Econ CH7

the firm can choose any of the three equivalent approaches to minimize its cost

-lowest isocost rule -tangency rule -last dollar rule

slope of the isocost

-w/r

The Nifty Gum Co. has purchased a large parcel of land for $1 million. The company recently discovered that the land is contaminated and is worthless to all possible buyers. The opportunity cost of the land is

$0.

Suppose the short run production function is q= L^0.5. If the marginal cost go producing the tenth unit is $5, what is the wage per unit of labor?

0.25

Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting this job to work full time in her own business. She will invest her savings of $50,000 (which currently has an annual 10% rate of return) into the business. Her annual opportunity cost of this new business is

$45,000

Last dollar rule equivalency

(MPL/w)= (MPK/r)

When the isocost line is tangent to the isoquant, then A) the firm is producing that level of output at minimum cost B) the firm has achieved the right economies of scale C) all of these D) MPL=MPK

A)

A firms marginal cost can always be thought of as the change in total cost if A) the firm buys one more unit of capital B)the firm produces one more unit of output C) the firm's average cost increases by $1 D) the firm moves to the next highest isoquant

B)

Suppose a firm can only vary the quantity of labor hired in the short run. An increase in the cost of capital will A) decrease the firms marginal cost B) have no effect on the firms marginal cost C) increase the firms marginal cost D) more info needed

B)

Suppose the short run production is q=10xL. If the wage rate is $10 per unit of labor, then MC equals A)q B)1 C) 10/q D) q/10

B)

Fixed Costs are A) equal to total cost divided by the units of output produces B) a production expense that changes with the quantity of output produces C) a production expense that does not vary with output D) The amount by which a firm's cost changes if the firm produces one more unit of output

C)

If the average cost of producing a good is increasing as a firm produces more of a good, then which of the following must be TRUE? A) AVC is rising B) MC>AVC C) All of theses D) AFC is falling

C)

Variable Costs are A) the amount by which a firm's cost changes if the firm produces one more unit of output B) a production expense that does not vary with output C) a production expense that changes with the quantity of output produced D) equal to total cost divided by the units of output produced

C)

Suppose each worker must use only one shovel to dig a trench, and shovels are useless by themselves. In the long run, the firm will experience a. increasing returns to scale b. decreasing returns to scale c. constant returns to scale d. returns to scale cannot be determined

C.

Cost Equation

C= VC + F

A firms total cost equation

C=wL+rK

If the isoquants are straight lines of L'shaped, then a cost0minimizing firm will A) not be able to minimize costs B)choose not to produce any outputs C) Find the highest isocost line touching the relevant isoquant D) find the lowest isocost line touching the relevant isoquant

D)

Which of the following will cause the marginal cost curve of making cigarettes to shift? A) a 5m penalty charged to each maker B) a 1m ad campaign by American Cancer Society C) all of theses D) a 1$ per pack tax on cigs

D)

If the marginal cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE? A) AFC is rising. B) AVC is rising. C) MC > AVC. D) MPL is falling.

MPL is falling

MRTS

MPL/MPK

Assuming that w and r are both positive, if the long-run expansion path is horizontal, then

MRTS is a function of capital only

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. Which of the following statements is TRUE at all levels of production? A) MC = AVC B) MC = AC C) MC > AFC D) All of the above.

a

sunk cost

a past expenditure that cannot be recovered not relevant to a firm when deciding how much to produce now

Assume Congress decides that Social Security taxes must increase in order to fund the system. This would A) shift up the marginal cost curve for any firms that hire labor. B) guarantee a decrease in profits. C) shift up the average fixed cost curve for any firms that hire labor. D) guarantee an increase in tax revenues.

a.

Assume Congress decides that oil companies are making too much profit and decides to tax oil companies for each gallon of gasoline produced. This would A) shift the marginal cost curve up. B) shift the marginal cost curve down. C) shift the average fixed cost curve up. D) shift the average fixed cost curve down.

a.

In the short run, the expansion path is A) horizontal. B) vertical. C) diagonal. D) indeterminate.

a.

Learning by doing is represented by A) a decrease in the average total cost curve. B) an increase in the average total cost curve. C) no change in the average total cost curve. D) an increase in the average total cost curve and a decrease in the marginal cost curve.

a.

