Sample Questions on Production and Cost

1.The reason economists assume that firms try to maximize economic profit isa.over time, firms that don't earn profits will have difficulty securing financing to survive

b.firms in the real world always maximize profit

c.profit is easier to calculate than revenues

d.if a firm fails to earn a profit in its first year, it will go out of business

e.profit maximization is easier for firms than revenue maximization

ANS:A

2.Implicit cost involves a direct cash payment for the use of a resource.a.True

b.False

ANS:B

3.All other things constant, higher implicit cost results in lower accounting profit.a.True

b.False

ANS:B

4.Which of the following is not an explicit cost?a.salaries

b.sales taxes

c.the cost of utilities, such as gas and electricity

d.insurance premiums

e.the value of a firm owner's time

ANS:E

5.If Ripco owns the building where it operates, then ifa.the firm pays no rent, there is no opportunity cost

b.the firm does not rent the building to anyone else, there is no opportunity cost

c.the firm pays no rent, there is an opportunity cost

d.its usage of the building precludes it from renting to anyone else, there is an opportunity cost

e.the firm could use the building for other things, there is no opportunity cost

ANS:D

6.Which of the following are implicit costs for a typical firm?a.insurance costs

b.electricity costs

c.opportunity costs of capital owned and used by the firm

d.cost of labor hired by the firm

e.the cost of raw materials

ANS:C

7.Which of the following is not an explicit cost?a.Payment for raw materials

b.The value of the firms owner own time

c.Wages for the workers

d.Insurance cost

e.Utilities payment

ANS:B

8.Cash payments for steel to be used in production would be an example ofa.sunk costs

b.fixed costs

c.explicit costs

d.implicit costs

e.entrepreneurial costs

ANS:C

9.A firm's opportunity costs of using resources provided by the firm's owners are calleda.sunk costs

b.fixed costs

c.explicit costs

d.implicit costs

e.entrepreneurial costs

ANS:D

10.Unlike implicit costs, explicit costsa.reflect opportunity costs

b.include the value of the owner's time

c.are not included in a firms accounting statements

d.are actual cash payments

e.do not change as a firm's output changes

ANS:D

11.An implicit cost isa.any cost a firm cannot avoid in the short run

b.any expenditure a firm makes

c.an opportunity cost

d.accurately measured in accounting statements

e.ignored by economists

ANS:C

12.Marge opens an oxygen bar in a building she owns. She used to rent the building to her brother in law for $10,000 a year. To open the oxygen bar, Marge quit her job as a physician assistant, which paid $80,000 a year. As a bar owner, Marge has to pay $40,000 a year wages for her bartender, spend $25,000 a year for supplies, and the utilities bill is $9,500 a year. To cover the start-up costs, she used up all of her savings which earned $4,600 in interest. What are her implicit costs? a.$10,000

b.$90,000

c.$84,600

d.$94,600

e.$74,500

ANS:D

13.Marge opens an oxygen bar in a building she owns. She used to rent the building to her brother in law for $10,000 a year. To open the oxygen bar, Marge quit her job as a physician assistant, which paid $80,000 a year. As a bar owner, Marge has to pay $40,000 a year wages for her bartender, spend $25,000 a year for supplies, and the utilities bill is $9,500 a year. To cover the start-up costs, she used up all of her savings which earned $4,600 in interest. What are her explicit costs? a.$40,000

b.$49,500

c.$84,600

d.$94,600

e.$74,500

ANS:E

14.The opportunity cost of a resourcea.includes both explicit and implicit cost

b.includes explicit cost only

c.includes implicit cost only

d.is equal to the market price of the resource

e.is not related to the market price of the resource

ANS:A

15.Explicit costs area.not part of opportunity cost

b.the only cost considered in opportunity cost

c.exactly the same as implicit costs

d.actual monetary payments for resources purchased

e.the opportunity costs of using resources owned by the firm

ANS:D

16.If all my savings are invested in my consulting company, an increase in the interest rate increases my implicit costs.a.True

b.False

ANS:A

17.If a firm's economic profit is positive, its accounting profit must also be positive.a.True

b.False

ANS:A

18.The difference between a firm's total revenue and what must be paid to attract resources from their best alternative use is calleda.total revenue

b.utility

c.economic profit

d.cost

e.production efficiency

ANS:C

19.Opportunity cost usuallya.cannot be measured

b.applies to labor but not to capital

c.is involved in calculating economic profit

d.is greater than the cash payment made to a resource

e.is less than the cash payment made to a resource

ANS:C

20.John moved his office from a building he was renting downtown to the carriage house he owns in back of his house. How will his costs change?a.explicit and implicit costs rise

b.explicit costs rise; implicit costs fall

c.explicit and implicit costs fall

d.explicit costs fall; implicit costs rise

e.not enough information is given

ANS:D

21.A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What are his explicit costs?a.$26,000

b.$66,000

c.$78,000

d.$52,000

e.$72,000

ANS:D

22.A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What are his implicit costs?a.$26,000

b.$66,000

c.$78,000

d.$52,000

e.$72,000

ANS:A

23.Two friends, Diane and Sam, own and run a bar. Diane tends bar on Monday, Wednesday, and Friday and receives a wage in addition to tips. Sam tends bar on Tuesday, Thursday, and Saturday and receives only tips. Which of the following represents an implicit cost of operating the bar?a.Diane's wage

