Chapter 7 Homework Examples

Which of the following is an example of a sunk cost fallacy? "I will not buy an Under Armour hoodie until it goes on sale for at least 25% off." "I paid $85 for this wool sweater, but it is too scratchy on my skin, so I think I'll give it to my mother-in-law." "I'm not going to allow the sacrifice of my men be in vain by quiting before the job is done." "I'm going to buy another bag of popcorn because this popcorn is burnt."

"I'm not going to allow the sacrifice of my men be in vain by quiting before the job is done."

Debbie, a popular wedding photographer, is able to photograph a wedding every Saturday of the year. She charges couples $4,000 for a complete set of photographs that cost her $2,200 to print and develop. Suppose that on one Saturday Debbie photographs her niece's wedding without charge, but her niece insists on paying Debbie $2,200 to cover her printing and developing costs. What is Debbie's economic cost of photographing her niece's wedding? $0 $1,800 $2,200 $4,000

$1,800

A firm is producing 50 units of output at a total cost of $1,000, with a per-unit variable cost of $8. What is the firm's average fixed cost? $20 $12 $28 $4

$12

Suppose a firm's total cost is given by TC = 150 + 0.50Q + 1.5Q2. What is the firm's average variable cost of producing 10 units of output? $15 $15.50 $17 $5.55

$15.50

A firm's production function is given by Q = KL. The wage rate (W) = $50 and the rental per unit of capital (R) is $12.50. In the short run, capital (K) is fixed at 10 units. The short-run average total cost of producing 100 units of output is _____, and the long-run average total cost of producing 100 units of output is _____. $6.25; $5 $6.25; $4.20 $14.75; $9 $14.75; $8.80

$6.25; $5

A firm is producing 4 units of output at an average total cost of $40. When the firm produces 5 units of output, average total cost rises to $50. What is the marginal cost of the fifth unit of output? $90 $30 $10 $120

$90

A landscaping company is considering renting a backhoe at $12,000 for the season. The variable cost of completing a landscaping project with the use of the backhoe is $500. Alternatively, without the use of the backhoe, the company would incur a variable cost of $1,000 per landscaping project and no fixed costs. If the landscaping company plans to complete more than _____ projects, the total cost of landscaping projects will be lower _____. 18; with the backhoe 24; with the backhoe 44; without the backhoe 12; without the backhoe

24; with the backhoe

Suppose a firm's total cost and marginal cost functions are given by TC = 18 + Q + 2Q2 and MC = 1 + 4Q, respectively. What is the output level that minimizes average total cost? 5 6 3 4.45

3

If the sign of the first derivative of ATC with respect to Q is negative: TC is increasing as Q increases. ATC is increasing as Q increases. ATC is decreasing as Q increases. ATC is constant as Q increases.

ATC is decreasing as Q increases.

Average variable cost is minimized at the quantity where: AFC = MC. AVC = TC. ATC = MC. AVC = MC.

AVC = MC.

Which of the following statements is (are) TRUE? I. The firm's total cost is the sum of its fixed and variable costs. II. Over the long term, the costs of the firm's inputs tend to become fixed. III. In the long run, the firm can adjust the use of all of its inputs.

I and III

Suppose a firm's total cost is given by TC = 100 + 4Q + 2Q2. Which of the following statements is (are) TRUE? I. AVC = 4Q + 2Q2 II. MC = 4+4Q III. ATC = 2Q + 4 + 100/Q IV. FC = 100 + 4Q

II and III

The firm's long-run total cost is given by LTC = 100Q - 10Q2 + (1/3)Q3 . At what output level does the firm have economies of scale? Q < 175 Q < 4,000 Q < 88 Q < 15

Q < 15

Which of the following statements is (are) TRUE? The long-run average total cost curve is derived by tracing out all of the firm's short-run average total cost curves. It is not possible for two short-run average total cost curves to cross. Short-run average total cost curves intersect the long-run average total cost curve at its minimum point. The long-run average total cost curve indicates that it is more costly to produce output in the long run, especially when input prices are rising because of inflation.

The long-run average total cost curve is derived by tracing out all of the firm's short-run average total cost curves.

An entrepreneur gathers the following information to make a decision on whether to stay open for business or to shut down permanently: Future operating revenues = $18 million Future operating costs = $14 million Sunk costs = $8 million The entrepreneur should: continue to operate because the operating revenues exceed the operating costs. shut down because the operating revenues are insufficient to cover the operating costs and sunk costs. shut down because the sunk costs are greater than zero. continue to operate to help pay off the sunk costs.

continue to operate because the operating revenues exceed the operating costs.

A firm is producing 10,000 units of output at a total cost of $5,000. If the firm increases output by 5,000 units and its total costs rise by $2,000, the firm has: economies of scope. constant returns to scale. economies of scale. diseconomies of scale.

economies of scale.

Producing 200 units of good Y and 100 units of good X in the same factory costs the firm $50,000. In contrast, producing 200 units of good Y in one factory and 100 units of good X in another factory costs the firm $75,000. So if the firm produces the two goods together, it achieves: quadratic returns to scale. economies of scope. diseconomies of scope. diseconomies of scale and diseconomies of scope.

economies of scope.

Suppose the total cost of producing goods Q1 and Q2 jointly is given by TC = 100 + 50Q1Q2 - (Q1Q2)0.5. The total cost of producing Q1 and Q2 in two separate facilities is given by TC = 75 + 3,000Q1 + 1,000Q2 + + . If the firm produces Q1 = 40 and Q2 = 100, the firm should produce the goods _____ because of _____ of scope. jointly; economies jointly; diseconomies in separate facilities; diseconomies in separate facilities; economies

jointly; economies

Which of the following factors are likely to result in fewer fixed costs? longer time horizons stronger labor unions greater capital requirements for production unreliable resale markets

longer time horizons

Suppose a firm with a production function Q = KL (where MPL = K and MPK = L) is producing 125 units of output by using 5 workers and 25 units of capital. The wage rate (W) per worker is $10 and the rental per unit of capital (R) is $2. If it decreases output to 45 units, long-run average total cost _____ at 125 units of output to _____ at 45 units of output. falls from $0.80; $0.60 rises from $1.80; $2 falls from $1.80; $1.15 rises from $0.80; $1.33

rises from $0.80; $1.33

Long-run marginal cost is: the derivative of the short-run total cost function with respect to Q. derived by plugging the firm's short-run input demands into the long-run total cost function. the derivative of the long-run total cost function with respect to Q. derived by plugging the firm's long-run input demands into the long-run total cost function.

the derivative of the long-run total cost function with respect to Q.