Econ Chap 6

The Nifty Gum Co. has purchased a large parcel of land for $1 million. The company recently discovered that the land is contaminated and is worthless to all possible buyers. The opportunity cost of the land is A) $0. B) $1 million. C) some amount greater than $0 but less than $1 million. D) equal to the cost of the factory that was planned to be built there.

A) $0.

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. The average cost of the 5th T-shirt is A) 2. B) 12. C) 52. D) 60.

A) 2.

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. The marginal cost of the 5th T-shirt is A) 2. B) 10. C) 12. D) 60.

A) 2.

Which of the following will cause the average fixed cost curve of making cigarettes to shift? A) A $5 million penalty charged to each cigarette maker. B) A $1 per pack tax on cigarettes. C) A $3 per hour wage increase. D) An increase in the demand for cigarettes.

A) A $5 million penalty charged to each cigarette maker.

Which of the following statements best explains why long-run average cost is never greater than short-run average cost? A) In the long run, tangency of the isocost and isoquant is attainable. This is not necessarily true in the short run. B) In the long run, diseconomies of scale might not occur, but in the short run diminishing marginal returns do. C) In the long run, the cost of capital declines because the firm is able to pay down some of its debts. D) In the long run, the average cost curve need not be U-shaped, but in the short run it is.

A) In the long run, tangency of the isocost and isoquant is attainable. This is not necessarily true in the short run.

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. Which of the following statements is TRUE at all levels of production? A) MC = AVC B) MC = AC C) MC > AFC D) All of the above.

A) MC = AVC

At the XYZ Co., a unit of capital costs 3 times as much as a unit of labor. If the isoquants are convex, and the firm does not change its input mix in the long run, we can conclude that A) MPK = 3 * MPL. B) the firm will not hire any capital. C) the firm will hire 3 times as much labor as capital. D) the firm will hire 3 times as much capital as labor.

A) MPK = 3 * MPL.

Suppose that capital and labor must be kept in a fixed proportion to produce a particular good. For example, digging a trench requires one worker who has one shovel. What does this imply about returns to scale? A) There are constant returns to scale. B) There are increasing returns to scale. C) There are decreasing returns to scale. D) Nothing.

A) There are constant returns to scale.

The slope of the isocost line tells the firm how much A) capital must be reduced to keep total cost constant when hiring one more unit of labor. B) capital must be increased to keep total cost constant when hiring one more unit of labor. C) more expensive a unit of capital costs relative a unit of labor. D) the isocost curve will shift outward if the firm wishes to produce more.

A) capital must be reduced to keep total cost constant when hiring one more unit of labor.

The total cost of producing one unit is $50. The total cost of producing two units is $75. At a production level of two units, the cost function exhibits A) economies of scale. B) rising average costs. C) increasing marginal costs. D) constant returns to scale.

A) economies of scale.

Which of the following will cause the marginal cost curve of making cigarettes to shift? A) A $5 million penalty charged to each cigarette maker. B) A $1 per pack tax on cigarettes. C) A $1 million advertising campaign by the American Cancer Society. D) All of the above.

B) A $1 per pack tax on cigarettes.

If a particular production process is subject to diminishing marginal returns to labor at every level of output, then at every level of output A) AC is upward sloping. B) MC exceeds AVC. C) AFC is constant. D) All of the above.

B) MC exceeds AVC.

Assuming that w and r are both positive, if the long-run expansion path is horizontal, then A) MPK = 0. B) MRTS is a function of capital only. C) w = r. D) All of the above.

B) MRTS is a function of capital only.

If a production function is represented as q = L K, the long-run average cost curve will be horizontal as long as A) a + b = 0. B) a + b = 1. C) q > 0. D) L = K.

B) a + b = 1.

Johnny has worked as a CPA for five years and wants to open his own public accounting practice. The cost of his college degree in accounting represents A) the opportunity cost of this endeavor. B) a sunk cost. C) an expense. D) a variable cost.

B) a sunk cost.

In the long run, fixed costs are A) sunk. B) avoidable. C) larger than in the short run. D) not included in production decisions.

B) avoidable.

In the short run, the point at which diminishing marginal returns to labor begin is the point at which the marginal cost curve A) peaks. B) bottoms out. C) is upward sloping. D) is downward sloping.

B) bottoms out.

If the isoquants are straight lines or L-shaped, then a cost-minimizing firm will A) not be able to minimize costs. B) find the lowest isocost line touching the relevant isoquant. C) find the highest isocost line touching the relevant isoquant. D) choose not to produce any output.

B) find the lowest isocost line touching the relevant isoquant.

Suppose MPL = 0.5*(q/L) and MPK = 0.5*(q/K). In the long run, the firm will hire equal amounts of capital and labor A) all of the time. B) only when w = r. C) only when w = 0.5 * r. D) at no point in time.

B) only when w = r.

Long-run average cost is never greater than short-run average cost because in the long run A) capital costs equal zero. B) the firm can move to the lowest possible isocost curve. C) wages always increase over time. D) wages always decrease over time.

B) the firm can move to the lowest possible isocost curve.

When the isocost line is tangent to the isoquant, then A) MPL = MPK. B) the firm is producing that level of output at minimum cost. C) the firm has achieved the right economies of scale. D) All of the above.

B) the firm is producing that level of output at minimum cost.

Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting this job to work fulltime in her own business. She will invest her savings of $50,000 (which currently has an annual 10% rate of return) into the business. Her annual opportunity cost of this new business is A) $0. B) $40,000. C) $45,000. D) $90,000.

C) $45,000.

Economic costs of an input include A) only implicit costs. B) only explicit costs. C) both implicit and explicit costs. D) whatever management wishes to report the shareholders.

C) both implicit and explicit costs.

