ECON 102 Chapter 11 Practice Questions

Refer to Table 11-3. What is the variable cost of production when the firm produces 115 lanterns?

$1,157

If a firm produces 20 units of output and incurs a total cost of $1,000 and a variable cost is $700, calculate the firm's average fixed cost of production if it expands output to 25 units.

$12

Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. What is Vipsana's total cost per day when she does not produce any gyros and does not hire any workers?

$120

Refer to Table 11-3. What is the average total cost of production when the firm produces 120 lanterns?

$14

A characteristic of the long run that is not available in the short run is that a firm is free to vary its output.

false

Average total cost is equal to average variable cost minus average fixed cost.

false

If average product is decreasing, then marginal product must be negative.

false

If marginal cost is above the average variable cost, then average variable cost is decreasing.

false

If the firm is producing no output in the short run, then its total costs are zero.

false

If the long-run average total cost curve is downward-sloping, then the firm is experiencing decreasing returns to scale.

false

The slope of an isocost line determines the marginal rate of substitution.

false

Academic book publishers hire editors, designers, and production and marketing managers who help prepare books for publication. Because these employees work on several books simultaneously, the number of people the company hires will not go up and down with the quantity of books the company publishes during any particular year. The salaries and benefits of people in these job categories will be included in

fixed cost and total cost but not variable cost.

Refer to Figure 11-1. In a diagram that shows the marginal product of labor on the vertical axis and labor on the horizontal axis, the marginal product curve

intersects the horizontal axis at a point corresponding to the 5th worker.

Maximizing the level of output for a given total cost of production

is equivalent to minimizing cost for a given level of output.

A firm has successfully adopted a positive technological change when

it can produce more output using the same inputs.

If production displays constant returns to scale, then all economies of scale have been exhausted.

true

If the marginal product of labor is decreasing, then marginal cost of production must be rising.

true

The formula for total fixed cost is

TFC = TC - TVC

Average variable cost can be calculated using any of the formulas below except

(TC - FC)/Q.

State the law of diminishing marginal returns.

In a production process, as one input variable is increased, there will be a point at which the marginal per unit output will start to decrease, holding all other factors constant.

What is the difference between total cost and variable cost in the long run?

In the long run, all costs are variable so total cost of production is equal to the variable cost of production.

Refer to Figure 11-5. Suppose for the past 8 years the firm has been producing Qd units per period using plant size ATC4. Now, following a permanent change in demand, it plans to cut production to Qc units. What will happen to its average cost of production?

In the short run, its average cost rises from $47 to $55, and in the long run, average cost falls to $41.

Which of the following is an example of a long run adjustment?

Wal-Mart builds another Supercenter.

If a producer is not able to expand its plant capacity immediately, it is

operating in the short run.

Table 11-1 shows the technology of production at the Matsuko's Mushroom Farm for the month of May 2011. Refer to Table 11-1. Diminishing marginal returns sets in when the ________ worker is hired.

3rd

Table 11-1 shows the technology of production at the Matsuko's Mushroom Farm for the month of May 2011. Refer to Table 11-1. What is the marginal product of the 4th worker?

5 pounds

When the average total cost is $16 and the total cost is $800, then the number of units the firm is producing is

50

Refer to Figure 11-4. Curve G approaches curve F because

average fixed cost falls as output rises

If the marginal cost curve is below the average variable cost curve, then

average variable cost is decreasing

Marginal cost is equal to the

change in total cost divided by the change in output.

When a firm's long-run average cost curve is horizontal for a range of output, then that range of production displays

constant returns to scale

Economic costs of production differ from accounting costs in that

economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.

If, when a firm doubles all its inputs, its average cost of production decreases, then production displays

economics of scale

Long-run cost curves are U-shaped because

economies and diseconomies of scale

A firm increased its production and sales because the firm's manager rearranged the layout of his factory floor. This is an example of

positive technological change.

Assume that 1366 Technologies initially does not sell enough solar wafers to realize economies of scale. To reach economies of scale, 1366 Technologies must

produce and sell more wafers at a lower average total cost.

Which of the following is an implicit cost of production?

rent that could have been earned on a building owned and used by the firm

One reason why, in the short run, the marginal product of labor might increase initially as more workers are hired is that

specialization allows a worker to focus on one task, thereby increasing her proficiency at that task.

