Chapter 7

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.

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?

$20,000

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

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 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:

$6,550

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.

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.

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?

Average total cost is declining.

Which of the following is an implication of the law of diminishing returns?

In the short run, expansion of output will eventually lead to increases in marginal cost and average total cost.

Which of the following represents the key difference between the short run and the long run?

In the short run, the firm makes commitments to a certain type of production technology, which are represented as fixed costs in the short run. For example, they have signed a lease on a particular production facility. These fixed costs do not exist in the long run.

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

Marginal cost is increasing.

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

Output in a given period of time.

Which of the following statements is true?

TFC = TC − TVC.

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?

The accounting services provided free of charge to the firm by Paul's wife, who is an accountant.

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: a restaurant kitchen).

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 inputs.

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

U-shaped.

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

a. Economic profits are less than accounting profits.

1.Explicit costs would include:

a. rent.

During the short-run period of the production process, a firm will be:

able to vary some of its factors of production.

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

at least one factor of production to be fixed.

Fixed costs are best defined as:

costs that do not vary with output.

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?

d. $52,000.

In the long run, total fixed cost:

does not exist.

Which of the following is not an explicit cost?

e. The firm owner's time.

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 the average variable cost.

The opportunity costs associated with the use of resources owned by a firm are:

implicit costs.

Economies of scale can be caused by all of the following except:

increases in the firm's average total cost.

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.

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

property taxes on the firm's buildings.

Normal profit is a term for:

the minimum profit to keep a firm in operation.

The primary source of scale diseconomies appears to be:

the organizational difficulties of managing an ever larger enterprise.

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.