Economics Ch. 5

In the short run, the marginal cost of the first unit of output is $20, the average variable cost of producing three units of output is $16, and the marginal cost of producing the second unit of output is $16. What is the marginal cost of producing the third unit of output?

A) $ 12

In the short run, the marginal cost of the first unit of output is $40, the average variable cost of producing three units of output is $32, and the marginal cost of producing the second unit of output is $32. What is the marginal cost of producing the third unit of output?

A) $ 24

Figure 5.3 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 100, the average fixed cost is

A) $ 30

) Table 5.4 presents the cost schedule for David's Figs. If David produces two figs, David's marginal costs are

A) $ 80

Refer to Table 5.1, which gives a firm's production function. Assume that all non-labor inputs are fixed. Marginal product is maximized when the firm hires

A) 2 workers

Suppose that your firm's marginal cost of producing a pencil is 5 cents and the average cost of producing a pencil is 7 cents. If your firm is interested in minimizing average total costs, what should your firm do?

A) Increase production.

Diminishing marginal returns implies that

A) Marginal product is decreasing

Which of the following is TRUE if a firm has indivisible inputs?

A) The long-run average cost curve is downward sloping at lower levels of output.

When marginal costs are increasing

A) a firm is experiencing diminishing returns

If the firm has already reached the minimum efficient scale, then

A) any additional output will not result in a lower long run average cost.

) Most empirical studies show that firms' long-run average cost curves

A) are L-shaped

Refer to Figure 5.1, which shows a family of average cost curves. The average total cost curve is represented by

A) curve 1

A firm scaled down its operation by reducing all inputs by 50% and experienced a more-than-50% decrease in output. If all input prices remain unchanged, the firm's long-run average cost exhibits

A) economies of scale at the current output level.

A firm scaled up its operation by increasing all inputs by 100%. If the firm experienced 150% increase in the output, the firm's long-run average cost exhibits

A) economies of scale at the current output level.

Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, they are able to buy inputs in bulk, resulting in lower input prices. It is likely that continued growth will result in

A) economies of scale.

Suppose that in 2012 ABC Corp. produced 500 million units of a good at an average cost of $2, and in 2013 ABC Corp. expanded its plant capacity and produced 600 million units at an average cost of $1.80. In this range, one can conclude that ABC Corp. is experiencing

A) economies of scale.

If the firm is producing in the long run, then the firm's average total cost curve

A) equals the average variable cost curve

6) In the long run

A) firms have the ability to enter or exit the industry.

________ is a cost that is independent of the quantity produced by the firm and is incurred by the firm in the short run.

A) fixed cost

Under which conditions might diseconomies of scale result?

A) hampered coordination brought about by bureaucracy

) When the firm increases output and the costs rise proportionately, then the long-run average cost curve is ________ and the firm is experiencing ________.

A) horizontal; constant returns to scale

Suppose McDonald's puts up five new stores in San Francisco using exactly the same floor plan, capital equipment and number of workers, then the long run average cost curve of McDonald's would be ________ and the company experiences ________.

A) horizontal; constant returns to scale

The long-run marginal cost (LMC) is the increase in the cost incurred by the firm when producing one additional unit of output, holding

A) neither the workforce nor the production facility constant

When does a firm's average variable cost exceed the average total cost?

A) never

In the long run, diminishing returns would

A) not exist because no input is held constant.

In the short run, ________ factors of production are fixed, while in the long run, ________ of them are.

A) some; none

If the marginal cost of producing the next unit of output exceeds the average total cost, then

A) the average total cost curve is increasing.

In the short run, the firm's total cost equals

A) the total fixed costs + the total variable costs.

Which of the following is NOT true when the firm experiences diminishing marginal product?

A) the total product is decreasing

Refer to Figure 5.1, which shows a family of average cost curves. The average fixed cost at a given level of output is represented by

A) the vertical distance between Curve 1 and Curve 2 at a given level of output.

Refer to Figure 5.1, which shows a family of average cost curves. The average variable cost at a given level of output is represented by

A) the vertical distance between Curve 1 and Curve 3 at a given level of output

) Refer to Table 5.1, which gives a firm's production function. Assume that all non-labor inputs are fixed. Diminishing marginal returns set in with the addition of the

A) third worker.

