Microeconomics Production and Cost
Marginal cost is:
change in TFC over change in Q
Marginal cost is the
change in total cost that results from producing one more unit of output
The short-run average total cost curve is U-shaped because:
of increasing and diminishing returns
Average fixed costs can be determined graphically by:
the vertical distance between ATC and AVC.
Economic profits are calculated by subtracting
explicit and implicit costs from total revenue
A fixed cost is:
any cost which a firm would incur even if output was zero.
The short run is characterized by
at least one fixed resource
Suppose that, when producing 10 units of output, a firm's AVC is $22, its AFC is $5, and its MC is $30
firm's total cost is $270.
Other things equal, if the prices of a firm's variable inputs were to fall
marginal cost, average variable cost, and average total cost would all fall
Implicit costs are...
nonexpenditure costs
Diseconomies of scale:
pertain to the long run.
The basic characteristic of the short run is that
the firm does not have sufficient time to change the size of its plant
Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year. If the firm sold 100,000 units of its output at $50 per unit, its accounting
profits were zero and its economic losses were $500,000
Marginal product is
the increase in total output attributable to the employment of one more worker
Normal profit is
the return to the entrepreneur when economic profits are zero
Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were
$200,000 and its economic profits were zero
Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and average variable costs of $150. The firm's total fixed costs are
$5,000
Which of the following is a short-run adjustment?
A local bakery hires two additional bakers.
Other things equal, if the fixed costs of a firm were to increase by $100,000 per year, which of the following would happen?
Average fixed costs and average total costs would rise
What do wages paid to blue-collar workers, interest paid on a bank loan, forgone interest, and the purchase of component parts have in common?
All are opportunity costs
Which of the following best expresses the law of diminishing returns?
As successive amounts of one resource (labor) are added to fixed amounts of other resources (property), beyond some point the resulting extra output will decline
The total output of a firm will be at a maximum where
MP is zero
When a firm does more of something, it gets better at it. This learning-by-doing is:
a source of economies of scale.
If a technological advance reduces the amount of variable resources needed to produce any level of output, then the:
MC curve will shift downward.
The relationship between marginal cost and average fixed cost is such that:
MC may either rise or fall as AFC declines.
Which of the following is correct as it relates to cost curves?
Marginal cost intersects average total cost at the latter's minimum point
Which of the following statements is correct?
Marginal cost is the price or cost of an extra variable input (for example, an additional worker) divided by its marginal product.
Which of the following is correct?
Marginal product rises faster than average product and also falls faster than average product.
The law of diminishing returns results in
a total product curve that eventually increases at a decreasing rate.
Which of the following holds true?
When AP is rising AVC is falling, and when AP is falling AVC is rising
Which of the following is correct?
When AP is rising, AVC is falling.
Which of the following is not correct?
Where total product is at a maximum, average product is also at a maximum.
Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?
depreciation charges on company-owned equipment
Which of the following is most likely to be an implicit cost for Company X?
depreciation charges on company-owned equipment
Total fixed cost (TFC):
does not change as total output increases or decreases.
Total cost minus total variable cost equals:
total fixed cost
In the short run it is impossible for an expansion of output to increase:
B) average fixed cost.
Average fixed cost is:
TFC over Q
Assume a firm closes down in the short run and produces no output. Under these conditions:
TFC and TC are positive, but TVC is zero.
As a firm produces successive units of output in the short run we would expect:
TVC to increase initially by declining amounts, but eventually increase by increasing amounts
Which of the following is most likely to be a variable cost?
fuel and power payments
If you owned a small farm, which of the following would be a fixed cost?
hail insurance
The ABC Corporation decreases all of its inputs by 12 percent and finds that its output falls by only 8 percent. This means that initially it was producing:
in the range of diseconomies of scale
The law of diminishing returns describes the
relationship between resource inputs and product outputs in the short run
If a firm doubles its output in the long run and its unit costs of production decline, we can conclude that:
economies of scale are being realized
Marginal cost
equals both average variable cost and average total cost at their respective minimums
To the economist total cost includes
explicit and implicit costs, including a normal profit
The long-run average total cost curve:
indicates the lowest unit costs achievable when a firm has had sufficient time to alter plant size
If a firm increases all of its inputs by 10 percent and its output increases by 15 percent, then:
it is encountering economies of scale
If a firm decides to produce no output in the short run, its costs will be
its fixed costs.