b.Sam's time

c.Diane's tips

d.Sam's tips

e.both Diane's and Sam's tips

ANS:B

24.Maryann and Don want to open their own deli. To do so, Maryann must give up her job, at which she earns $20,000 per year, and Don must give up his part-time job, at which he earns $10,000 per year. They must liquidate their money market fund, which earns $1,000 interest annually. The rent on the building is $10,000 per year, and expenses for such necessities as utilities, corned beef, and pickles are $35,000 annually. What is the explicit cost per year of operating the deli?a.$10,000

b.$35,000

c.$45,000

d.$31,000

e.$76,000

ANS:C

25.Amanda, age 6, opens a lemonade stand. She makes all the lemonade from a mix she found in her parents' pantry. Her stand is an old box she found in the garage. The pitcher and paper cups were taken from the kitchen. Which of the following is true?a.The opportunity cost of the lemonade is zero.

b.The only opportunity cost of the lemonade is Amanda's time.

c.Amanda's explicit costs are zero.

d.The implicit costs of Amanda's lemonade are zero.

e.Whatever revenue Amanda gets will be pure economic profit.

ANS:C

26.Which of the following would not appear on a firm's accounting statement?a.sunk costs

b.fixed costs

c.explicit costs

d.implicit costs

e.insurance costs

ANS:D

27.Accounting profit equalsa.explicit costs minus implicit costs

b.economic profit minus implicit costs

c.economic profit minus explicit costs

d.economic profit minus explicit costs and implicit costs

e.economic profit plus implicit costs

ANS:E

28.Marge opens an oxygen bar in a building she owns. She used to rent the building to her brother in law for $10,000 a year. To open the oxygen bar, Marge quit her job as a physician assistant, which paid $80,000 a year. As a bar owner, Marge has to pay $40,000 a year wages for her bartender, spend $25,000 a year for supplies, and the utilities bill is $9,500 a year. To cover the start-up costs, she used up all of her savings which earned $4,600 in interest. Total annual revenue at the end of the year is $450,000. Marges accounting profit is:a.$450,000

b.$375,500

c.$169,100

d.$280,900

e.$410,000

ANS:B

29.Marge opens an oxygen bar in a building she owns. She used to rent the building to her brother in law for $10,000 a year. To open the oxygen bar, Marge quit her job as a physician assistant, which paid $80,000 a year. As a bar owner, Marge has to pay $40,000 a year wages for her bartender, spend $25,000 a year for supplies, and the utilities bill is $9,500 a year. To cover the start-up costs, she used up all of her savings which earned $4,600 in interest. Total annual revenue at the end of the year is $450,000. Marges economic profit is: a.$450,000

b.$375,500

c.$74,500

d.$280,900

e.$410,000

ANS:D

30.Economic profit is defined as total revenuea.plus total costs

b.minus marginal costs

c.minus variable costs

d.minus total costs

e.minus fixed costs

ANS:D

31.Economic profit is defined asa.total revenue minus implicit costs

b.total revenue plus explicit costs

c.total revenue plus implicit costs

d.wages plus interest minus rent

e.total revenue minus implicit and explicit costs

ANS:E

32.Which of the following would be shown on IBM's accounting statement?a.revenue, implicit costs, explicit costs, and economic profit

b.revenue, implicit costs, explicit costs, and accounting profit

c.revenue, explicit costs, and economic profit

d.revenue, explicit costs, and accounting profit

e.revenue, implicit costs, and accounting profit

ANS:D

33.Maryann and Don want to open their own deli. To do so, Maryann must give up her job, at which she earns $20,000 per year, and Don must give up his part-time job, at which he earns $10,000 per year. They must liquidate their money market fund, which earns $1,000 interest annually. The rent on the building is $10,000 per year, and expenses for such necessities as utilities, corned beef, and pickles are $35,000 annually. What minimum amount of revenue per year would make it worthwhile, financially, for Maryann and Don to operate the deli?a.$10,000

b.$35,000

c.$45,000

d.$31,000

e.$76,000

ANS:E

34.Suppose Ernie gives up his job as financial advisor for P.E.T.S., at which he earned $30,000 per year, to open up a store selling spot remover to Dalmatians. He invested $10,000 in the store, which had been in savings earning 5 percent interest. This year's revenues in the new business were $50,000, and explicit costs were $10,000. Calculate Ernie's accounting profit.a.$10,000

b.$50,000

c.$20,000

d.$40,000

e.$9,500

ANS:D

35.Suppose Ernie gives up his job as financial advisor for P.E.T.S., at which he earned $30,000 per year, to open up a store selling spot remover to Dalmatians. He invested $10,000 in the store, which had been in savings earning 5 percent interest. This year's revenues in the new business were $50,000, and explicit costs were $10,000. Calculate Ernie's economic profit.a.$10,000

b.$50,000

c.$20,000

d.$40,000

e.$9,500

ANS:E

36.Zipco's accounting profit is equal to itsa.total revenue minus opportunity costs

b.total revenue plus opportunity costs

c.total revenue minus imputed costs

d.total revenue minus explicit costs

e.total revenue minus explicit and implicit costs

ANS:D

37.Economic profit is defined asa.total revenue minus price

b.price minus quantity

c.total revenue minus what must be paid to resources to attract them from their best alternative use

d.total revenue divided by what must be paid to resources to attract them from their best alternative use

e.total revenue plus what must be paid to resources to attract them from their best alternative use

