Ch. 7 Production Costs

What is the average total cost at an output level of four units?

$1,500.

44. In Exhibit 7-5, the marginal product of the second worker is:

12

76. In Exhibit 7-12, the AFC of 4 pizzas is:

$10.

49. 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.

95. A firm estimates that when output is 10, its total costs are $900. It also finds that when output is 11, its total costs are $920. The marginal cost of the eleventh unit of output is:

$20 and the minimum point of the average total cost occurs at an output level greater than 11.

74. In Exhibit 7-11, the pizzeria's fixed cost is equal to:

$20.

122. In Exhibit 7-14, constant returns to scale only exist for output levels between:

2,000 and 3,000.

121. In Exhibit 7-14, economies of scale only exist for output levels up to:

2,000.

97. In Exhibit 7-11, the marginal cost curve crosses the average total cost curve at

30 pizzas.

30. Suppose when a car wash has 2 washing stations and 5 workers and is able to wash 100 cars per day. When it adds a third station, but no more workers, it is able to wash 150 cars per day. The marginal product of the third washing station is:

50 cars per day.

126. If the firm represented in Exhibit 7-15 is operating with a plant whose size corresponds to short-run average total cost curve A, the level of output that would minimize its short-run average total cost is:

500 units per week.

32. Exhibit 7-1 shows the change in the production of pizzas as more workers are hired. The marginal product of the second employee equals:

6.

What is the difference between economic and accounting profit? Why is a distinction between them important?

An economic profit includes implicit costs and accounting profit does not. A distinction between them is important because an accounting profit is a relative amount of money. Some amount of accounting profit may or may not be a sufficient amount of profit to keep an entrepreneur in his/her present line of business. Whereas an economic profit, if it is earned, is always good news because it is an amount of profit above the entrepreneur's opportunity cost.

47. 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.

124. In Exhibit 7-14, the U-shaped LRAC curve indicates which of the following as quantity increases from 0 to 4,000?

Economies of scale; constant returns to scale; diseconomies of scale.

130. In Exhibit 7-16, which firm's long-run average cost curve experiences constant returns to scale between 2 and 5 units?

Firm B.

131. Which firm in Exhibit 7-16 displays a long-run average cost curve with economies of scale throughout the range of output shown?

Firm C.

53. Which of the following statements is true?

TFC = TC − TVC

Unlike implicit costs, explicit costs:

are actual cash payments

92. When the cost curves have U-shapes, at the point where marginal cost equals average total cost:

average total cost is at its minimum.

94. If the marginal cost of the 5,000th unit is $0.06 and the average total cost of the 5,000th unit is $0.10:

average total cost is falling.

81. If the marginal cost of the 10th unit of output is $15 and the average total cost of the 10th unit of output is $15,

average total cost is minimized at 10 units of output.

111. Economies of scale imply that within some range one can increase the size of operation and:

average total cost will decrease.

93. If the marginal cost of the 100th unit is $3.25, the total cost of producing 100 units is $825, and the fixed cost is $500,

average variable cost is at its minimum.

60. When costs that vary with the level of output are divided by the output, you have calculated:

average variable cost.

123. In Exhibit 7-14, a firm finds that it is experiencing numerous managerial and information problems. The position of its short- and long-run average total cost curves suggest that it is operating at a production level:

between 3,000 and 4,000.

Variable inputs are defined as any resource that:

can be changed as output changes.

114. A car leasing company that expands its size by buying its competitors may run the risk of increasing production cost per unit due to:

diseconomies of scale.

The long run is a planning period:

during which the firm can vary all inputs including its plant size.

When total revenue minus total cost is equal to zero, the firm is:

earning a normal profit.

Cash payments to a steel mill for steel used in production would be an example of:

explicit costs.

117. Diseconomies of scale exist for all of the following reasons except:

firm size is too small.

96. In Exhibit 7-10, the marginal cost of increasing production from 2 to 3 cases of books is:

higher than the marginal cost of increasing production from 1 to 2 cases of books, so the marginal cost curve must be rising in between 2 and 3 cases.

118. Constant returns to scale cause the long-run average cost curve to be:

horizontal

64. The change in total cost that results from the production of one additional unit is called:

marginal cost.

67. A bus is mostly filled with passengers and ready to travel from Los Angeles to San Francisco. At the last minute, a person comes running up to the bus and takes a seat. The change in the bus company's total cost as a result of transporting one more passenger on this trip is called:

marginal cost.

52. Bill is an accountant for a small machine shop. His boss has asked him to calculate the shop's total fixed cost. Which method will get Bill the correct answer?

subtracting the total variable cost from the total cost

The long run is a period of:

sufficient length to allow a firm to alter its plant size and capacity and all other factors of production.

40. As a fishing firm hires its first, second, and third workers, it could find that marginal product actually rises. The reason for this is:

the division of labor creates greater productivity.

31. Marginal product measures the change in:

the firm's output brought about by employing one additional unit of input.