If average total cost is declining, then
marginal cost must be less than average total cost
Which of the following is most likely to be a fixed cost?
property insurance premiums
If marginal cost is:
rising, then average total cost could be either falling or rising
Implicit and explicit costs are different in that
the former refer to nonexpenditure costs and the latter to out-of-pocket costs
If a variable input is added to some fixed input, beyond some point the resulting extra output will decline. This statement describes
the law of diminishing returns
When diseconomies of scale occur:
the long-run average total cost curve rises
In the short run the Sure-Screen T-Shirt Company is producing 500 units of output. Its average variable costs are $2.00 and its average fixed costs are $.50. The firm's total costs:
are $1250
The law of diminishing returns indicates that
as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point
If a technological advance increases a firm's labor productivity, we would expect its:
average total cost curve to fall
For most producing firms
average total costs decline as output is carried to a certain level, and then begin to rise
The basic difference between the short run and the long run is that
at least one resource is fixed in the short run, while all resources are variable in the long run
Answer the next question(s) on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed. Number Units of of workers output 0 0 1 40 2 90 3 126 4 150 5 165 6 180
Refer to the above data. Diminishing marginal returns become evident with the addition of the third worker Refer to the above data. The marginal product of the sixth worker is 15 units of output Refer to the above data. Average product is at a maximum when two workers are hired
Use the following data to answer the next question(s). The letters A, B, and C designate three successively larger plant sizes. Output ATC-A ATC-B ATC-C 10 6 13 44 20 5 9 35 30 4 6 27 40 5 4 20 50 7 3 14 60 10 4 11 70 14 5 8 80 19 7 6 90 25 10 5 100 32 16 7
Refer to the above data. In the long run the firm should use plant size "A" for: 10 to 30 units of output. Refer to the above data. In the long run the firm should use plant size "C" for: all units of output greater than 80. Refer to the above data. Economies of scale are realized over the ___ to ___ levels of output; diseconomies of scale exist over the ___ to ___ levels of output. 10, 50; 60, 100 Refer to the above data. At what level of output is minimum efficient scale realized? 50
Which of the following is incorrect?
Total fixed cost equals total variable cost in the long run.
If you operated a small bakery, which of the following would be a variable cost in the short run?
baking supplies (flour, salt, etc.)
The long run is characterized by
the ability of the firm to change its plant size
Diseconomies of scale means that:
a firm's long-run average total cost curve is rising
An explicit cost is
a money payment made for resources not owned by the firm itself
Suppose a firm is in a range of production where it is experiencing economies of scale. Knowing this, we can predict that:
a 10 percent increase in all inputs will increase output by more than 10 percent
If an industry's long-run average total cost curve has an extended range of constant returns to scale, this implies that:
both relatively small and relatively large firms can be viable in the industry
The vertical distance between a firm's ATC and AVC curves represents:
AFC, which decreases as output increases.
Which of the following statements concerning the relationships between total product (TP), average product (AP), and marginal product (MP) is not correct?
AP continues to rise so long as TP is rising
If a profitable firm's fixed costs somehow were zero:
AVC and ATC would coincide
Other things equal, if the wage rates paid to a firm's labor inputs were to rise, we would expect the:
AVC, ATC, and MC curves all to rise.
Which of the following definitions is correct?
Economic profit = accounting profit - implicit costs
Use the following cost information for the Creamy Crisp Donut Company to answer questions 16-23: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Entrepreneur's potential economic profit from the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
Refer to the above data. Creamy Crisp's explicit costs are $150,000 Refer to the above data. Creamy Crisp's implicit costs, including a normal profit are: $136,000 Refer to the above data. Creamy Crisp's total economic costs (explicit + implicit costs, including a normal profit) are $286,000 Refer to the above data. Creamy Crisp's accounting profit is $230,000 Refer to the above data. Creamy Crisp's economic profit is $94,000 Refer to the above data. Creamy Crisp's total revenues exceed its total costs, including a normal profit, by $94,000 Refer to the above data. Creamy Crisp is earning an economic profit Refer to the above data. If, other things equal, Creamy Crisp's revenue fell to $286,000 it would earn a normal profit but not an economic profit
Answer the next question(s) on the basis of the following cost data: Total Output cost 0 $24 1 33 2 41 3 48 4 54 5 61 6 69
Refer to the above data. The total variable cost of producing 5 units is: $37 Refer to the above data. The average total cost of producing 3 units of output is: $16 Refer to the above data. The average fixed cost of producing 3 units of output is: $8 Refer to the above data. The marginal cost of producing the sixth unit of output is: $8 Refer to the above data. The profit-maximizing output for this firm: cannot be determined from the information given.