Marginal cost is A) positive or zero. B) negative or zero. C) positive or negative but not zero. D) positive, negative, or zero.

a.

The total cost of producing one unit is $50. The total cost of producing two units is $75. At a production level of two units, the cost function exhibits A) economies of scale. B) rising average costs. C) increasing marginal costs. D) constant returns to scale.

a.

economies of scale in nuclear power plants exist because of a. both more efficient plant mgmt and a better understanding of the plants idiosyncrasies, or learning by doing b. nuclear power tech changes c. better understanding of the plat's idiosyncrasies d. more efficient plant mgmt

a.

if there are diseconomies of scale within a given range of output, which of the following is TRUE a. the long run average cost curve must be upward sloping within that range of output b. all c. long run average cost must equal short run average cost d. the short run average cost curve must be upwards sloping within that range of output

a.

johnny has worked as a cap for 5 years and warts to open his own practice. the cost of his college degree in accounting represents a. a sunk cost b. an expense c. a variable cost d. the opportunity cost of this endevoue

a.

which of the following statements is NOT true? a. C=F+VC b. avc= WAGE/ mil c. AC= AFC+AVC d. AFC= AC- AVC

b

In the long run, fixed costs are A) sunk. B) avoidable C) larger than in the short run. D) not included in production decisions.

b.

In the short run, average variable costs are minimized when a. MPL equals APL b. Both MPL equals APL and APL is maximized c.MPL is maximized and APL is increasing d. APL is maximized

b.

In the short run, the point at which diminishing marginal returns to labor begin is the point at which the marginal cost curve A) peaks. B) bottoms out. C) is upward sloping. D) is downward sloping.

b.

Why might a police officer not pull over someone speeding two miles over the speed limit? A) The explicit costs of stopping the driver over are too high. B) The opportunity costs of stopping the driver are too high. C) The opportunity costs of topping he driver are too low. D) The explicit costs of stopping the driver are too low.

b.

the high cost of advertising during the super bowl will a. not effect the efficient level of output because advertising is a fixed cost b. not effect the efficient level of output because advertising is a sunk cost c.not enough info is given d. will affect the efficient level of output because profits will fall significantly

b.

A change in relative factor prices will always result in A) a change in the slope of the isoquants. B) a tangency between the new isocost line and a new isoquant. C) a rotation of the isocost lines. D) All of the above.

c.

A specific tax of $1 per unit of output will affect a firm's A) average total cost, average variable cost, average fixed cost, and marginal cost. B) average total cost, average variable cost, and average fixed cost. C) average total cost, average variable cost, and marginal cost. D) marginal cost only.

c.

If there are diseconomies of scale within a given range of output, which of following is(are) TRUE? A) The short-run average cost curve must be upward sloping within that range of output. B) The long-run average cost curve must be upward sloping within that range of output. C) Long-run average cost must equal short-run average cost. D) All of the above.

c.

The long run average cost curve may initially slope downward due to A) decreasing average fixed costs. B) increasing marginal returns. C) economies of scale. D) All of the above.

c.

The production of cigarettes is highly automated; however, a worker is required to monitor each machine. Machines and workers do not interact with one another. Given this information, there are most likely A) economies of scale. B) economies of scope. C) constant returns to scale. D) increasing returns to scale.

c.

economists proclaim that competitive firms make zero economic profit in the long run. this shows how a. detached economists are from the real world b. unrealistic economic theory is c. firms cover all their costs, both monetary and non-monetary d. firms cover only monetary costs when economic profits are zero

c.

if the average cost is positive, a. marginal cost is less than average cost b. marginal cost exceeds average cost c. not enough info in given d. marginal cost equals average cost

c.

which of the following will cause average fixed cost curve of making cigarettes to shift? a/ a $1 per pack tax on cigarettes b. a $3 per hour wage increase c. a $5 mill penalty charged to each cigarette maker d. an increase in the demand for cigarettes

c.

