Micro chapter 7 quiz

Leather World Corp. produces 5,000 leather belts per week. Its average total cost each week is $80, and its fixed cost is $200,000. What is its variable cost?

200,000 Total cost = average total cost × number of units of output produced = $80 × 5,000 = $400,000. Fixed cost of the firm = $200,000. So, variable cost = $400,000 - $200,000 = $200,000.

Peyton, a fashion designer, plans to quit her current job, which pays $25,000 a year, and open a boutique. She intends to take over the building that she owns and currently rents to her friend for $8,000 a year. Her expenses in setting up the boutique will be $50,000 for raw materials and $5,000 for interior décor and electricity. Her implicit costs will amount to _____.

33,000 Implicit cost = value of the office salary given up + value of the rent forgone = $33,000.

If total product for each of six units of labor is 10, 16, 20, 30, 34, and 36, respectively, the marginal product of the fifth unit is:

4 Marginal product of the fifth unit = total product of the fifth unit - total product of the fourth unit = 34 - 30 = 4.

Peyton, a fashion designer, plans to quit her current job, which pays $25,000 a year, and open a boutique. She intends to take over the building that she owns and currently rents to her friend for $8,000 a year. Her expenses in setting up the boutique will be $50,000 for raw materials and $5,000 for interior décor and electricity. What are Peyton's explicit costs?

55,000 Explicit cost = cost of raw materials + cost of interior décor and electricity = $55,000

Which of the following is true of long run?

A firm can vary all its resources to change its output in the long run. In the long run, no resource is fixed. This means the firm can change its production by varying both the fixed and variable resources.

Which of the following costs will be incurred by a firm even if it stalls production in the short run?

Fixed cost A firm continues to incur a fixed cost even when output is zero. The variable cost of production is zero when the firm produces no output.

Graphically, the distance between the total cost curve and the total variable cost curve at each level of output reflects the:

Fixed cost The total cost curve is simply the variable cost curve shifted vertically by the fixed cost.

Which of the following concepts can explain the shape of the short-run MC curve?

Marginal returns When a firm experiences increasing marginal returns, the marginal cost of its output falls; when it experiences diminishing marginal returns, the marginal cost of its output increases. This explains the shape of the MC curve.

Which of these is an example of a short-run adjustment in production made by a firm?

People's Bank hiring two new tellers to meet increased demand for customer services Output can be changed in the short run by adjusting variable resources, but the size, or scale, of a firm is fixed in the short run. In the long run, all resources can be varied. The length of the long run differs from industry to industry because the nature of production differs.

Which of the following is an example of a long-run adjustment in a firm?

Siemens healthcare sets up a new factory to increase its production of ultrasound machines. Output can be changed in the short run by adjusting variable resources, but the size, or scale, of a firm is fixed in the short run. In the long run, all resources can be varied. The length of the long run differs from industry to industry because the nature of production differs.

Edward marries Melisa and makes her the co-owner of his law firm. Melisa, who holds a degree in financial accounting, decides to handle the accounting work for the firm that was earlier outsourced to a consultant. Which of the following will result from this change?

The firm's explicit costs will fall, but its implicit costs will rise. The law firm will no longer have to pay the consultant for the accounting services, so the explicit cost will fall. The use of the owner's personal resources leads to an increase in the implicit costs.

Artisan Co. is a labor-intensive cottage firm. When it adds the first four workers to its production process in the short run, its output rises from 0 to 15 to 35 to 45 to 50. Which of the following can be concluded about the marginal product of labor from this information?

The marginal product of the third worker is 10 units of output. The marginal product is 15 units of output for the first worker, 20 units of output for the second worker, 10 units for the third worker, and 5 units for the fourth worker.

Identify the correct statement.

The scale of a firm is fixed in the short run. Output can be changed in the short run by adjusting variable resources, but the scale of a firm is fixed in the short run.

Identify a key feature of explicit costs.

These are actual cash payments made by a firm to its suppliers of inputs.

Changes in marginal cost reflect changes in the marginal productivity of the variable resource. Which of the following is a valid relationship between marginal cost and marginal product?

When marginal product increases, marginal cost falls When the firm experiences increasing marginal returns, the marginal cost of output falls; when the firm experiences diminishing marginal returns, the marginal cost of output increases.

When a firm earns normal profit,

accounting profit equals implicit costs The accounting profit just sufficient to ensure that all resources used by the firm earn their opportunity cost is called a normal profit. Any accounting profit in excess of a normal profit is economic profit.

A firm is said to experience economies of scale when:

average cost falls as a firm expands its plant size. A firm experiences economies of scale when its long-run average cost falls as the scale of production expands.

Variable costs refer to costs that:

change as output changes Any production cost that changes as the rate of output changes is called variable cost.

The long-run average cost curve of a firm is often horizontal over a particular output range. Over this range, the firm experiences:

constant average cost Constant long-run average cost is a condition that occurs if, over some range of output, long-run average cost neither increases nor decreases with changes in the firm size.

A firm's total revenue minus the opportunity cost of all resources used in production is called its:

economic profit Economic profit equals total revenue minus all costs, both implicit and explicit.

The payment made to coal suppliers by a thermal power plant would be an example of a(n):

explicit cost A firm's explicit costs are its actual cash payments for resources: wages, rent, interest, insurance, taxes, and the like.

A firm's opportunity cost of using a resource it owns is called its:

implicit cost

A fixed cost refers to a production cost that:

is independent of the rate of output. Any production cost that is independent of the firm's rate of output is called a fixed cost.

A firm will continue its operation as long as

its economic profit is positive

A firm experiences diseconomies of scale when:

its long-run average cost increases as output increases.

A firm experiences increasing marginal returns when:

its total product increases at an increasing rate. When increasing marginal returns sets in, the marginal product increases. Total product also increases at an increasing rate.

The minimum efficient scale refers to the:

lowest rate of output at which a firm takes full advantage of economies of scale. The minimum efficient scale is the lowest rate of output at which a firm takes full advantage of economies of scale.

The change in total product that results when a firm increases its usage of a particular resource by one unit, keeping all other resources constant, is referred to as the:

marginal product of that resource.

The long-run average cost curve of a firm is sometimes referred to as the firm's:

planning curve

The short-run variable costs of a law firm include:

the commission given to the lawyers. Any production cost that changes as the rate of output changes is called a variable cost. In this example, the lawyers are the variable resources used by the firm. Therefore, the commission paid to the lawyers is a variable cost borne by the firm.

The implicit costs of a firm will include:

the entrepreneurial skills of the owner. Implicit costs are the opportunity costs of using resources owned by a firm or provided by the firm's owners.

The slope of the total cost curve at each rate of output equals:

the marginal cost at that rate of output. The slope of the total cost curve at each rate of output equals the marginal cost at that rate of output.

Suppose labor is the only variable input used in production. In this case, the marginal cost of production will increase when:

the marginal product of labor declines. When a firm experiences increasing marginal returns to labor, the marginal cost of output falls. When a firm experiences diminishing marginal returns to labor, the marginal cost of output increases.

Given resource prices and technology, a firm can minimize its cost of producing a particular rate of output in the long run by operating along the points of tangency between:

the short-run average cost curve and the long-run average cost curve The points of tangency between the short-run average cost curves and the long-run average cost curves represent the least-cost way of producing each particular rate of output, given resource prices and technology.

A firm is likely to experience increasing marginal returns from labor when:

there is specialization and division of labor Division of labor increases the marginal product of each worker and allows a firm to experience increasing marginal return from labor

Factors of production that can be adjusted quickly to increase or decrease production are called:

variable input Any resource that can be varied in the short run to increase or decrease production is called a variable input.