ANS:C

38.Zipco's economic profit is equal to itsa.total revenue minus accounting profit

b.total revenue minus explicit costs

c.total revenue plus accounting profit

d.total revenue plus opportunity costs

e.accounting profit minus implicit costs

ANS:E

39.Accounting profit isa.always less than economic profit

b.never less than economic profit

c.equal to economic profit if a normal profit is earned

d.less than economic profit only when implicit costs are greater than explicit costs

e.greater than economic profit only when implicit costs are greater than explicit costs

ANS:B

40.Suppose Ben buys out Jerry's ownership in the firm but retains him as a salaried employee. If so,a.economic profit increases

b.economic profit decreases

c.there is no change in economic profit

d.there is no change in accounting profit

e.accounting profit increases

ANS:C

41.Normal profit is defined asa.accounting profit

b.economic profit

c.profit necessary to ensure that opportunity costs are covered

d.accounting profit minus economic profit

e.economic profit minus accounting profit

ANS:C

42.Suppose a soccer coach has been making $25,000 per year but gives up his coaching job in order to make lace doilies. If his revenue from the sale of these doilies is $50,000 and his materials cost $20,000, then his economic profit isa.$5,000

b.$25,000

c.$30,000

d.$50,000

e.$80,000

ANS:A

43.Suppose Bob leaves his $50,000-a-year job as a financial advisor to P.E.T.S. and starts his own business selling spot remover for Dalmatians. In the first year his accounting profit is $70,000. Based on this level of success, Bob shoulda.return to his old job because his economic profit is negative

b.return to his old job because his economic profit is smaller than his accounting profit

c.return to his old job because his economic profit is less than his old salary

d.stay with his new firm because his economic profit is positive

e.stay with his new firm because accounting profit is positive

ANS:D

44.Suppose a lawyer leaves his $50,000-a-year job and starts his own firm breeding pit bulls. In the first year, his accounting profit is $70,000. The lawyer finances his new business with $100,000 from his savings account, which had earned 10 percent interest. His economic profit isa.$10,000

b.$60,000

c.$70,000

d.-$80,000

e.-$90,000

ANS:A

45.If General Motors is earning only a normal profit,a.it is making economic profit

b.it is breaking even

c.it is suffering an economic loss

d.it is covering only explicit costs

e.it is covering only implicit costs

ANS:B

46.If the Money Store earns a normal profit this year, itsa.economic profit is equal to its accounting profit

b.economic profit is zero

c.economic profit is equal to the average accounting profit in other industries

d.accounting profit is zero

e.accounting profit is less than its economic profit

ANS:B

47.If the Baloney Store earns more than a normal profit, itsa.economic profit must be greater than its accounting profit

b.economic profit is positive

c.economic profit is, therefore, equal to its accounting profit

d.accounting profit is zero

e.accounting profit is less than its economic profit

ANS:B

48.Suppose a professor gives up her teaching job to devote her time to writing textbooks. If salaries of professors rise,a.her accounting profit will rise

b.her accounting profit will fall

c.her explicit costs will rise

d.her economic profit from textbooks will fall

e.her economic profit from textbooks will rise

ANS:D

49.Suppose Joan uses her savings to purchase computer equipment for her new consulting business. Soon after this, the market interest rate rises. As a result, hera.explicit costs rise immediately

b.accounting profit falls immediately

c.accounting profit rises immediately

d.economic profit rises immediately

e.economic profit falls immediately

ANS:E

50.John moved his office from a building he was renting downtown to the carriage house he owns in back of his house. How will his profit change?a.Implicit costs fall.

b.Explicit costs remain unchanged while implicit costs rise.

c.Economic profit must fall.

d.Explicit costs rise.

e.Accounting profit will rise.

ANS:E

Exhibit 7-1

Total Revenue$100,000

Assistants salary$20,000

Material & equipment15,000

Forgone salary30,000

Forgone interest1,000

Foregone building rental10,000

51.Sally owns a small business that she operates in a small building she owns. Given the information in Exhibit 7-1, Sally's accounting profit isa.$80,000

b.$50,000

c.$65,000

d.$35,000

e.$24,000

ANS:C

52.Sally owns a small business that she operates in a small building she owns. Given the information in Exhibit 7-1, Sally's normal profit isa.$80,000

b.$41,000

c.$65,000

d.$35,000

e.$24,000

ANS:B

53.Sally owns a small business that she operates in a small building she owns. Given the information in Exhibit 7-1, Sally's economic profit isa.$80,000

b.$50,000

c.$65,000

d.$35,000

e.$24,000

ANS:E

54.Suppose I have $1,000 to put into a one-year CD. Community Bank offers 5 percent interest, Floatbank offers 5.25 percent, and Squidbank offers 5.40 percent. If I place my money in Squidbank, my economic profit on the investment isa.5.40 percent

b.5 percent

c.0.40 percent

d.0.15 percent

e.-0.40 percent

ANS:D

55.Suppose that at the current level of output, Pat's Hats has fixed costs of $500, variable costs of $1,000, and $2,000 in total revenue. Which of the following is true?a.Profit is currently $500 and, in the long run, it will be $1,000 because there will be no fixed costs.

b.Profit is currently $500 and, in the long run, it will be $1,500 because there will be no variable costs.

c.Profit is currently $500.

d.Profit is currently $500, and Pat's Hats will want to decrease its plant size in the long run to lower its fixed costs.

e.Pat's Hats will continue to operate as long as revenue is greater than $500.