Figure 11-8 shows the optimal input combinations for the production of a given quantity of cotton in the United States and in China. Refer to Figure 11-8. Consider the following statements: a. For each country, the marginal product per dollar spent on labor equals to the marginal product per dollar spent on capital. b. The price of labor is relatively higher in the United States than in China and the price of capital is relatively lower in the United States than in China. c. The price of labor and the price of capital are relatively higher in the United States than in China. Based on the figure, which of the statements above is true?

statements a and b only

If production displays economies of scale, the long-run average cost curve is

downward-sloping

Refer to Figure 11-1. The marginal product of the 7th worker is

-2

At the minimum efficient scale,

the firm has achieved the lowest possible average cost of production.

An expansion path shows

the least-cost combination of inputs for each level of output.

Higher isocost lines correspond to higher

total costs of production

If four workers can produce 18 chairs a day and five can produce 20 chairs a day, the marginal product of the fifth worker is

2 chairs.

When a firm produces 50,000 units of output, its total cost equals $6.5 million. When it increases its production to 70,000 units of output, its total cost increases to $9.4 million. Within this range, the marginal cost of an additional unit of output is

$145

If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35, what is the firm's average fixed cost at that level of output?

$15

Vipsanaʹs Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyrois $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day.Calculate Vipsanaʹs average fixed cost per day when she produces 50 gyros using two workers?

$2.40

Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's variable cost per day when she produces 50 gyros using two workers?

$220

Table 11-3 shows cost data for Lotus Lanterns, a producer of whimsical night lights. Refer to Table 11-3. What is the marginal cost per unit of production when the firm produces 100 lanterns?

$32

Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's total cost per day when she produces 50 gyros using two workers?

$340

Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her implicit costs?

$41,500

Refer to Table 11-3. What is the average variable cost per unit of production when the firm produces 90 lanterns?

$5.44

If average total cost is $50 and average fixed cost is $15 when output is 20 units, then the firm's total variable cost at that level of output is

$700

Which of the following equations is correct?

AFC + AVC = ATC

Who was the economist who first analyzed the advantages of specialization and the division of labor?

Adam Smith

hat is the difference between explicit costs and implicit costs? List three examples each of explicit costs and implicit costs that may be experienced by a small business.

An explicit cost is a direct payment made to others while running a business. This could be paying wages, rent, or the purchase of materials. An implicit cost is present but is not initially shown or reported as a separate cost. This could be time taken to train an employee (the hourly wage goes towards someone else than into production), not taking a salary when first starting a business to get it going, and the small business could own the building instead of renting it out to someone else.

All of the following statements are true of the minimum efficient scale except one. Which one?

An increase in the output level will increase profit.

What is an isoquant? What is the slope of an isoquant?

An isoquant is a graph showing combinations of capital and labor that a firm can use to produce a given output. The slope of an isoquant is the slope of a tangent line at that point.

As the level of output increases, what happens to the value of average fixed cost, and what happens to the difference between the value of average total cost and average variable cost?

As the level of output​ increases, the difference between the value of average total cost and average variable cost decreases because average fixed cost decreases as output increases.

What is the difference between "diminishing marginal returns" and "diseconomies of scale"?

Diminishing marginal returns, which applies only in the short run when at least one factor is fixed, explains why marginal cost increases, while diseconomies of scale, which applies in the long run when all factors are variable, explains why average cost increases.

Refer to Figure 11-4. Identify the curves in the diagram.

E = marginal cost curve; F = average total cost curve; G = average variable cost curve; H = average fixed cost curve.

What are economies of scale? What are diseconomies of scale?

Economies of scale refer to these reduced costs per unit arising due to an increase in the total output. Diseconomies of scale occur when the output increases to such a great extent that the cost per unit starts increasing.

Is it possible for technological change to be negative? If so, give an example.

It is possible for technological change to be negative. An example is when a firm hires less skilled workers or when a hurricane damages a firms's facilities.

Refer to Figure 11-5. Identify the minimum efficient scale of production.