Average Average fixed variable Output cost cost 1 $50.00 $100.00 2 25.00 80.00 3 16.67 66.67 4 12.50 65.00 5 10.00 68.00 6 8.37 73.33 7 7.14 80.00 8 6.25 87.50
Refer to the above data. Total fixed cost is $50.00. Refer to the above data. The average total cost of five units of output is: $78 Refer to the above data. The total cost of four units of output is: $310 Refer to the above data. If the firm closed down and produced zero units of output, its total cost would be: $50 Refer to the above data. The marginal cost of the fifth unit of output is: $80 Refer to the above data. The marginal cost curve would intersect the average variable cost curve at about: 4 units of output Refer to the above data. If the firm decided to increase its output from 6 to 7 units, its total costs would rise by: $120.00
The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs (TVC) change with output as shown in the accompanying table. Use this information to answer the following question(s). Output TVC 1 30 2 50 3 65 4 85 5 110
Refer to the above information. The total cost of producing 3 units of output is: $105. Refer to the above information. The average total cost of 3 units of output is: $35 Refer to the above information. The average fixed cost of 3 units of output is: $13.33 Refer to the above information. The marginal cost of the third unit of output is: $15 Refer to the above information. This firm: may be either realizing a profit or a loss.
Total cost is:
TFC + TVC
Average total cost is:
TFC + TVC over Q
In the short run:
TVC will increase for a time at a diminishing rate, but then beyond some point will increase at an increasing rate
In the short run which of the following statements is correct?
Total cost will exceed variable cost
A firm's total variable cost will depend on:
all of the above
Fixed cost is
any cost which does not change when the firm changes its output
When average fixed costs are falling
average variable cost may be either rising or falling
In comparing the changes in TC and TVC associated with an additional unit of output, we find that:
both are equal to MC.
As output increases, total variable cost:
increases at a decreasing rate and then at an increasing rate
Economic cost can best be defined as...
compensations that must be received by resource owners to insure their continued supply
Average fixed cost
declines continually as output increases
Accounting profits are typically
greater than economic profits because the former do not take implicit costs into account
The relationship between the marginal cost and the average total cost schedule is such that
if MC is declining, ATC must also be declining.
Which of the following is not a source of economies of scale?
inelastic resource supply curves.
The long-run average total cost curve:
is based on the assumption that all resources are variable.
The vertical distance between the total cost and the total variable cost curves differs by an amount which:
is constant as output changes.
The minimum efficient scale of a firm:
is the smallest level of output at which long-run average total cost is minimized.
If a firm increases all of its inputs by 10 percent and its output increases by 10 percent, then:
it is encountering constant returns to scale
If in the short run a firm's total product is increasing, then its
marginal product could be either increasing or decreasing
The first, second, and third workers employed by a firm add 24, 18, and 9 units to total product respectively. Therefore, the
marginal product of the third worker is 9
Marginal product
may initially increase, then diminish, and ultimately become negative
Costs to an economist
may or may not involve monetary outlays
Diseconomies of scale arise primarily because:
of the difficulties involved in managing and coordinating a large business enterprise.
If the total variable cost of 9 units of output is $90 and the total variable cost of 10 units of output is $120, then:
the average variable cost of 9 units is $10.
In comparing the changes in TVC and TC associated with an additional unit of output, we find that:
the changes in TC and TVC are equal
Economies of scale are indicated by:
the declining segment of the long-run average total cost curve.
Fixed costs are associated with:
the short run only.
Because the marginal product of a variable resource at first increases and then decreases as the output of the firm is increased:
total cost at first increases at a decreasing rate and then increases at an increasing rate
Which of the following represents a long-run adjustment?
unable to meet foreign competition, a U.S. watch manufacturer sells one of its branch plants
A natural monopoly exists when:
unit costs are minimized by having one firm produce an industry's entire output.
The amount of calendar time associated with the long run
varies from industry to industry