ANS:C

56.A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building he owns and currently rents for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What is the minimum revenue he must earn per year in order for it to be worth his while to open his sushi bar?a.$26,000

b.$66,000

c.$78,000

d.$52,000

e.$72,000

ANS:C

57.The graph of average fixed cost is a horizontal line.a.True

b.False

ANS:B

58.In the long run, all of a firm's inputs are variable.a.True

b.False

ANS:A

59.In the short run, all costs are fixed.a.True

b.False

ANS:B

60.In the long run, all inputs are variable.a.True

b.False

ANS:A

61.Inputs that can be increased or decreased in the short run are calleda.fixed inputs

b.variable inputs

c.economic inputs

d.accounting inputs

e.normal inputs

ANS:B

62.Which of the following is most likely to be a fixed resource for Paul's Country Fresh Pies, Inc.?a.berries

b.flour

c.bakers

d.eggs

e.ovens

ANS:E

63.Bart operates a lemonade stand in front of his house. His father works at the Springfield Nuclear Power Plant. Which of the following is most likely to be true?a.The long run is the same for the power plant as it is for the lemonade stand.

b.The long run is longer for the power plant than it is for the lemonade stand.

c.The long run is shorter for the power plant than it is for the lemonade stand.

d.We cannot compare the long runs because these are different businesses.

e.It's impossible for the power plant short run to be shorter than the lemonade stand's long run.

ANS:B

64.The short run is a period of timea.equal to or less than six months

b.during which all resources may be varied

c.during which all resources are fixed

d.during which at least one resource is fixed

e.during which at least one resource may be varied

ANS:D

65.Which of the following is most likely to be a fixed resource for the City Slicker's Dude Ranch?a.the lodge where the guests stay

b.food for the guests

c.stable hands to take care of the horses

d.hay for the horses

e.water for the horses

ANS:A

66.Which of the following is most likely to be a fixed resource for the Speedy Word Processing and Rsum Company?a.floppy disks

b.typists

c.computer terminals

d.electricity

e.paper

ANS:C

67.Which of the following probably has the shortest long run?a.a law firm

b.a steel mill

c.an automobile plant

d.a tire factory

e.an aircraft engine factory

ANS:A

68.Which of the following is a long-run adjustment?a.A new economics professor is hired on campus.

b.General Motors increases its orders for steel.

c.Microsoft cuts back its hiring of new graduates.

d.Glow Electric disassembles one of its nuclear power plants.

e.Texaco buys more crude oil to refine into gasoline.

ANS:D

69.Which of the following is a short-run adjustment?a.Toyota builds an automobile plant in Kentucky.

b.Faced with increasing enrollment, a private college builds a new School of Business building.

c.Because of staggering losses, three insurance companies exit the industry.

d.People's Bank hires two new tellers to meet increased demand for customer services.

e.Shaveco enters the razor blade market with a new product, produced in the United States.

ANS:D

70.Which of the following would most likely reach the long run most rapidly?a.a nuclear power plant

b.a college

c.a lumber mill

d.a shopping mall

e.a hot dog stand

ANS:E

71.The length of time that represents the long runa.is greater than one year

b.is greater than six months

c.is longer in service industries than in manufacturing

d.is the same for all industries

e.varies from industry to industry

ANS:E

72.The short run is a period of timea.less than one year

b.greater than one year

c.during which all resources are variable

d.during which at least one resource is fixed

e.during which at least one resource is variable

ANS:D

73.The long run is a period of timea.during which at least one resource is fixed

b.during which all resources are variable

c.during which all resources are fixed

d.less than one year

e.greater than one year

ANS:B

74.If marginal product is negative, total product must be negative.a.True

b.False

ANS:B

75.If a firm is experiencing diminishing marginal returns, its marginal product is negative.a.True

b.False

ANS:B

76.If a firm is experiencing diminishing marginal returns, its marginal product is declining.a.True

b.False

ANS:A

77.The additional output obtained by adding another unit of labor to the production process is calleda.the marginal cost of labor

b.the average output of labor

c.a variable cost

d.the marginal product of labor

e.the marginal utility of labor

ANS:D

78.Marginal product is defined asa.the increase in revenue that occurs when an additional unit of a resource is added

b.the increase in output that occurs when all resources are increased by the same proportion

c.the increase in output that occurs when an additional unit of a resource is added, holding all other resources constant

d.the amount of additional resources needed to increase output by one unit when all resources are increased by the same amount

e.the amount of additional money needed to increase output by one unit when all resources are held constant

ANS:C

Exhibit 7-2

LaborTotal product(pairs of shoes)

