Econ Analysis & Business Decisions - Chapter 7 MC

Average fixed cost is A) AC minus AVC. B) TC divided by Q. C) AVC minus MC. D) TC minus TVC.

A) AC minus AVC.

Which of the following cost relationships is not true? A) AFC = AC - MC B) TVC = TC - TFC C) The change in TVC/the change in Q = MC D) The change in TC/ the change in Q = MC

A) AFC = AC - MC

When a firm increased its output by one unit, its AC decreased. This implies that A) MC < AC. B) MC = AC. C) MC < AFC. D) the law of diminishing returns has not yet taken effect.

A) MC < AC.

Which of the following cost functions will exhibit both decreasing and increasing marginal costs? A) a cubic cost function B) a quadratic cost function C) a linear cost function D) All of the above

A) a cubic cost function

The method of estimating long-run costs in which knowledgeable professionals familiar with production facilities and processes calculate optimal combination of inputs to produce given quantities and then estimate costs is known as A) engineering cost estimating. B) the survivorship method. C) regression analysis. D) None of the above

A) engineering cost estimating.

Assuming the existence of economies of scale, if a firm finds that it can reduce its unit cost by decreasing its scale of production, it means that A) it has too much production capacity relative to its demand. B) it should try to produce less. C) the law of diminishing returns has not taken effect. D) it has too much fixed overhead relative to its variable cost.

A) it has too much production capacity relative to its demand.

Which level indicates the point of maximum economic efficiency? A) lowest point on AC curve B) lowest point on AVC curve C) lowest point on MC curve D) None of the above

A) lowest point on AC curve

The main factor that explains the difference between accounting cost and economic cost is A) opportunity cost. B) fixed cost. C) variable cost. D) All of the above help to explain the difference.

A) opportunity cost.

Which of the following is a relevant cost? A) replacement cost B) sunk cost C) historical cost D) fixed cost E) All of the above are relevant.

A) replacement cost

Short-run cost functions are estimated using A) time-series regression analysis. B) cross-sectional regression analysis. C) nominal cost data. D) present value cost data.

A) time-series regression analysis.

Changes in the short-run total costs result from changes in only A) variable costs. B) fixed costs. C) zero. D) total fixed costs.

A) variable costs.

Which of the following relationships implies that a firm's short-run cost function is linear? A) MC = AC B) MC = AVC C) AC = AFC + AVC D) MC > AC

B) MC = AVC

Which of the following statements best represents a difference between short-run and long-run cost? A) Less than one year is considered the short run; more than one year the long run. B) There are no fixed costs in the long run. C) In the short-run labor must always be considered the variable input and capital the fixed input. D) All of the above are true.

B) There are no fixed costs in the long run.

Diseconomies of scale can be caused by A) the law of diminishing returns. B) bureaucratic inefficiencies. C) increasing advertising and promotional costs. D) All of the above

B) bureaucratic inefficiencies.

Long-run cost functions are estimated using A) time-series regression analysis. B) cross-sectional regression analysis. C) cost accounting data. D) None of the above

B) cross-sectional regression analysis.

As a firm attempts to increase its production, its long-run average costs eventually rise because of A) the law of diminishing returns. B) diseconomies of scale. C) fixed capital. D) insufficient demand.

B) diseconomies of scale.

Which of the following distinctions helps to explain the difference between relevant and irrelevant cost? A) accounting cost vs. direct cost B) historical cost vs. replacement cost C) sunk cost vs. fixed cost D) variable cost vs. incremental cost

B) historical cost vs. replacement cost

Economic profit equals accounting profit minus A) explicit costs. B) implicit costs. C) fixed costs. D) variable costs.

B) implicit costs.

The law of diminishing returns begins first to affect a firm's short-run cost structure when A) average variable cost begins to increase. B) marginal cost begins to increase. C) average cost begins to increase. D) average fixed cost begins to decrease.

B) marginal cost begins to increase.

The learning curve indicates that A) economies of scale are taking effect. B) repetition of various production tasks cause unit costs to decrease. C) workers must learn new skills in order to improve. D) it takes time to learn a new skill.

B) repetition of various production tasks cause unit costs to decrease.

Which of the following is the best example of economies of scope? A) Coca-Cola expands its global operations to sub-Sahara Africa. B) Alcohol for car fuel is produced from corn. C) Amazon.com decides to rent out its Web site to independent e-commerce companies. D) A company reduces its cost by getting bigger discounts for bulk purchases.

C) Amazon.com decides to rent out its Web site to independent e-commerce companies.

Which of the following is a reason for economies of scale? A) Fixed costs are spread out as volume increases. B) The law of diminishing returns does not take effect. C) Input productivity increases as a result of greater specialization. D) There is greater savings in transportation costs.

C) Input productivity increases as a result of greater specialization.

If a firm's rent increases, it will affect its cost structure in which of the following ways? A) AVC will increase. B) MC will increase. C) TFC will increase. D) All of the above will increase.

C) TFC will increase.

A short-run total cost function, TC = 100 + 32Q - 4Q2 + 0.4Q3, indicates the existence of A) a linear total cost curve. B) a constant average variable cost curve. C) a U-shaped average variable cost curve. D) a constant marginal cost curve.

C) a U-shaped average variable cost curve.

When the survivorship method of cost estimating is used, an increase, over time, in the proportion of industry product produced by medium size firms indicates the existence of A) continuing economies of scale. B) continuing diseconomies of scale. C) a U-shaped long-run average cost curve. D) large technological changes.