79. When the marginal cost is higher than the average total cost,

the higher additional value causes the average to rise.

38. The law of diminishing marginal returns implies that, in the short run:

the marginal product of the variable input must eventually decrease.

43. In Exhibit 7-5, diminishing returns set in when the ____ worker is hired.

third

A firm has $200 million in total revenue and explicit costs of $190 million. Suppose its owners have invested $100 million in the company at an opportunity cost of 10 percent interest rate per year. The firm's economic profit is:

zero.

87. Assume both the marginal cost and the average variable cost curves are U-shaped. At the minimum point on the AVC curve, marginal cost must be:

​equal to the average variable cost.

55. If average fixed costs equal $60 and average total costs equal $120 when output is 100, the total variable cost must be:

$6,000.

59. 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.

75. In Exhibit 7-11, the average total cost or producing 40 pizzas per hour is equal to:

$6.25 per pizza.

29. A farm is able to produce 5,000 bushels of peaches per season on 100 acres. Assume it adds one more acre and is able to produce 6,000 bushels per season. The marginal product of the additional acre of land for this farm is:

1,000 bushels per acre per year.

129. In Exhibit 7-15, diseconomies of scale are shown in the range of:

1,000 to 2,000 units per week.

128. In Exhibit 7-15, economies of scale exist up to:

1,000 units of output per week.

125. In Exhibit 7-15, short-run average total cost, short-run marginal cost, and long-run average cost are all equal at which level of output per week?

1,000 units.

127. Given the short-run average total cost curves in Exhibit 7-15, what level of output per week minimizes average total cost?

1,000 units.

68. In Exhibit 7-6, the total fixed cost is:

1,000.

82. Suppose the marginal product is maximized when the 10th worker is hired. Then the marginal cost value is minimized when

10 workers are hired.

61. If fixed cost is $200,000 and variable cost is $30 per unit over the relevant range of output, when 10,000 units are produced, the average total cost will be:

$50.

70. As shown in Exhibit 7-9, the average total cost of producing 5 units is:

$50.

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 accounting profit this year equals:

$51,400.

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 is the sum of his explicit costs?

$52,000

46. Which of the following best describes total fixed cost?

Costs that do not vary as output varies.

119. Distinguish economies and diseconomies of scale. How can the extent to which economies and diseconomies of scale explain the size and number of real world firms in an industry?

Economies of scale exist when a firm increases its scale of operations and lower per unit costs of production are experienced. Diseconomies of scale exist when a firm increases its scale of operations and higher per unit costs of production are experienced. If economies of scale are extensive we would expect to find a small number of very large firms operating within the industry. Conversely, if diseconomies of scale set in relatively early, we would expect to find a large number of relatively small firms operating within the industry.

36. 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.

Two friends, Diane and Sam, own and run a bar. Diane tends bar on Monday, Wednesday, and Friday and receives a wage in addition to tips. Sam tends bar on Tuesday, Thursday, and Saturday and receives only tips. Which of the following represents an implicit cost of operating the bar?

Sam's time.

88. 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.

99. Which of the following statements is true?

When marginal productivity of a variable input is falling then marginal costs of production must be rising.

The difference between a firm's total revenues and total costs when all explicit and implicit costs are included is the firm's:

economic profit.

108. If the total cost of producing 10 jets is $28 million and the total cost of producing 11 jets is $30 million, this firm is experiencing

economies of scale in the range of 10 to 11 jets.

105. A downward-sloping portion of a long-run average total cost curve is the result of:

economies of scale.

106. In the long run, firms in many industries often experience a falling average total cost curve as a result of:

economies of scale.

107. A large aircraft manufacturer, like Boeing, may have a cost advantage over a new smaller manufacturer because of:

economies of scale.

112. The decreasing portion of a firm's long run average cost curve is attributable to:

economies of scale.

90. 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.

109. If the long-run average cost of producing 50 units of Good X is $3.00 and the long run average cost of producing 51 units of Good X is $3.25, the firm is

experiencing diseconomies of scale in the range of 50 to 51.

89. 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.

41. As shown in Exhibit 7-3, the law of diminishing returns applies where there are:

more than 5 workers per day.

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

property taxes on the firm's buildings.

51. The total fixed cost curve:

remains constant regardless of output.

120. Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys their goods in large quantities and therefore at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices and free parking. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that:

there are economies of scale in retail sales.

Economic profit is:

total revenues minus explicit costs minus implicit costs.

100. Which of the following is true at the point where diminishing returns set in?

Marginal product is at a maximum and marginal cost at a minimum.

91. Which of the following is true at the point where diminishing returns set in?

Marginal product is at a maximum and marginal cost is at a minimum.

Implicit costs are:

the opportunity costs of using resources owned by the entrepreneur in his/her own business.

37. Bill lives in Montana and likes to grow zucchini. He applies fertilizer to his crops twice during the growing season and notices that the second layer of fertilizer increases his crop, but not as much as the first layer. What economic concept best explains this observation?

The law of diminishing returns.

