Econ 102 Exam #2
A book providing advice to entrepreneurs describes some business costs as being "the amount of money that will go out even if none at all comes in." a. The author is describing a business's ____ cost. b. Which of the following is an example of this type of cost?
fixed; rent for a store of warehouse
Assuming the marginal product of the second worker is 6, the law of diminishing marginal returns set in with the
fourth worker hired
When the average product of labor is decreasing, the average product of labor is ____the marginal product of labor, and when the average product of labor is increasing, the average product of labor is ____the marginal product of labor.
greater than; less than
Which of the following is most likely to be a fixed cost for a farmer?
insurance premiums on property
A firm cuts its workforce and is able to maintain its initial level of output. This is/is not an example of positive technological change.
is
A training program makes a firm's workers more productive. This is/is not an example of positive technological change.
is
An exercise program makes a firm's workers more healthy and productive. This is/ is not an example of positive technological change.
is
A firm rearranges the layout of its factory and finds that by using its initial set of inputs, it can produce exactly as much as before. This is/is not an example of positive technological change.
is not
a. A firm is able to cut each worker's wage rate by 10 percent and still produce the same level of output. This is/is not an example of positive technological change.
is not
The marginal cost curve intersects both the average variable cost and the average total cost curves at their maximum/minimum points
minimum
What is minimum efficient scale? Minimum efficient scale is
the level of output at which all economies of scale are exhausted. OR the level of output at which the long−run average cost of production no longer decreases with output.
What is the difference between total cost and variable cost in the long run? In the long run,
the total cost of production equals the variable cost of production.
Any cost that changes as output changes represents a firm's
variable cost
The marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum because
when the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the average, it pulls the average up.
What is likely to happen in the long run to firms that do not reach minimum efficient scale? A firm that does not reach its minimum efficient scale
will lose money if it remains in business.
Sally looks at her college transcript and says to you, "How is this possible? My grade point average (GPA) for this semester's courses is higher than my GPA for last semester's courses, but my cumulative GPA still went down from last semester to this semester." Explain to Sally how this is possible.
Sally's GPA for this semester is lower than her cumulative GPA.
What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or factory? A. Firms have difficulty coordinating production. B. Fixed costs become too large. C. Firms exhaust the benefits of specialization. D. Higher output levels result in lower market prices. E. The marginal product of labor begins to decrease according to the law of diminishing returns.
A
List the errors in the graph to the right (where AFC is average fixed cost, AVC is average variable cost, ATC is average total cost, and MC is marginal cost).
AFC should be MC, ATC should be AVC, and AVC should be ATC.
What is the difference between the average cost of production (ATC) and marginal cost of production (MC)?
ATC = TC/Q; MC =ΔTC/ΔQ.
How are implicit costs different from explicit costs?
An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost
Economies of scale occur A. when the marginal product of labor increases with output. B. when a firm's long-run average costs decrease with output. C. when a firm's long-run average costs increase with output. D. when the marginal cost of production decreases with output.
B
The short-run average cost can never be less the long-run average costs because A. in the long run, a firm produces more output so that the per-unit cost in the long run becomes less than the per-unit cost in the short run. B. in the long run, all inputs are adjusted including the ones that are fixed in the short run. C. the long-run marginal cost is less than the short-run marginal cost. D. in the long run, a firm always experiences the economies of scope.
B
What are diseconomies of scale? Diseconomies of scale is A. when a firm's long-run average costs decrease with output. B. when the marginal product of labor is decreasing with output. C. when a firm's long-run average costs increase with output. D. when the marginal cost of production is increasing with output.
C
For which of the following reason(s) may firms experience economies of scale? A. Firm's production may increase with a smaller proportional increase in at least one input. B. Large firms may be able to purchase inputs at lower costs than smaller competitors; they can also borrow money at a lower interest rate. C. Both managers and workers may become more specialized and hence more productive as output expands. D. All of the above.
D
Devra Gartenstein, a restaurant owner, made the following observation about preparing food: "Cooks become increasingly less productive as a kitchen becomes increasingly crowded." What do economists call the problem she is describing? What are its implications for the marginal product of labor for cooks
Diminishing marginal returns, where additional cooks produce less additional output
What is the difference between the short run and the long run?
In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology.
Southwest signs a new contract with the Transport Workers Union that requires the airline to increase wages for its flight attendants. Marginal cost would ____, average variable cost would ____, average fixed cost would _______, and average total cost would____.
Increase; increase; remain unchanged; increase
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 hurricane damages a firm's facilities.
Is the amount of time that separates the short run from the long run the same for every firm?
No
What is the difference between technology and technological change?
Technology is the process of using inputs to make output, while technological change is when a firm is able to produce the same output using fewer inputs
Do restaurant owners have a solution to this problem in the long run? Briefly explain.
Yes, restaurant owners can vary the size, or number, of kitchens.
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
What is negative technological change? Negative technological change is when
a firm produces less output with the same inputs
What are implicit costs? An implicit cost is
a nonmonetary opportunity cost.
What is the law of diminishing returns? The law of diminishing returns states that... Does it apply in the long run?
adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline. No
The ATC and MC curves have their expected shapes because A. the ATC curve is U shaped. B. as the ATC curve falls, the MC curve lies below it and when the ATC curve rises, the MC curve lies above it. C. the MC curve is passing through the minimum point of the ATC curve. D. all of the above are true.
all of the above
How do specialization and division of labor typically affect the marginal product of labor? In the initial stages of production, specialization and division of labor lead to an increasing marginal product for workers,
allowing workers to concentrate on a few tasks so that they become more skilled at doing them quickly and efficiently.
Which of the following is most likely to a variable cost for a business firm?
cost of shipping products
As the level of output increases, 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.
For Jill Johnson's pizza restaurant, explain whether each of the following is a fixed or variable cost. 1. The payment she makes on her fire insurance policy is a __ cost. 2. The payment she makes to buy pizza dough is a __ cost. 3. The wages she pays her workers is a __ cost. 4. The lease payment she makes to her landlord who owns the building where her store is located is a __ cost. 5. The $300-per-month payment she makes to her local newspaper for running her weekly advertisements is a __ cost.
fixed variable variable fixed fixed
Any cost that remains unchanged as output changes represents a firm's
fixed cost