Marginal product is defined as the change in ________ resulting from a one-unit increase in ________.

A) total product; input

Average variable cost is defined as

A) total variable cost divided by quantity

A tax levied on coal-fired plants that is based on the amount of carbon released in the atmosphere is considered by the firm as a

A) variable cost.

If the first copy cost of a music video is $223,000 and the marginal cost is $0, then as the firm produces an infinite quantity of the video, the average total cost of producing the video will approach

A) zero.

Figure 5.3 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 50, the total variable cost is

B) $ 1,500

Table 5.3 presents the cost schedule for Candy's Cakes. If Candy produces two cakes, Candy's marginal cost is

B) $ 20

Table 5.3 presents the cost schedule for Candy's Cakes. If Candy produces three cakes, Candy's marginal costs are

B) $ 25

Figure 5.3 shows a firm's marginal cost, average total cost, and average variable cost curves. The firm's total fixed cost is

B) $ 3,000

Figure 5.3 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 100, the total variable cost is

B) $ 4,000

Refer to Table 5.5. The total variable cost of producing five units of output is

B) $ 43

Refer to Table 5.5. The marginal cost of the third unit of output is

B) $ 7

Refer to Table 5.5. The average variable cost of producing five units of output is

B) $ 8.60

Table 5.4 presents the cost schedule for David's Figs. If David produces two figs, David's average variable costs are

B) $ 85

If the first copy cost of a music video is $223,000 and the marginal cost is $0, how much total cost would the firm incur if it produces 1 million copies?

B) $223,000

Figure 5.2 presents a firm's marginal cost, average total cost, average fixed cost, and average variable cost curves. The firm minimizes average variable costs by producing ________ units

B) 100

Refer to Table 5.1, which gives a firm's production function. Assume that all non-labor inputs are fixed. The marginal product of the fourth worker is

B) 11 units

Refer to Table 5.2, which gives a firm's production function. Assume that all non-labor inputs are fixed. The marginal product is maximized when the firm hires

B) 3 workers

Table 5.3 presents the cost schedule for Candy's Cakes. If Candy produces one cake, Candy's total variable costs are

B) 30

Table 5.3 presents the cost schedule for Candy's Cakes. If Candy produces zero cake, Candy's total costs ar

B) 50

2) Which of the following is a short-run adjustment?

B) A firm hires six new workers.

You observe that at your current production of rutabaga, the average total cost of producing rutabaga is $1 and the marginal cost of producing rutabaga is $2. What should always happen if you increase rutabaga production?

B) Average total cost will rise.

Refer to Figure 5.1, which shows a family of average cost curves. Why does the vertical distance between Curve 1 and Curve 2 decrease as output increases from Q1 to Q2?

B) Because average fixed cost decreases as output increases from Q1 to Q2.

Suppose that your firm's marginal cost of producing a pencil is 5 cents and the average cost of producing a pencil is 3 cents. If your firm is interested in minimizing average total costs, what should your firm do?

B) Decrease production.

In the short run, at least one factor of production is fixed. This implies that beyond some level of output a firm will

B) Experience diminishing marginal returns

4) Which of the following is a long-run adjustment?

B) The number of professional baseball teams increases by two.

Which of the following is a long-run adjustment?

B) Two firms exit the asbestos removal industry.

Average variable cost equals

B) average total cost minus average fixed cost

Refer to Figure 5.1, which shows a family of average cost curves. The average variable cost curve is represented by

B) curve 2

5.3 shows a firm's marginal cost, average total cost, and average variable cost curves. The average total cost curve is downward-sloping as output increases from Q = 50 to Q = 100 because

B) decreasing average fixed cost outweighs increasing average variable cost.

When at least one factor of production is fixed, firms require more and more workers to produce each additional unit of output. This describes

B) diminishing marginal returns.

) A firm doubled all its inputs and experienced a 50% increase in output. If all input prices remain unchanged, the firm's long-run average cost exhibits

B) diseconomies of scale at the current output level.

