Unit 6 Exam - Cost of Production

In the long run, the firm's choice of scale depends on the cost-minimizing combination of labor and capital. True False

False

A wheat farm that uses migrant labor to plant and harvest crops is capital-intensive. True False

False A firm that uses more labor relative to capital is labor intensive. In wheat farming, a firm could chooses to use more migrant labor than machinery is labor intensive.

Productivity and costs are directly related. True False

False Productivity and costs are inversely related. They are mirror images of each other.

The marginal cost curve passes through the average variable cost curve at the point of a. maximum marginal cost. b. minimum average variable cost. c. minimum marginal cost. d. maximum average variable cost.

b. minimum average variable cost.

The marginal product and average product curves always intersect at a. the origin. b. the point of maximum average product. c. the point of maximum marginal product. d. the point of maximum total product.

b. the point of maximum average product.

Refer to the graph below. Marginal product becomes negative when the firm hires a. the first worker. b. the second worker. c. the fifth worker. d. the sixth worker.

d. the sixth worker. The marginal product is positive until the sixth worker. When the curve drops below the horizontal axis, the marginal product is negative. The sixth worker has caused total product to decrease.

Using the table, the average product of labor for three workers is a. 7. b. 6.75. c. 7.5 d. 7.33.

d. 7.33. Calculate the average product of labor by dividing the total output of three workers by the number of workers, three. It is 22/3 = 7.33

The difference between _________________ cost and _________________ cost is ____________________ cost. a. marginal; opportunity; average fixed b. average total; marginal; average fixed c. fixed; variable; marginal d. average total; average variable; average fixed

d. average total; average variable; average fixed The difference between average total and average variable cost cost is average fixed cost. The statement must be true because fixed costs and average costs are the two components of costs.

When the slope of the total product curve is increasing at an increasing rate, the marginal product is __________ and ___________. a. positive; zero. b. positive; decreasing. c. negative; decreasing. d. positive; increasing.

d. positive; increasing. As the total product curve increases at an increasing rate, the marginal product curve is positive and increasing.

The marginal product of labor equals a. the change in average product divided by the number of workers. b. the change in total product divided by total output. c. the change in average product divided by total output. d. the change in total product divided by the change in the number of workers.

d. the change in total product divided by the change in the number of workers.

Diminishing marginal product of labor is associated with a. increasing marginal cost. b. increasing average cost. c. decreasing marginal cost. d. decreasing variable cost.

a. increasing marginal cost. When the marginal product decreases, marginal costs must increase. Marginal costs are related to marginal product by moving in the opposite direction.

If the average product of each worker is 20 units, and the wage rate is $100 per employee, what is the average variable cost of producing 100 units? a. $5 b. $500 c. $20 d. $2000

a. $5

Which of the following statements about average total cost (ATC) is true? a. Average total cost (ATC) is the sum of the average fixed cost (AFC) and the average variable cost (AVC). b. Average total cost (ATC) is the difference between the average fixed cost (AFC) and the average variable cost (AVC). c. Average total cost (ATC) is not a factor in a firm's profitability. d. Average total cost (ATC) is always increasing.

a. Average total cost (ATC) is the sum of the average fixed cost (AFC) and the average variable cost (AVC). Just as the total cost is the sum of the fixed costs and the variable costs, the average total cost (ATC) is the sum of the average fixed cost (AFC) and the average variable cost (AVC).

Examine the graph below for a particular firm that produces bikes. The point of inefficiency at which the firm cannot increase production by hiring more labor is at point a. D. b. C. c. B. d. A.

a. D. Inefficiency occurs when the firm hires the eighth employee. The firm can produce 50 bicycles with only seven employees. The eighth employee adss no more to total product.

Which of the following statements about the average product of labor is true? a. When the average product of labor is increasing, the average variable cost is decreasing. b. When the average product of labor is maximum, average variable cost is maximum. c. When a workforce becomes more productive, the average product of labor decreases. d. The average product of labor is unrelated to the average variable cost.

a. When the average product of labor is increasing, the average variable cost is decreasing. As the average product of labor increases, the cost for each unit of output decreases.

The output from adding the second unit of labor a. increases at an increasing rate. b. increases at a decreasing rate. c. decreases at an increasing rate. d. decreases at a decreasing rate.

a. increases at an increasing rate. The total product schedule shows that at small quantities of labor (one or two workers), the addition of one more worker increases the output at an increasing rate. The additional output from one more worker is the marginal product of labor. The first worker added 5 units of output. The second added 10.

