivity.

economies of scale. Explanation In the long run, if average total cost decreases as output (or firm size) increases, the firm is experiencing economies of scale. When a firm experiences economies of scale, marginal productivity is increasing.

Which of the following is an implicit cost of owning and operating a farm? multiple choice ◉ the money received for crops grown during the growing season ◉ the money paid for repairing a tractor ◉ the money paid for fertilizer each growing season ◉ the money a farmer could earn by working for someone else

the money a farmer could earn by working for someone else Explanation Money that the farmer receives is considered revenue, not cost. Money that the farmer pays for fertilizer or repairs is considered an explicit cost because a payment is made. If the farmer had not worked at his farm but worked somewhere else, he would have received a salary for his work. The loss of this salary does not include a payment now or in the future, but it is still a cost of production, which is called an opportunity cost or implicit cost.