Qb

Suppose you have just opened a store to sell espresso machines. Both you and a competing store buy this machine from a manufacturer for $130 each. Your competitor who has a store of the same size as yours is currently selling about 10 machines a month at a price of $200 per machine. You expect to sell about 6 machines a month at a price of $220 per machine. If you lower your price, you expect to make a loss. Which of the following could explain why your competitor is able to profitably sell the machine at a lower price although the cost of purchasing the machine is the same for the both of you?

The competing store probably has a lower average cost because average fixed cost falls as output increases.

Suppose a chain of convenience stores reorganized its system of supplying its stores with food. This led to a sharp reduction in the number of trucks that the company had to use and increased the amount of fresh food on store shelves. Which of the following statements best describes the chain stores' actions?

The firm is able to produce more output (increase its sales) using fewer inputs (less trucks). Therefore, the chain of convenience stores has implemented a positive technological change.

Which of the following is an example of market "production", as used by economist?

The theatre and film studies department in Fine Art's College stages a play at the local theatre.

Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.

Yes. If marginal cost is less than average total​ cost, then average total cost will be decreasing.

Which of the following is the best example of a short run adjustment?

Your local Wal-Mart hires two more associates.

Which of the following is a factor of production that generally is fixed in the short run?

a factory building

Which of the following would be categorized as an opportunity cost? a. not being able to spend your $10,000 savings if you sink the money in your business b. the cost of purchasing supplies for your house-cleaning business c. the cost of purchasing auto insurance for your dry-cleaning delivery business

a only

Suppose Argyle Sachs has to choose between building a smaller sweater factory and a larger sweater factory. In the following graph, the relationship between costs and output for the smaller factory is represented by the curve ATC1, and the relationship between costs and output for the larger factory is represented by the curve ATC2. a. If Argyle expects to produce 3,600 sweaters per month, should he build a smaller factory or a larger factory? Briefly explain? b. If Argyle expects to produce 5,000 sweaters per month, should he build a smaller factory or a larger factory? Briefly explain. c. If the average cost of producing sweaters is lower in the larger factory when Argyle produces 6,500 sweaters per week, why isn't it also lower when Argyle produces 4,000 sweaters per week?

a. If the production is 3,600 sweaters per month, he should build a smaller factory. The advantage of larger factory starts if the production is more than 4,000 sweaters per month, because ATC2 starts from there. Anything below that production level (3,600 < 4,000) should appropriate for smaller factory. b. If the production is 5,000 sweaters per month, he should build a larger factory. Here ATC2 should be preferred, since the vertical perpendicular of 5,000 quantity touches ATC2 at the minimum point compare to the point of touching on ATC1. It means at larger production the average cost would be the minimum. Therefore, the firm should go for a larger production. c. It happens because of diseconomies of scale. Diseconomies of scale is a situation where the average cost is increasing with the increase in output. Production facilities are very limited in a smaller factory, which tends to increase the average cost when large scale of production is there.

Suppose the total cost of producing 40,000 flash drives is $120,000, and the fixed cost is $30,000. a. What is the variable cost? b. When output is 40,000, what are the average variable cost and the average fixed cost? c. Assuming the cost curves have the usual shape, is the dollar difference between the average total cost and the average variable cost greater when the output is 40,000 flash drives or when the output is 60,000 flash drives? Explain.

a. Variable cost=total cost-fixed cost. So, $90,000=$120,000-$30,000. b. AVC=VC/Q=$90,000/40,000=$2.25.AFC=FC/Q=$30,000/40,000=$0.75 c. The gap must get smaller as output rises because ATC=AVC+AFC, and AFC falls as output rises. So,the dollar difference between ATC and AVC is greater when the output of flash drives is 40,000.

Explain how the listed events (a-d) would affect the following at Hilton Hotels. i. marginal cost ii. average variable cost iii. average fixed cost iv. average total cost a. Hilton decides on an across-the-board 5 percent increase in executive salaries. b. Hilton decides to eliminate all print advertising. c. Hilton signs a new contract with the Culinary Workers Union that requires the company to increase wages for all its kitchen workers. d. The federal government starts to levy a $5 room tax on all hotel rooms.

a. average fixed cost and average total cost will decrease; marginal cost and average variable cost will be unaffected. b. average fixed cost and average total cost will increase; marginal cost and average variable cost will be unaffected c. marginal cost, average cost, and average total cost will increase; average fixed cost will be unaffected d. marginal cost, average variable cost, and average total cost will increase; average fixed cost will be unaffected