00

120

250

375

480

575

79.Given the information in Exhibit 7-2, what is the marginal product of the third unit of labor?a.45 pairs of shoes

b.25 pairs of shoes

c.15 pairs of shoes

d.$45

e.$25

ANS:B

80.Given the information in Exhibit 7-2, at what point do diminishing marginal returns set in?a.before the first unit of labor

b.between the first and second units of labor

c.between the second and third units of labor

d.between the third and fourth units of labor

e.between the fourth and fifth units of labor

ANS:C

81.Given the information in Exhibit 7-2, at what point do negative marginal returns set in?

e.between the fourth and fifth units of labor

82.Increasing marginal returns are generally the result of

c.specialization and division of labor

83.As Product Co. adds the first four workers to its production process in the short run, its output rises from 0 to 12 to 25 to 35 to 43. Addition of the fifth worker will most likely lead to an output rate

c.less than 51

Exhibit 7-12

Resource (Labor) Total product (T-shirts)

0123456 0204262727468

84.Given the information in Exhibit 7-12, the production of T-shirts exhibits increasing marginal returns to labor for:

b.The first two workers

85.Given the information in Exhibit 7-12, at what point do diminishing marginal returns set in?

b.Between the second and the third worker

86.Given the information in Exhibit 7-12, at what point do negative marginal returns set in?

e.Between the fifth and the sixth worker

87.The law of diminishing returns explains why

b.short-run MC and AVC curves are U-shaped

88.If a firm is experiencing diminishing marginal returns to labor, which of the following must be true?

c.The positive effect of specialization in production is being offset by the negative effect of crowding of inputs.

Exhibit 7-3

Numberof workersTotaloutput

00

110

240

3100

4140

5160

6170

7150

89.In Exhibit 7-3; the total product of four workers is

e.140

90.In Exhibit 7-3, the marginal product of the third worker is

c.60

91.In Exhibit 7-3, diminishing marginal returns set in with the addition of the

c.fourth worker

92.The law of diminishing marginal returns states that

c.as units of a variable input are added to a given amount of fixed inputs, the marginal product of the variable input eventually diminishes

93.If total product for each of five units of labor is 10, 16, 20, 30, and 34, respectively, the marginal product of the third unit is

c.4

Exhibit 7-4

Units oflaborTotalproductMarginalproduct

00-

166

2148

32410

43612

5426

6464

94.In Exhibit 7-4, marginal returns increase with the hiring of up to _____ worker(s).

d.four

95.In Exhibit 7-4, marginal returns begin to diminish with the hiring of the _____ worker.

d.fifth

96.The law of diminishing marginal returns is first evident in the following table

LaborTotal

InputProduct

00

110

222

333

440

545

642

c.when the third unit of labor is added

97.When marginal product is negative, the slope of the total product curve must be negative.a.True

98.If the marginal product of an input is negative, the total product must also be negative.

b.False

99.When diminishing marginal returns set in, total product

e.increases at a decreasing rate

100.When diminishing marginal returns set in, marginal product is

b.positive and decreasing

101.In the range of increasing marginal returns, total product isb.increasing at an increasing rate

102.At the point where diminishing marginal returns set in, the slope of the total product curve isb.positive and decreasing

103.Which of the following is true of marginal product?

e.When marginal product is increasing, total product is increasing by increasing amounts.

104.The marginal product of labor is the

e.change in output from using one more unit of labor

105.To a firm facing constant input prices, increasing marginal returns

c.can occur due to specialization and division of labor

106.Which of the following is most likely to be a fixed cost for any firm?

d.rent on office space

107.Which of the following is a fixed cost for Wendy's Hamburgers?

d.interest on funds borrowed to build new facilities

108.A variable cost is one that changes

e.as output changes

109.For a person who owns and operates an automobile, insurance premiums are a _____ and maintenance and repairs are a _____.

e.fixed cost; variable cost

110.Which of the following is a fixed cost of preparing meals?

d.a microwave oven

111.Which of the following is a fixed cost of driving a car?

d.license plates

112.Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party favors. For simplicity, assume that Andrew is considered one of the guests and he receives an invitation too. Assuming that 25 people attend the party, the fixed cost of the party is:a.$400

113.Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party favors. For simplicity, assume that Andrew is considered one of the guests and he receives an invitation too. Assuming that 25 people attend the party, the variable cost of the party is:

c.$650

114.Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party favors. For simplicity, assume that Andrew is considered one of the guests and he receives an invitation too. Assuming that 25 people attend the party, the total cost of the party is:

b.$1,050

115.In the short run, which of the following is likely to be a variable cost to a physician?

d.insurance forms

116.If fixed cost at Q = 100 is $130, then

d.fixed cost at Q = 200 is $130

117.Which of the following would not be considered a fixed cost for a law firm?a.paper for the photocopy machine

118.Fixed costs are defined as

d.costs that do not vary as quantity produced increases

119.When marginal cost is decreasing, total cost is rising.a.True

120.Which of the following best explains why marginal cost eventually increases as output increases?

d.marginal product decreases

121.What is true of marginal cost when marginal returns are increasing?

d.It is positive and decreasing.

122.What is true of marginal cost when marginal returns are decreasing?

c.It is positive and increasing.

123.What is the relationship between marginal cost and marginal product?

c.When marginal product increases, marginal cost falls.

