ECON

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Graph 1

"The bigger the volume, the lower the cost, and we pass the savings on to you" is a familiar slogan. Its idea is illustrated in which of the above graphs?

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. What is the economic profit generated by Extreme Gaming in the first year?

$160,000

Point B

At which point does marginal cost (MC) equal average variable cost (AVC)?

The reason the marginal cost curve eventually increases as output increases for the typical firm is because of

diminishing marginal returns.

If the total cost of production increases by 10 percent and output increases by less than 5 percent, then the firm is experiencing

diseconomies of scale

If a firm's total revenue just covers its implicit and explicit costs of production, then

economic profit is zero.

Imagine that a firm expands the size of its plant, doubling its total cost of production but more than doubling its output. This situation is known as

economies of scale

The ability of Intel to spread product development costs over a larger number of units of output arises from

economies of scale

A decrease in the long-run average total cost as output increases is due to

economies of scale.

If you owned a small farm, which of the following would most likely be a fixed cost of production in the short run?

Hail Insurance

total variable cost.

If the firm is producing at Q1, the area 0BEQ1 represents the

30

If the three plant sizes shown are the only ones possible, then there are economies of scale in producing up to ________ units of output, and diseconomies of scale after that.

10 to 30 units of output.

The letters A, B, and C designate three successively larger plant sizes. In the long run, the firm should use plant size "A" for the production of

$8

The marginal cost associated with the production of the sixth unit of output is

Which of the following statements is correct?

The marginal cost curve intersects the average variable cost curve at its lowest point.

10

The marginal product of the 40th input item is

$2,500

The total cost associated with the production of 5 units of output is

$63.00

The total variable cost associated with the production of 5 units of output is

If the economic profit generated by a firm is zero and its implicit costs are greater than zero, then

accounting profit is greater than zero

In the long run

all cost are variable

The larger the diameter of a natural gas pipeline is, the lower is the average total cost of transmitting 1,000 cubic feet of gas 1,000 miles. This is an example of one reason for

economies of scale.

To an economist, the economic costs associated with the use of resources include

explicit and implicit costs.

Accounting profit equals total revenue minus

explicit costs

Which of the following is most likely to be a variable cost of production in the short run?

fuel and power payments

Fixed costs are those costs that are

independent of the amount of output a firm produces in the short run.

Round Things, Inc.'s production process exhibits economies of scale. Currently its long-run average total cost is $1/unit. If Round Things doubles its use of all inputs, its new long-run average total cost will be

less than $1/unit.

When a firm is experiencing economies of scale

long-run average total cost is decreasing.

A rising short-run average variable cost of production for a firm indicates that

marginal cost is above average variable cost.

In the long run, a firm will choose a plant size that has the

minimum average total cost of producing its target level of output.

The law of diminishing marginal returns in a manufacturing plant of a fixed capacity implies that, eventually, employing

one more worker will decrease the average product per worker.

Implicit costs are

opportunity costs of using owned resources.

Which factor could contribute to a firm experiencing economies of scale?

productivity gains from more specialized labor

According to the law of diminishing marginal returns

the additional product generated by additional units of an input will eventually diminish

16.00

the average total cost of producing 3 units of output is

third unit of input.

Diminishing marginal returns set in with the addition of the

Suppose that you could either prepare your own tax return in 15 hours or hire a tax specialist to prepare it for you in 2 hours. You value your time at $11 an hour; the tax specialist will charge you $55 an hour. The opportunity cost of preparing your own tax return is

$165

If you know that total fixed cost is $200, total variable cost is $600, and total product is 4 units, then average total cost must be

$200

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The implicit costs of Harvey's firm in the first year were

$60,000

If you know that when a firm produces 8 units of output, average fixed cost is $12.50 and average variable cost is $81.25, then the average total cost associated with this output level is

$93.75

If you know that when a firm produces 10 units of output, total cost is $1,030 and average fixed cost is $10, then total variable cost is

$930.

If average variable cost is $74 and total fixed cost is $100 at 5 units of output, then average total cost at this output level is

$94

Jose owns his own business. The first three employees can create 10, 12, and 11 widgets per hour. When Jose hires the 4th worker the total production from all employees increased to 40 total widgets per hour. What was the marginal product of the 4th worker?

7 Widgets

With total fixed cost of $400, a firm incurs an average total cost of $3 and average variable cost of $2.50. The amount of output produced by the firm must be

800 units

Graph 2

For which graph are there economies of scale throughout the entire range of output of cars?

4,000 to 4,500 units

Plant sizes get larger as you move from Plant 1 to Plant 4. In the long run, the firm should use Plant 3's size for what level of output?

Plant 2

Plant sizes get larger as you move from Plant 1 to Plant 4. Which plant size would generate the least average total cost for the 3,000-4,000 level of output?

$8.00

The average fixed cost of producing 3 units of output is

24

The average product of the 30th input item is

3 and 4

The firm's marginal cost is equal to average total cost somewhere between units

Graph D

The graphs show the long-run average total cost (LRATC) curve for cars. Just after World War II, the Ford Motor Company opened a large automobile manufacturing facility near Detroit with capacity Q0 autos per year. Shortly thereafter, the plant was closed and two smaller ones were opened in the same vicinity, each more profitably producing about one-half as many cars as the old facility. Which graph best shows the situation described above, when only one plant was operating?

$7.50

What is the average variable cost of the 4th unit of production?

$7

What is the long-run average total cost of producing 30 units of output?

If the long-run average total cost curve for a firm is horizontal in a relevant range of production, then it indicates that there

are constant returns to scale.

When a bakery manager reports that productivity of the 15 workers at her bakery last month was 1,800 loaves per worker, she is referring to the

average product of labor.

If the marginal cost curve is above the average total cost curve, then

average total cost is increasing

At any level of output

average total cost will exceed average variable cost by the amount of the average fixed cost.

In the short run, total output in an industry

can vary as the result of using a fixed amount of plant and equipment more or less intensively.

Marginal product of labor refers to the

change in total product resulting from employing one more unit of labor.

Variable cost are

costs that change with the amount of output a firm produces.

Average fixed cost

declines continually as output increases.

Marginal cost can be defined as the change in

total cost resulting from the production of an additional unit of output


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