The slope of the isoquant tells the firm how much A) output increases when labor increases by one unit. B) output increases when capital and labor are doubled. C) capital must decrease to keep output constant when labor increases by one unit. D) a unit of capital costs relative to the cost of labor.

C) capital must decrease to keep output constant when labor increases by one unit.

The production of cigarettes is highly automated; however, a worker is required to monitor each machine. Machines and workers do not interact with one another. Given this information, there are most likely A) economies of scale. B) economies of scope. C) constant returns to scale. D) increasing returns to scale.

C) constant returns to scale.

Suppose a firm can only vary the quantity of labor hired in the short run. An increase in the cost of capital will A) increase the firm's marginal cost. B) decrease the firm's marginal cost. C) have no effect on the firm's marginal cost. D) More information is needed to answer the question.

C) have no effect on the firm's marginal cost.

Suppose the short-run production function is q = L0.5. If the marginal cost of producing the tenth unit is $5, what is the wage per unit of labor? A)$10 B)$5 C)$2.5 D)Cannot be determined without more information.

C)$2.5

Suppose the short-run production function is q = 10 * L. If the wage rate is $10 per unit of labor, then AVC = A) q. B) q/10. C) 10/q. D) 1.

D) 1.

Suppose the short-run production function is q = 10 * L. If the wage rate is $10 per unit of labor, then MC= A) q. B) q/10. C) 10/q. D) 1.

D) 1.

If the average cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE? A) AFC is falling. B) AVC is rising. C) MC > AVC. D) All of the above.

D) All of the above.

When the isocost line is tangent to the isoquant, then A) MRTS = w/r. B) the firm is producing that level of output at minimum cost. C) the last dollar spent on capital yields as much extra output as the last dollar spent on labor. D) All of the above.

D) All of the above.

Which of the following will cause the average cost curve of making cigarettes to shift? A) A $5 million penalty charged to each cigarette maker. B) A $1 per pack tax on cigarettes. C) A $1 an hour wage increase paid to all cigarette production workers. D) All of the above.

D) All of the above.

Suppose the short-run production function is q = 10 * L. If the wage rate is $10 per unit of labor, then AFC = A) 0. B) 1. C) 10/q. D) Cannot determined from the information provided.

D) Cannot determined from the information provided.

If the marginal cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE? A) AFC is rising. B) AVC is rising. C) MC > AVC. D) MPL is falling.

D) MPL is falling.

Suppose that each worker must use only one shovel to dig a trench, and shovels are useless by themselves. In the long run, the firm's cost function is A) TC = (w/r) * q. B) TC = (w + r)/q. C) TC = (w + r). D) TC = (w + r) * q.

D) TC = (w + r) * q.

Suppose that each worker must use only one shovel to dig a trench, and shovels are useless by themselves. In the long run, an increase in the price of shovels will result in A) fewer shovels being purchased to produce the same number of trenches. B) more workers being hired to produce the same number of trenches. C) the firm wishing to produce more trenches. D) no change in the firm's input mix.

D) no change in the firm's input mix.

Suppose each worker must use only one shovel to dig a trench, and shovels are useless by themselves. In the short run, an increase in the price of shovels will result in A) fewer shovels being purchased. B) more workers being hired. C) a decrease in the firm's output. D) no change in the firm's output.

D) no change in the firm's output.

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month. Joey's dad is thinking of increasing the rent to $400 per month. As a result Joey's marginal cost of cutting grass will A) increase by $100 divided by the amount of grass cut. B) increase by $100. C) decrease by $100. D) not change.

D) not change.

If a firm buys a building so as to have office space for its workers, the monthly opportunity cost of the building is best measured as A) the monthly mortgage payment the firm must pay. B) the price the firm paid divided by twelve. C) zero. D) the rent the firm could earn if it rented the building to another firm.

D) the rent the firm could earn if it rented the building to another firm.

When a firm produces one unit, the variable cost is $3. When the firm produces two units, the variable cost is $6. What is the marginal cost associated with two units of production? A)$2 B)$0.5 C)$6 D)$3

D)$3

If increasing returns to scale are present, the long-run average cost increases as more output is produced. T/F

False. Increasing returns to scale imply that with a doubling of inputs, output more than doubles. Since average cost is the ratio of total cost divided by output, this increase in inputs will cause the numerator to be just double the old value while the new denominator is more than double the old value. As a result, long-run average cost falls as more output is produced.

When buying a piece of equipment, it is always best for the firm to pay cash instead of borrowing the funds since this renders the equipment less costly. T/F

False. It depends. The opportunity cost of the capital when paying cash is the interest the firm receives on its cash reserves. This is an implicit cost. The opportunity cost of the capital when the funds are borrowed is the interest the firm must pay to the lender. This is an explicit cost. If the rate the firm receives on its cash reserves exceeds the rate at which it borrows, the firm is better off borrowing the funds to buy the equipment.

Short-run average cost exceeds long-run average cost only when there are economies of scale. T/F

False. Short-run average costs exceed long-run average costs because the firm is locked into a certain input mix in the short run that may not be cost minimizing when all inputs are variable. This condition holds regardless of the presence of economies of scale.

If a pharmaceutical firm is researching ways to improve its heartburn medicine and discovers a technique that will improve its allergy medicine, one could conclude that economies of scope exist in that industry. T/F

True. Economies of scope imply that the cost of producing two goods together is less than the cost of producing them separately. In this case, the costs of producing heartburn medicine and allergy medicine are lower for the firm that produces both.

The "Law of Diminishing Marginal Returns" could also be termed the "Law of Increasing Marginal Costs." T/F

True. Since MC = w/ MPL in the short run, the fact that MPL eventually declines means that MC must eventually increase.