A firm scaled down its operation by reducing all inputs by 50% and experienced a less-than-50% decrease in output. If all input prices remain unchanged, the firm's long-run average cost exhibits

B) diseconomies of scale at the current output level.

Suppose that in 2012 MBI Corp. produced 100 million units of a good at an average cost of $6, and in 2013 MBI Corp. expanded its plant capacity and produced 200 million units at an average cost of $6.20. In this range, one can conclude that MBI Corp. is experiencing

B) diseconomies of scale.

) Since a large and a small wind turbine have the same installation, operating, and maintenance costs, but a large turbine has four times the generating capacity but costs less than three times as much as a small turbine, the wind power industry faces

B) economies of scale.

5) In the short run

B) firms are able to alter some, but not all, of their factors of production.

In Figure 5.4, the difference between total costs and variable cost is

B) fixed cost

Refer to Table 5.2, which gives a firm's production function. Assume that all non-labor inputs are fixed. Diminishing returns set in with the addition of the

B) fourth worker

From 1998 to 2010, the cost of electricity produced with nuclear power has ________ and the cost of electricity produced with solar power has ________.

B) increased; decreased

Under which conditions might diseconomies of scale result?

B) increasing price of inputs

The change in total cost resulting from a one-unit increase in the change in quantity is

B) marginal cost

Diminishing marginal returns implies that

B) marginal costs are increasing

Diminishing marginal returns implies that firms

B) require more and more workers to produce each additional unit of output.

Total cost divided by the quantity of output the firm chooses when it can choose a production facility of any size describes

B) the long-run average cost of production.

Which of the following is an example of something that economists would consider a cost but accountants would not?

B) the wages that the owner of a firm could have earned in some alternative job

The long-run average cost of production is defined as

B) total cost divided by the quantity of output the firm chooses when it can choose a production facility of any size.

Explain the relationship between average fixed cost and marginal cost.

By definition, the total fixed cost does not vary with the output level. On the other hand, the marginal cost is the change in total cost as an additional output is produced. With a fixed production facility, any change in total production cost comes from a change in total variable cost because total fixed cost does not change. Thus there is no relationship between the average fixed cost and the marginal cost.

) Table 5.4 presents the cost schedule for David's Figs. If David produces four figs, David's average total costs are

C) $ 100

Table 5.4 presents the cost schedule for David's Figs. If David produces zero figs, David's total costs are C) $100.

C) $ 100

) You are a student at a university. You pay $8,000 per year in tuition, $5,000 per year in living expenses, and $1,000 per year for books. Were you not in school, you could earn $15,000 per year and you would not live with your parents. What is your economic cost of a year in college?

C) $ 24,000

Jane is a student at a university. She pays $10,000 per year in tuition, $4,000 per year in living expenses, and $800 per year for books. Were she not in school, she could earn $20,000 per year working as a bookkeeper and she would not live with her parents. What is her economic cost of a year in college?

C) $ 30,000

Figure 5.3 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 50, the total cost is

C) $ 4,500

Mark's Baseballs produces baseballs. Mark's Baseballs has total fixed costs of $500. Mark's average variable cost is $20, and his average total cost is $25. Mark is currently producing

C) 100 baseballs

Figure 5.2 presents a firm's marginal cost, average total cost, average fixed cost, and average variable cost curves. The firm minimizes average total costs by producing ________ units.

C) 150

If the first copy cost of a music video is $223,000 and the marginal cost is $0, then how many copies should the firm sell in order to break even if the price was $10 each?

C) 22,300

Refer to Table 5.2, which gives a firm's production function. Assume that all non-labor inputs are fixed. The marginal product of the fifth worker is

C) 25 units

Suppose a firm experiences lower average costs whenever output increases in the long run. Then we would expect the firm to have

C) a long-run average cost curve that always decreases.

Average total costs equals

C) average fixed cost plus average variable cost

The marginal cost curve intersects the short-run average total cost curve where

C) average total costs are minimized in the short run.

Refer to Figure 5.1, which shows a family of average cost curves. The average fixed cost curve is represented by

C) curve 3

The short-run average total cost curve is U-shaped because average fixed costs ________ and average variable costs ________ eventually as quantity produced increases.