124.When a firm is experiencing diminishing marginal returns, marginal cost isa.rising

125.As output rises, marginal product eventually diminishes anda.marginal cost increases

126.The Toys-R-Danger-Us Toy Company can produce 500 water pistols for a total cost of $1,400. If the variable cost of producing 500 water pistols is $1,300, thena.fixed cost must be $100

127.The Toys-R-Danger-Us Toy Company can produce 500 water pistols for a total cost of $1,400. The company can also produce 1,000 water pistols for a total cost of $3,000, but it would have costs of $200 even if it produced no water pistols. Which of the following is true?

c.Marginal cost is positive and increasing as output increases.

128.If variable cost at each output level doubles,

d.MC doubles

129.If variable cost rises from $60 to $100 as output increases from 15 to 20 units, the marginal cost of the twentieth unit

d.is $8

130.Suppose Guild produces 5,000 guitars per year. Its average total cost is $90, and its fixed cost is $250,000. What is its variable cost?

e.$200,000

131.Which of the following statements is true? If the marginal product of labor diminishes,

c.marginal cost rises

132.If labor is a firm's only variable input, marginal cost ultimately depends on

d.how much output each worker produces

133.On a graph of production costs, the vertical distance between the fixed cost curve and the total cost curve at a specific quantity representsa.variable cost

134.Total fixed cost divided by the level of output yields

b.average fixed costs per unit

Exhibit 7-5

Outputper dayWorkersper dayTotalcost

00$10

5120

15230

18340

20450

135.In Exhibit 7-5, what is fixed cost at 15 units of output?

b.$10

136.In Exhibit 7-5, what is fixed cost at 20 units of output?

b.$10

137.In Exhibit 7-5, what is variable cost when no output is being produced?a.$0

138.In Exhibit 7-5, what are variable costs at 15 units of output?

d.$20

139.In Exhibit 7-5, what is the marginal cost of the 15th unit of output?

c.$1

Exhibit 7-6

OutputRentCost ofLaborMaterials

0$200$0$0

10200100100

20200200200

30200250300

40200350400

50200500500

140.Given the information in Exhibit 7-6, what is fixed cost?

b.$200

141.In Exhibit 7-6, the marginal cost of the 40th unit of output isa.$20

142.In Exhibit 7-6, which costs are fixed costs?

e.rent only

143.In Exhibit 7-6, the average total cost of producing 20 units is

c.$30

144.In Exhibit 7-6, the average variable cost of producing 20 units isa.$20

Exhibit 7-7

145.Fixed cost in Exhibit 7-7 equals

c.$50

146.Total cost is calculated as

b.fixed cost plus variable cost

147.Total cost is calculated as

d.VC + FC

148.A firm enters into a consent decree to avoid an even greater legal setback. If the terms of the consent decree effectively double the firm's fixed costs, then

c.marginal cost remains unchanged

149.When marginal product is decreasing, marginal cost is

e.increasing

150.If a firm shuts down in the short run and produces no output, its total cost will be

c.equal to total fixed cost

151.If total cost at Q = 0 is $100 and total cost at Q = 10 is $500, then average variable cost at Q = 10 isa.$500

b.$400

c.$50

d.$40

e.$10

ANS:D

152.Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party favors. For simplicity, assume that Andrew is considered one of the guests and he receives an invitation too. Assuming that 25 people attend the party, the average variable cost of the party is:a.$16

b.$1,050

c.$42

d.$350

e.$26

ANS:E

153.Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party favors. For simplicity, assume that Andrew is considered one of the guests and he receives an invitation too. Assuming that 25 people attend the party, the average total cost of the party is:a.$16

b.$1,050

c.$42

d.$350

e.$26

ANS:C

154.Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party favors. For simplicity, assume that Andrew is considered one of the guests and he receives an invitation too. What happens with the average fixed cost when the number of guests increases from 25 to 30?a.decreases from $42 to $39.33

b.decreases from $16 to $13.33

c.increases from $16 to $42

d.increases from $3 to $5

e.stays the same

ANS:B

Exhibit 7-8

155.In Exhibit 7-8, the vertical distance between lines B and C at any level of output representsa.marginal cost

b.average total cost

c.average variable cost

d.average fixed cost

e.average marginal cost

ANS:D

156.In Exhibit 7-8, when output is 10,a.total cost equals $10

b.fixed cost equals $1

c.variable cost equals $10

d.marginal cost equals $10

e.fixed cost equals $10

ANS:C

157.In Exhibit 7-8, when output is 10,a.total cost equals $80

b.fixed cost equals $10

c.variable cost equals $70

d.marginal cost equals $10

e.fixed cost equals $7

ANS:A

158.In Exhibit 7-8, curve B representsa.marginal cost

b.average total cost

c.average variable cost

d.average fixed cost

e.average marginal cost

ANS:C

159.The short-run average variable cost curvea.is always downward-sloping

b.starts at the origin and always slopes upward

c.starts above the origin and always slopes upward

d.is a horizontal line intersecting the vertical axis

e.slopes downward at low rates of output, then slopes upward at higher rates of output

ANS:E

160.The average total cost curve and the average variable cost curvea.are closer together as output increases, with average variable cost reaching its minimum level first

b.are closer together as output increases, with average total cost reaching its minimum level first

c.are farther apart as output increases, with average variable cost reaching its minimum level first

d.are farther apart as output increases, with average total cost reaching its minimum level first

e.are parallel to each other, and reach their minimum levels at the same rate of output