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. The marginal cost of the 5th T-shirt is a. 2 b.52 c.12 d. 60

c. (using AVC formula)

rK represents

capital costs (rate x amount of capital)

The slope of the isocost line tells the firm how much

capital must be reduced to keep total cost constant when hiring one more unit of capital

The sum of the isoquant tells the firm how much

capital must decrease to keep output content when labour increases by one unit

Marginal Cost Equation

change in variable cost / change in quantity

Assume Congress decides that oil companies are making too much profit and decides to increase the tax on oil companies for each gallon of gasoline produced. This would A) guarantee a decrease in profits. B) guarantee an increase in profits. C) guarantee an increase in tax revenues. D) None of the above.

d.

If Option A costs $40 and yields 20 units of output and Option B costs $50 and yields 30 units of output A) Option B and Option A are equally economically efficient. B) Option B is economically efficient relative to Option A. C) Option A is economically efficient relative to Option B. D) It is not possible to determine which option is more economically efficient.

d.

If a firm buys a building so as to have office space for its workers, the monthly opportunity cost of the building is best measured as A) the monthly mortgage payment the firm must pay. B) the price the firm paid divided by twelve. C) zero. D) the rent the firm could earn if it rented the building to another firm.

d.

If a particular production process is subject to diminishing marginal returns to labor at every level of output, then at every level of output A) AC is upward sloping. B) MC exceeds AVC. C) AFC is constant. D) None of the above

d.

If the average cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE? A) AFC is falling . B) AVC is rising. C) MC > AVC. D) All of the above.

d.

In the long run, the expansion path is A) horizontal. B) vertical. C) diagonal. D) Not enough information.

d.

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month. Joey's dad is thinking of increasing the rent to $400 per month. As a result Joey's marginal cost of cutting grass will A) increase by $100 divided by the amount of grass cut. B) increase by $100. C) decrease by $100. D) not change.

d.

Which of the following does NOT represent a possible shape of the long-run average cost curve? A) downward-sloping B) upward-sloping C) U-shaped D) vertical

d.

Which of the following will cause the average cost curve of making cigarettes to shift? A) A $5 million penalty charged to each cigarette maker. B) A $1 per pack tax on cigarettes. C) A $1 an hour wage increase paid to all cigarette production workers D) All of the above.

d.

economic efficiency entails a. producing a given amount of output with the most expensive mix of inputs b. producing a given amount of output with the least number of inputs C) producing a given amount of output with the most inputs. D) producing a given amount of output with the cheapest mix of inputs.

d.

if the cost of labour increases, the isocost line will a.shift outward in parallel fashion b. stay the same c. shift inward in a parallel fashion d. rotate inward around the point where only capital in employed in production

d.

in the short run, marginal cost is minimized when a. MPL equals zero b. APL equals zero c. APL is maximized d. MPL is maximized

d.

suppose MPL= 0.5 * (q/L) and MPK= 0.5 * (q/k). In the long run, the firm will hire equal amounts of capital and labour a. at no point in time b. only when w= 0.5*r c. all of the time d. only when w = r

d.

the cost of waiting two months for health care in canada to address debilitating problem is most accurately described as a. an explicit cost b. an accounting cost c. no real cost d. an opportunity cost

d.

at what output level, q, is average cost minimized if the short-run costs for a company are C=40+ 4q+ q^2? a. q-40 b. q=2 c. q=0 d. q=2(10)^2

d. 2(10)^2

explicit costs

direct, out of pocket payments for inputs to its production process within a given time period

average fixed cost

fixed cost/ quantity produced

Solving the cost equation for K (variable along y-axis)

k= (C/r)-(w/r)(L)

wL represents

labour costs (wage x amount of labor)

if average cost is decreasing, marginal cost is...

less than average cost

tangency rule

pick the bundle of inputs where the isoquant is tangent to the isocost line

last dollar rule

pick the bundle of inputs where the last dollar spent on one input gives as much extra output as the last dollar spent on any other input

lowest isocost rule

pick the bundle of inputs where the lowest isocost line touches the isoquant

economies of scale

property of a cost function whereby the average cost of production falls as output increases

diseconomies of scale

property of a cost function whereby the average cost of production rises when output increases

implicit costs

reflect only a forgone opportunity rather than an explicit, current ependiture

At the point of tangency

the slope of the isoquant equals the slope of isocost (MPL/MPK)= (w/r)

economic cost

the value of the best alternative as a resource includes both explicit and implicit costs

average cost

total cost/ units of output produced AC= AFC+AVC

average variable cost

variable cost/ units of output produced