C) decrease; increase

Since a large and a small wind turbine have similar installation, operating, and maintenance costs, but a large turbine has four times the generating capacity but costs less than three times as much as a small turbine, the average cost of generating electricity with wind is

C) decreasing as output increases

Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, coordination of work teams is becoming more difficult because of increased bureaucracy. It is likely that continued growth will result in

C) diseconomies of scale.

Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, demand for inputs causes input prices to rise. It is likely that continued growth will result in

C) diseconomies of scale.

Increased specialization in large firms might lead to

C) downward-sloping long-run average cost curves.

Suppose that the only input used in the generation of solar energy is sunlight and has a zero cost. The average total cost of producing electricity is

C) equal to the average fixed cost.

Figure 5.3 shows a firm's marginal cost, average total cost, and average variable cost curves. For an output level greater than Q = 100, the average total cost curve is upward-sloping because

C) increasing average variable cost outweighs decreasing average fixed cost.

When a firm is experiencing diminishing marginal returns

C) marginal costs are increasing

Marginal product in the short run

C) may initially increase, then eventually decrease

Suppose that in 2012 ABC Corp. produced 500 million units of a good at an average cost of $2, and in 2013 ABC Corp. expanded its plant capacity and produced 600 million units at an average cost of also $2. In this range, one can conclude that ABC Corp. is experiencing

C) neither economies of scale or diseconomies of scale.

The effect of spreading out the fixed costs outweighing the effect of diminishing returns is illustrated by the ________ average cost curve ________.

C) short-run; decreasing

Other things being equal, if a firm's marginal cost curve shifts upward at all output levels

C) the average fixed cost curve remains unchanged at all output levels

79) If the marginal cost of producing the next unit of output is less than the average total cost, then

C) the average total cost curve is decreasing.

Marginal cost is defined as

C) the change in total cost resulting from a one-unit increase in the change in quantity.

Which of the following is an example of something that economists would consider a cost but accountants would not?

C) the interest income foregone by the firm's owner because the owner invested funds into the firm

The minimum efficient scale is

C) the output level beyond which the firm will not experience scale economies.

) Total cost of production is the sum of total variable cost and total fixed cost. If the total fixed cost alone increases

C) the vertical distance between the average total cost curve and average variable cost curve increases at all output levels.

Total cost of production is the sum of total variable cost and total fixed cost. If the total fixed cost alone decreases

C) the vertical distance between the average total cost curve and the average variable cost curve decreases at all output levels

Refer to Figure 5.1, which shows a family of average cost curves. The average total cost at a given level of output is represented by

C) the vertical sum of Curve 2 and Curve 3 at a given level of output.

One can tell that Figure 5.4 shows short run costs because

C) total costs are positive when output is zero implying fixed costs.

When the firm increases output and the costs rise disproportionately faster, then the long-run average cost curve is ________ and the firm is experiencing ________.

C) upward sloping; diseconomies of scale

________ is a cost that changes with the quantity produced by the firm and is incurred by the firm in the short run.

C) variable cost

Refer to Table 5.5. The total fixed cost of producing two units is D) $15.

D) $ 15

If a firm's total fixed costs are $30, the firm's marginal cost of producing the first unit of output is $30, and the average total cost of producing two units of output is $42, the marginal cost of the second unit of output is

D) $ 24

Table 5.4 presents the cost schedule for David's Figs. If David produces three figs, David's total variable costs are

D) $ 240

Joe runs a restaurant. He pays his employees $200,000 per year. His ingredients cost him $50,000 per year. Prior to running his restaurant, Joe was a lawyer earning $150,000 per year. What would economists say is Joe's cost of running the restaurant?