ANS:A

161.As a firm expands into overseas markets, information problems and the complexity of operating within many varied cultures and economies may result ina.constant returns to scale

b.diminishing marginal returns

c.declining long-run marginal cost

d.diseconomies of scale

e.economies of scale

ANS:D

162.The marginal cost curve intersects the minimum point of the average variable cost curve.a.True

b.False

ANS:A

163.If the average height in the classroom were 5 feet 10 inches and Patrick Ewing, who is 7 feet tall, came in and sat down,a.the average height would rise to 7 feet

b.the marginal height would be 5 feet 10 inches

c.the average height would not change

d.the average height would rise somewhat

e.the marginal height would rise

ANS:D

164.Which of the following correctly describes the relationship between the marginal cost and average variable cost curves?a.MC is everywhere above AVC

b.AVC is everywhere above MC

c.MC crosses AVC at AVC's minimum point

d.MC crosses AVC at MC's minimum point

e.both AVC and MC first rise and then fall

ANS:C

165.If marginal cost exceeds average variable cost,a.average variable cost is negative

b.average variable cost is increasing

c.marginal cost is greater than average total cost

d.average variable cost is decreasing

e.average fixed cost is increasing

ANS:B

166.If marginal cost is less than average total cost,a.marginal cost must be falling

b.average total cost must be increasing

c.average variable cost equals average total cost

d.average variable cost must be decreasing

e.average variable cost may be increasing or decreasing

ANS:E

167.Which of the following is true of the MC curve?a.It intersects the ATC curve at its minimum, but it does not intersect the AVC curve at its minimum.

b.It intersects the AVC curve at its minimum, but it does not intersect the ATC curve at its minimum.

c.It intersects both the ATC and the AVC curves at their minimums.

d.It intersects both the ATC and the AFC curves at their minimums.

e.It intersects both the AVC and the AFC curves at their minimums.

ANS:C

168.Jerrys ice-cream parlor is hosting Andrews birthday party in one week. Overall, 25 to 30 people will attend the party and Andrews costs are as follows: $200 for rent, $150 for the cake, $3 per person for customized invitations, $15 per person for the meal, $50 for decorations, and $8 per person for party favors. For simplicity, assume that Andrew is considered one of the guests and he receives an invitation too. Assuming that 25 people attend the party, what is the marginal cost of having the 26th guest at the party?a.$42

b.$26

c.$16

d.$8

e.$15

ANS:B

169.As output expands, the slope of the average total cost curvea.stays negative throughout

b.stays positive throughout

c.is first negative and then positive

d.is first positive and then negative

e.is constant

ANS:C

170.Which of the following is true in the short run at the output level where average total cost is at its minimum?a.Marginal cost equals average total cost.

b.Average variable cost equals fixed cost.

c.Marginal cost equals average variable cost.

d.Average total cost equals average fixed cost.

e.Average total cost equals average variable cost.

ANS:A

171.The marginal cost curve intersects the average total cost curve (ATC)a.at the ATC's minimum point

b.only when the ATC is sloping upward

c.at the ATC's maximum point

d.only when the ATC is sloping downward

e.when the ATC intersects the fixed cost curve

ANS:A

172.The marginal cost curve intersects the average variable cost curve (AVC)a.only when the AVC is rising

b.at the AVC curve's maximum point

c.at the AVC curve's minimum point

d.only when the AVC is sloping downward

e.when the AVC intersects the fixed cost curve

ANS:C

173.The relationship between average and marginal variables can be stated as follows: if the marginal is greater than the average,a.the average is increasing

b.the average is decreasing

c.the marginal is increasing

d.the marginal is decreasing

e.the total is decreasing

ANS:A

174.With respect to the average cost curves, the marginal cost curvea.intersects average total cost, average fixed cost, and average variable cost at their minimum points

b.intersects average total cost, average fixed cost, and average variable cost at their maximum points

c.intersects both average total cost and average variable cost at their minimum points

d.intersects average total cost where it is increasing and average variable cost where it is decreasing

e.intersects only average total cost at its minimum point

ANS:C

175.The shape of short-run variable cost curve is determined bya.the firm's effort to minimize cost

b.the firm's effort to maximize profit

c.competition in the industry

d.the marginal productivity of the variable inputs the firm uses

e.the money the firm spends

ANS:D

176.The long-run average cost curve is tangent to the minimum point of every short-run average total cost curve.a.True

b.False

ANS:B

177.Long-run average costs are the same as long-run total costsa.True

b.False

ANS:A

178.A firm's long-run average cost curve is also called itsa.profit curve

b.explicit cost curve

c.opportunity cost curve

d.production curve

e.planning curve

ANS:E

179.Which of the following is also known as the firm's planning curve?a.the average total cost curve

b.the total cost curve

c.the long-run average cost curve

d.the long-run marginal cost curve

e.the fixed cost curve

ANS:C

180.For each size of plant a manufacturer could build, there is a differenta.long-run average fixed cost curve

b.long-run average variable cost curve

c.short-run average total cost curve

d.long-run average total cost curve

e.long-run marginal cost curve

ANS:C

181.Empirical studies of production suggest that the long-run average cost curvea.is U-shaped