Based on the following marginal cost curve, a. teamwork and specialization are maximized at 50 units of output. b. this firm does not experience congestion of the fixed inputs. c. marginal productivity is minimized at 50 units of output. d. teamwork and specialization begin to take effect after 50 units of output.

a. teamwork and specialization are maximized at 50 units of output.

Mathematically, marginal cost equals a. the change in variable cost divided by the change in total output. b. the change in total product divided by the change in variable cost. c. the change in variable cost minus the change in total product. d. the change in total product minus the change in variable cost.

a. the change in variable cost divided by the change in total output. Marginal cost measures the change in cost because of a one-unit increase in output. Since fixed costs do not change with a change in output, the change invariable costs measure the marginal costs.

Average variable cost is a. total variable cost divided by total output. b. total output divided by total variable cost. c. total variable cost times total output. d. total cost minus total variable cost.

a. total variable cost divided by total output. Average variable cost is a per-unit measure. You must divide the total variable cost by the total output.

If one worker can produce one fifth of a unit of output, and the wage rate is $10 per worker, what is the cost of producing one unit of output? a. $10 b. $50 c. $2 d. $5

b. $50

Assume that a firm produces 10 televisions per day. It decides to double all its inputs to increase its production. After the change in inputs, the firm produces 15 units per day. We can say that this firm has a. increasing returns to scale. b. decreasing returns to scale. c. constant returns to scale. d. diminishing marginal product.

b. decreasing returns to scale. The firm doubled its inputs but output increases by a smaller proportion. This is the definition of decreasing returns to scale.

Competitive firms will consider leaving the industry when they suffer a. short-run losses. b. long-run losses. c. normal profit. d. zero economic profit.

b. long-run losses. Firms leave the industry when long-run losses occur. Short-run losses would not cause firms to leave. In the long run, firms could make a normal profit but not an economic profit.

Assume Sally's ice cream store produce cones where P = MR = MC = ATC. Sally decides to hire more workers and keep her capital constant. Her time frame now is a. long run. b. short run. c. medium run. d. both B and C.

b. short run. When Sally produces at P = MR = MC = ATC, she is in the long run. Increasing labor but holding capital constant puts her into the short run because she is keeping some inputs fixed.

The slope of the total cost curve equals the slope of a. the marginal cost curve. b. the variable cost curve. c. the fixed cost curve. d. the average cost curve.

b. the variable cost curve.

Examine the graph below. This graph represents a firm's a. marginal cost curve. b. total cost curve. c. fixed cost curve. d. average variable cost curve.

b. total cost curve.

The marginal cost curve passes through the points of a. minimum average fixed cost and minimum average variable cost. b. minimum total cost and minimum variable cost. c. minimum average variable cost and minimum average total cost. d. minimum fixed cost and minimum total cost.

c. minimum average variable cost and minimum average total cost.

If each of 9 workers produces 12 widgets per day and each of 10 workers produces 14 widgets per day, what is the marginal product of the tenth worker? a. 1 widget b. 2 widgets c. 32 widgets d. 140 widgets

c. 32 widgets Total product (TP) for 9 workers is 108 widgets per day, and TP for 10 workers is 140 widgets, so the marginal product (MP) for the tenth worker is 140 widgets minus 108 widgets, or 32 widgets.

Which of the following is an adjustment that would be made in the short run? a. Saturn builds a new automobile plant. b. A major university builds a new school of education because their enrollment increases. c. Gymnastics Unlimited hires two new workers because the demand for their service has increased. d. A soap company enters the market with a new product.

c. Gymnastics Unlimited hires two new workers because the demand for their service has increased. Hiring more workers is likely to be a short run adjustment, because it is one of the only production variables that can be changed in a short period of time.

Which of the following statements about marginal cost is true? a. Marginal cost is the change in variable cost that results from hiring an additional worker. b. Marginal cost is equal to the wage rate. c. Marginal cost is the change in variable cost that results from producing an additional unit of output. d. Marginal cost is the change in variable costs that results from hiring an additional unit of capital.

c. Marginal cost is the change in variable cost that results from producing an additional unit of output.

Suppose that the wage = $10 per worker. Which of the following statements is true? a. The variable cost of producing 1 unit is $20. b. The variable cost of producing 2 units is $80. c. The variable cost of producing 1 unit is $10. d. The variable cost of producing 2 units is $40.

c. The variable cost of producing 1 unit is $10.

All of the following may cause a shift in a firm's cost curves except a. the cost of capital. b. a change in technology. c. increased labor productivity d. the price of the firm's product.

d. the price of the firm's product. A change in the product's price causes a movement along a cost curve.