C) a U-shaped long-run average cost curve.

The results of many empirical studies of short-run cost functions have shown that total costs conform to A) a quadratic total cost function. B) a power cost function. C) a linear cost function. D) a cubic cost function.

C) a linear cost function.

The marginal cost will intersect the average variable cost curve A) when the average variable cost curve is rising. B) where average variable cost curve equals price. C) at the minimum point of the average variable cost curve. D) The two will never intersect.

C) at the minimum point of the average variable cost curve.

Economies of scale are indicated by A) declining long-run AVC. B) declining long-run AFC. C) declining long-run AC. D) declining long-run TC.

C) declining long-run AC.

To an economist, total costs include A) explicit, but not implicit costs. B) implicit, but not explicit costs. C) explicit and implicit costs. D) neither explicit nor implicit costs.

C) explicit and implicit costs.

Average fixed cost A) does not change as total output increases or decreases. B) varies directly with total output. C) falls continuously as total output expands. D) rises as the output is expanded.

C) falls continuously as total output expands.

When a firm increased its output by one unit, its AC rose from $45 to $50. This implies that its MC is A) $5. B) between $45 and $50. C) greater than $50. D) Cannot be determined from the above information

C) greater than $50.

Economists consider which of the following costs to be irrelevant to a short-run business decision? A) opportunity cost B) out-of-pocket cost C) historical cost D) replacement cost

C) historical cost

When a firm's MC curve shifts to the right, it implies that A) new firms are entering the market. B) labor productivity is decreasing. C) labor productivity is increasing. D) the firm's overhead costs are decreasing.

C) labor productivity is increasing.

The learning curve A) is really no different from a marginal cost curve. B) calculates average cost at a particular point in time. C) shows the decrease in unit cost as more of the same product is produced over time. D) None of the above

C) shows the decrease in unit cost as more of the same product is produced over time.

Among the problems encountered when time series analysis is used to estimate cost functions is A) that technological changes may have occurred. B) that accounting changes may have occurred during the period analyzed. C) that some costs are recorded on the books of account at a time other than when they are incurred. D) All of the above

D) All of the above

In estimating short-run cost functions, one must adjust for A) price level changes. B) accounting procedure changes. C) product heterogeneity. D) All of the above

D) All of the above

If total cost equals $2,000 and quantity produced is 100 units, then A) fixed cost is $200 and average variable cost is $18. B) fixed cost is $600 and average variable cost is $14. C) fixed cost is $500 and marginal cost is $15. D) Either A or B can be correct.

D) Either A or B can be correct.

The distinction between sunk and incremental costs is most helpful in answering which question? A) How many more people should be added to the production process? B) What is the correct price to charge? C) Should we begin to build a new factory? D) Should we continue developing a new software application that we began last year?

D) Should we continue developing a new software application that we began last year?

Which of the following relationships is correct? A) When marginal product starts to decrease, marginal cost starts to decrease. B) When marginal cost starts to increase, average cost starts to increase. C) When marginal cost starts to increase, average variable cost starts to increase. D) When marginal product starts to decrease, marginal cost starts to increase.

D) When marginal product starts to decrease, marginal cost starts to increase.

In the long run A) fixed costs tend to be greater than variable costs. B) variable costs tend to be greater than fixed costs. C) all costs are fixed costs. D) all costs are variable costs.

D) all costs are variable costs.

Economies of scale are created by greater efficiency of capital and by A) longer chains of command in management. B) better wages for labor. C) smaller plant sizes. D) increased specialization of labor.

D) increased specialization of labor.

When a firm experiences increasing returns to scale A) its AFC will decrease. B) its AFC will increase. C) its AC will increase. D) its AC will decrease.

D) its AC will decrease.

Which of the following distinctions does not help to explain the difference between relevant and irrelevant cost? A) historical vs. replacement cost B) sunk vs. incremental cost C) variable vs. fixed cost D) out-of-pocket vs. opportunity cost E) All help to explain the difference.

D) out-of-pocket vs. opportunity cost

Which of the following actions has the best potential for experiencing economies of scope? A) producing a product that has appeal to a wider segment of the market B) producing computers and software C) producing spaghetti and soft drinks D) producing cars and trucks

D) producing cars and trucks

Which of the following is most likely a fixed cost? A) expenditures for raw materials B) wages for unskilled labor C) fuel cost D) property taxes

D) property taxes

When a firm increased its output by one unit, its AFC decreased. This is an indication that A) the law of diminishing returns has taken effect. B) MC < AFC. C) AVC < AFC. D) the firm is spreading out its total fixed cost.

D) the firm is spreading out its total fixed cost.

MC increases because A) MC naturally increases as the firm nears capacity. B) labor is paid overtime wages when volume increases. C) in the short run, MC always increases. D) the law of diminishing returns takes effect.

D) the law of diminishing returns takes effect.

Costs of production that change with the rate of output are A) sunk costs. B) opportunity costs. C) fixed costs. D) variable costs.

D) variable costs.

The relationship between MC and AC can best be described as A) when AC increases, MC starts to increase. B) when MC increases, AC starts to increase. C) when MC decreases, AC decreases. D) when MC exceeds AC, AC increases.

D) when MC exceeds AC, AC increases.

The major advantage of using cross-sectional analysis for long-run costs studies includes A) the inclusion in the sample of different plants of different sizes. B) the avoidance of having to adjust for inflationary trends. C) the avoidance of having to account for interregional cost differences. D) All of the above E) A and B above

E) A and B above