b.has an inverted L shape

c.is L-shaped

d.is horizontal

e.shows diminishing marginal returns

ANS:A

Exhibit 7-9

182.If the firm represented in Exhibit 7-9 wants to produce output level q, then in the long run it should build a plant size with average total cost curve ofa.1

b.2

c.3

d.4

e.the question cannot be answered with the information given

ANS:B

Exhibit 7-10

183.In Exhibit 7-10, lines H, J, and K represent, respectively,a.marginal product, average product, and total product

b.average fixed cost, average total cost, and average variable cost

c.marginal cost, average total cost, and average variable cost

d.average total cost, marginal cost, and average variable cost

e.marginal cost, average product, average total cost

ANS:C

184.The shape of the long-run average cost curve reflectsa.market demand

b.economies and diseconomies of scale

c.increasing and diminishing marginal returns

d.productivity of fixed inputs

e.all of the above

ANS:B

185.If a firm is producing at its minimum efficient scale, increasing its output slightly will lead to diseconomies of scale.a.True

b.False

ANS:A

186.If a firm experiencing "economies of scale" decreases its output, its long-run average cost will decrease.a.True

b.False

ANS:B

187.Economies of scale occur wherea.long-run average cost falls as new firms enter the industry

b.short-run average cost falls as new firms enter the industry

c.long-run average cost falls as one firm expands plant size

d.short-run average cost falls as one firm expands plant size

e.long-run average cost rises as one firm expands plant size

ANS:C

188.Which economic concept explains why a large drugstore chain can produce at a lower average cost than Whoville Pharmacy, an individually owned drugstore?a.increasing marginal returns

b.diminishing marginal returns

c.economies of scale

d.diseconomies of scale

e.constant returns to scale

ANS:C

189.Doubling the circumference of an oil pipeline more than doubles the volume of oil that can be pumped through. This is an example ofa.production inefficiency

b.diminishing marginal returns

c.diseconomies of scale

d.constant returns to scale

e.economies of scale

ANS:E

190.For building contractors, doubling the size of an office building does not require double the inputs because there are common walls. This is an example ofa.increasing marginal product

b.diminishing marginal returns

c.economies of scale

d.diseconomies of scale

e.constant returns to scale

ANS:C

191.To maximize profit in the long run, a firm musta.charge the highest price possible

b.produce where demand is unit elastic

c.sell the most output possible

d.minimize the cost of producing any given amount of output

e.produce at minimum long-run total cost

ANS:D

192.Economies of scale can be caused bya.all of the following

b.short-run increases in marginal productivity

c.the use of larger, more specialized machines

d.higher information costs as a firm expands

e.bureaucratic red tape as a firm expands

ANS:C

193.The minimum efficient scale for a firm is thea.lowest rate of output at which long-run average cost is at a minimum

b.lowest rate of output at which short-run average total cost is at a minimum

c.lowest rate of output at which short-run average variable cost is at a minimum

d.average of the rates of output at which long-run average cost is at a minimum

e.average of the rates of output at which short-run average total cost is at a minimum

ANS:A

194.Someone once said that Chevrolet is so large that if it shakes its tail, its takes two years for its head to notice it. This is an example ofa.profit centers

b.economies of scale

c.diseconomies of scale

d.diminishing marginal returns

e.diminishing marginal cost

ANS:C

195.In recent years, the number of farms has fallen while the average farm size has increased. What concept may explain this phenomenon?a.diminishing marginal returns

b.declining productivity

c.diseconomies of scale

d.economies of scale

e.good weather in midwestern states

ANS:D

196.Which of the following reflects diseconomies of scale?a.Marginal product decreases as output increases.

b.Short-run marginal cost increases as output increases.

c.Long-run marginal cost increases as output increases.

d.Short-run average cost increases as output increases.

e.As output doubles, long-run total cost more than doubles.

ANS:E

197.If General Electric finds that when it doubles both its plant size and the amount of associated inputs, its output level does not double, thena.the law of diminishing returns is in effect

b.long-run average costs must be decreasing

c.the firm is experiencing diseconomies of scale

d.the firm should increase production

e.the firm is experiencing constant returns to scale

ANS:C

198.As output increases, diseconomies of scalea.lead to rising long-run average costs

b.lead to declining long-run average costs

c.lead to rising short-run average total costs

d.lead to declining short-run total cost

e.means the law of diminishing marginal returns is affecting production

ANS:A

199.If a firm triples all of its inputs and its output doubles, it is said to be experiencinga.diminishing marginal returns

b.increasing marginal returns

c.diseconomies of scale

d.economies of scale

e.constant average costs

ANS:C

200.At a given rate of output, marginal cost equals the slope of thea.long-run average cost curve

b.short-run average total cost curve

c.planning curve

d.total cost curve

e.average variable cost curve

ANS:D

201.Marginal cost indicates how much total cost increases if one more unit is produced or how much total cost drops if production declines by one unit.a.True

b.False

ANS:A

202.The least-cost way of producing a particular rate of output is represented by a point of tangency between a short-run average cost curve and thea.total cost curve

b.short-run average total cost curve

c.average variable cost curve

d.long-run average cost curve

e.marginal cost curve

ANS:D