65. Suppose the fixed cost of building a nuclear power plant is $1 billion. Suppose also that the only variable cost is the labor of Homer Simpson, and he earns $10 per hour. If the plant generates 1,000 kilowatts each hour, and has already generated 1 billion kilowatts, what can you say about the marginal cost of the next kilowatt?

The marginal cost is equal to $.01.

86. If total cost is $1,000 when output is zero, and total cost is $1,200 when output is one, and total cost is $1,500 when output is two, then which of the following is true?

The marginal cost of producing the second unit of output is $300.

54. Which of the following is an example of a fixed cost for a fishing company?

The monthly loan payment on the boat.

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

U-shaped.

85. In Exhibit 7-13, ATC is shown by the graph labeled:

V.

80. The marginal cost intersects the average variable cost

and the average total cost through their minimum points.

35. Exhibit 7-2 shows the labor, energy, and materials cost of making various quantities of pizzas. The table shows that the labor cost of making pizzas will:

increase at an increasing rate.

110. Economies of scale are created by greater efficiency of capital and by:

increased specialization of labor.

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

increases in the firm's average total cost.

78. The mirror image of the marginal cost curve is the

marginal product curve.

42. As shown in Exhibit 7-4, the law of diminishing returns applies in the range of:

over 3 workers per day.

28. 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.

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 is the sum of his implicit costs?

$26,000.

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.

72. In Exhibit 7-10, the publisher's fixed cost is equal to:

$200.

69. As shown in Exhibit 7-9, the total cost of producing 4 units is:

$227.

71. As shown in Exhibit 7-9, the marginal cost of producing the third unit is:

$24.

66. American Airlines makes numerous nonstop flights from Chicago's O'Hare Airport to the airport at Dallas-Fort Worth. The distance between those two cities is 1,000 miles. The only variable cost, fuel, costs $.06 for each passenger-mile it flies. Bob, on his way to an emergency business meeting, buys a ticket in coach class for $1,300 at the very last minute. The marginal cost of flying Bob from Chicago to Dallas-Fort Worth is:

$60.

73. In Exhibit 7-10, the average variable cost of producing 2 cases of books is:

$75 per case.

57. Barbara owns a small shop where dresses are made. At the end of a given month, she has 250 dresses. Her expenses for the month are $1,000 for rent, $6,000 for wages, $1,500 for fabric and thread, and $500 for electricity. Her total variable costs for the month are:

$8,000.

Which of the following factors of production is not variable in the long run?

All factors of production are variable in the long run.

101. 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 would be considered an implicit cost?

Foregone rent on assets owned by the firm

84. In Exhibit 7-13, AFC is shown by the graph labeled:

I.

83. In Exhibit 7-13, TFC is shown by the graph labeled:

II

58. Which statement about the total variable cost curve is true?

It begins at the origin and is always increasing.

56. Which of the following is true if the total variable cost curve is increasing at an increasing rate?

Marginal cost is increasing.

98. Which of the following must be true if average total cost is rising?

Marginal cost must be greater than average total cost.

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.

27. 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.

45. Distinguish the short run from the long run. Generally, what causes costs of production to vary with output in the short run? What generally causes costs of production to vary in the long run?

The short run is any amount of time in which at least one resource is fixed. In the short run there are some fixed costs. In the long run, nothing is fixed. There are no fixed costs in the long run. Costs of production vary with output in the short run because of increasing and diminishing returns. Costs of production vary with output in the long run because of economies and diseconomies of scale.

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

able to vary some of its factors of production.

39. For the law of diminishing returns to be present, we must have:

at least one factor of production to be fixed.

103. When the curve that envelops the series of possible short-run average total cost curves is horizontal, this means that there are:

constant returns to scale.

34. Exhibit 7-1 shows the change in the short-run production of pizzas as more workers are hired. The table shows the marginal product of the labor input is decreasing with the hiring of the third worker. A possible reason for this diminishing marginal product is:

decreases in labor productivity.

A firm's opportunity cost of using resources provided by the firm's owners is called:

implicit costs.

Monetary payments to nonowners of a firm are called:

implicit costs.

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

implicit costs.

The short run is a period of time:

in which a firm uses at least one fixed input.

77. In Exhibit 7-12, the marginal cost of producing the 3rd pizza

is lower than the average total cost of 3 pizzas, so the average total cost curve is decreasing at a quantity of 3 pizzas.

102. For a typical firm, the long-run average total cost curve:

is tangent to each possible short-run average total cost curve at one point.

116. If a firm enlarges its factory size and realizes higher average costs of production then:

it has experienced diseconomies of scale.

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

output in a given period of time

115. Diseconomies of scale exist over the range of output for which the long-run average cost curve is:

rising

104. If the minimum points of all the possible short-run average total cost curves become successively lower as quantity of output increases, then:

there are economies of scale.

33. Exhibit 7-1 shows the change in the production of pizzas as more workers are hired. The marginal product of the labor input begins to fall with the employment of the

third worker.