D) $ 400,000

Figure 5.2 presents a firm's marginal cost, average total cost, average fixed cost, and average variable cost curves. The firm faces fixed costs of

D) $ 4000

In the short run, the marginal cost of the first unit of output is $20, the marginal cost of producing the second unit of output is $16, and the marginal cost of producing the third unit of output is $12. The firm's total variable cost of producing three units of output is

D) $ 48

Figure 5.3 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 50, the average fixed cost is

D) $ 60

Figure 5.3 shows a firm's marginal cost, average total cost, and average variable cost curves. At Q = 100, the total cost is

D) $ 7,000

Refer to Table 5.2, which gives a firm's production function. Assume that all non-labor inputs are fixed. The marginal product of the fourth worker is

D) 30 units

You observe that at your current production of lunch boxes, the average total cost of producing lunch boxes is $5 and the marginal cost of producing lunch boxes is $2. What should always happen if you increase lunch box production?

D) Average total cost will fall.

Which of the following statements in incorrect?

D) a firm's total accounting cost is at least as large as the firm's implicit costs.

A firm experiences diminishing marginal returns because

D) at least one factor of production is fixed.

Suppose you know that at the current level of production average total cost equals marginal cost, then you know that it is also TRUE that

D) average total cost is minimized at the current level of output

Under which conditions might diseconomies of scale result?

D) both A and B

In the short run, the marginal cost of producing the first unit of output is $50, the marginal cost of the second unit of output is $20, and the marginal cost of producing the third unit of output is $16. The firm's total cost of producing three units of output is

D) cannot be determined from the information provided

When the firm increases output and the costs rise disproportionately slower, then the long-run average cost curve is ________ and the firm is experiencing ________.

D) downward sloping; economies of scale

Lower input prices in large firms might lead to

D) downward-sloping long-run average cost curves.

) Refer to Table 5.5. The firm experiences diminishing returns beginning with the ________ unit.

D) fourth

Under which conditions might diseconomies of scale result?

D) increased bureaucracy

An input is indivisible if

D) it cannot be scaled down to produce a smaller quantity of output.

) Average total costs are minimized when

D) marginal cost equals average total cost.

Average variable costs are minimized when

D) marginal cost equals average variable cost

When a firm is experiencing diminishing returns

D) none of the above

The effect of diminishing marginal returns outweighing the effect of spreading out the fixed costs is illustrated by the ________ average cost curve ________.

D) short-run; increasing

Other things being equal, if the average fixed cost curve shifts upward at all output levels

D) the vertical distance between the average total cost curve and the average variable cost curve increases at all output levels.

Average total cost is defined as

D) total cost divided by quantity

Average fixed cost is defined as

D) total fixed cost divided by quantity

Which of the following is an example of an indivisible input?

D) train tracks between two cities

Coordination problems in large firms might lead to

D) upward-sloping long-run average cost curves.

Higher input prices in large firms might lead to

D) upward-sloping long-run average cost curves.

Under which conditions might economies of scale result?

D) workers having to spend less time switching back and forth between tasks.

Which of the following is TRUE?

D) ΔTC/ΔQ = MC

What is an explicit and implicit cost?

Explicit cost is the actual monetary payments for inputs while implicit cost is the opportunity cost of the inputs that do not require a monetary payment.

________are costs that do not require a monetary payment

Implicit cost

Explain the difference between fixed costs in the short run and in the long run.

In the short run, at least one factor of production is fixed, so the firm must pay for this factor of production, and that cost is the firm's fixed cost. In the long run, there are no fixed factors of production, and consequently, there are no fixed costs.

Can a firm's accounting profit be smaller than the economic profit? Assume that all costs are positive.

No. If all costs, implicit and explicit, are positive, then accounting profit will almost always be larger than economic profit because economic profit equals accounting profit minus implicit costs. Accounting profit equals economic profit if the firm incurs no implicit cost.

Explain the difference between the short run and the long run.

The short run is the period of time over which at least one factor of production is fixed. In the long run, firms are flexible to adjust all factors of production, and to enter or exit the industry.

What is economic profit?

Total revenue - economic cost

in the long run

all factors of production are variable

Which of the following are included in calculating economic costs?

all of the above are correct

An example of an implicit cost is?

c) the imputed rent on a store owned by the firm

________are cost that require a monetary payment

d)both Band C are correct

Average fixed costs in the short run

decrease as the quantity produced increases.

Accountants include ____ _costs as part of the firm's costs, while economists include______ costs

explicit; explicit and implicit

in the short run

some factors of production are variable, while at least one factor of production is fixed