The explicit cost of production is also called

accounting cost

Refer to Figure 11-2. Diminishing returns to labor set in

after L1

Refer to Figure 11-6. The movement from isoquant T to isoquant U depicts

an increase in output

In 1955, the chairman of the Sony corporation offered to sell transistor radios through department stores in the United States. Sony based its selling price on its average total cost of production. If a store bought 5,000 radios, Sony would sell them at $29.95 each. For 10,000 there would be a discount, and for more than 10,000 the price would begin to climb. Based on this information, Sony reached minimum efficient scale

at a quantity of 10,000 radios.

If the 15th unit of output has a marginal cost of $29.50 and the average cost of producing 14 units of output is $30.23, what will happen to the average cost of production if the 15th unit is produced?

average cost will fall

If fixed costs do not change, then marginal cost

equals the change in variable cost divided by the change in output.

The average total cost of production

equals total cost of production divided by the level of output.

If a firm decreases its plant size and finds that its long-run average costs have decreased, then

its diseconomies of scale are less.

Improvements in inventory control represent a positive technological change because they allow firms to produce the same output with fewer inputs. In recent years, many firms have adopted an inventory system in which firms accept shipments from suppliers as close as possible to the time they will be needed. Wal-Mart has been a pioneer in using inventory control systems to this in its stores. This type of inventory system is called a ________ inventory system.

just-in-time

If diminishing marginal returns have already set in for Golden Lark Woodworks, and the marginal product of the 6th carpenter is 8 chairs, then the marginal product of the 7th carpenter is

less than 8 chairs

The minimum efficient scale is

level of operation where long-run average costs are lowest.

In the short run, if marginal product is at its maximum, then

marginal cost is at its minimum.

If the average variable cost curve is above the marginal cost curve, then

marginal costs can be either increasing or decreasing.

In 1955, the chairman of the Sony corporation offered to sell transistor radios through department stores in the United States. Sony based its selling price on its average total cost of production. If a store bought 5,000 radios, Sony would sell them at $29.95 each. For 10,000 there would be a discount, and for more than 10,000 the price would begin to climb. Based on this information, 10,000 radios was located at the

minimum point on Sony's average total cost curve.

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

opportunity costs of capital owned and used by the firm

Which of the following is not a source of technological advancement for a producer?

outsourcing some aspect of production

The difference between technology and technological change is that

technology refers to the processes used by a firm to transform inputs into output while technological change is a change in a firm's ability to produce a given level of output with a given quantity of inputs.

Refer to Figure 11-2. The curve labeled "F" is

the average product curve.

An isoquant shows

the combinations of two inputs that yield the same total product.

Which of the following is an implicit cost of production?

the loss in the value of capital equipment due to wear and tear

The long-run average cost curve shows

the lowest average cost of producing every level of output in the long run.

Refer to Figure 11-2. The average product of labor declines after L2 because

the marginal product of labor is below the average product of labor.

The production function shows

the maximum output that can be produced from each possible quantity of inputs.

Refer to Figure 11-7. The lines shown in the diagram are isocost lines. Which of the following shows an increase in the price of labor while the price of capital remains unchanged?

the movement from BF to BD

Implicit costs can be defined as

the non-monetary opportunity cost of using the firm's own resources.

The absolute value of the slope of an isocost line equals the ratio of

the prices of the two inputs.

In the short run, marginal product of labor increases at first and then falls because

there are fewer opportunities for division of labor and specialization when fewer workers are hired.

Accounting costs exclude implicit costs.

true

An isoquant is a curve that shows all the combinations of two inputs that will produce the same level of output.

true

Consider a manufacturing operation that uses specialized machinery and labor to produce its output. In this case, the input that is not fixed in the short run is labor.

true

If a firm experiences positive technological change, it is able to produce more output using the same inputs.

true

If, after hiring the 6th worker, a firm's output falls, then the marginal product of the 6th worker is negative.

true

In the long run the relevant cost is total cost.

true

The short run is the time period during which a firm has at least one input constraint.

true

Which of the following costs will not change as output changes?

true

If another worker adds 9 units of output to a group of workers who had an average product of 7 units, then the average product of labor

will increase