principle of economics : chapter 22

Chapter 22—Production and Costs

MULTIPLE CHOICE

1. A cost that is incurred when an actual monetary payment is made is a(n) __________ cost.a. explicitb. implicitc. positived. expressed

ANS: A PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

2. A cost of resources used in production for which no actual monetary payment is made is a(n) __________ cost.a. tacitb. implicitc. covertd. explicit

ANS: B PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

3. Which of the following statements is true?a. Costs are always explicit, never implicit.b. Costs are always implicit, never explicit.c. George runs a stationery shop; he paid Frank $5,000 for the carpet he installed in the shop.

The $5,000 for carpet is an implicit cost.d. An implicit cost is a cost that represents the value of resources used in production for

which no actual monetary payment is made.e. none of the above

ANS: D PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

4. Five months ago Wilson opened up a health club. Which of the following is an implicit cost related to the health club?a. Wilson paid $120 for an outside laundry service to clean the towels used at the club.b. Wilson paid $100 for the pest control exterminator to spray the health club.c. Wilson previously worked as an accountant, earning $3,000 a month.d. Wilson usually eats four hamburgers a day, priced at $3 each.

ANS: C PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

5. Which of the following statements is false?a. Money must change hands before a cost can be incurred.

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

b. No monetary payment takes place when an implicit cost is incurred.c. Costs may be either explicit costs or implicit costs.d. Cost implies that a sacrifice has been made.

ANS: A PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

6. Economic profit is the difference between total revenue anda. explicit costs.b. implicit costs.c. sunk costs.d. the sum of explicit and implicit costs.

ANS: D PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

7. Consider the following information about a business Diane opened last year: price = $10, quantity sold = 25,000; implicit cost = $55,000; explicit cost = $160,000. What was Diane's economic profit?a. $35,000b. $195,000c. -$35,000d. $90,000e. There is not enough information provided to answer this question.

ANS: A PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New

8. Consider the following information about a business Diane opened last year: price = $10, quantity sold = 25,000; implicit cost = $55,000; explicit cost = $160,000. What was Diane's accounting profit?a. $35,000b. $195,000c. -$35,000d. $90,000e. There is not enough information provided to answer this question.

ANS: D PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New

9. Which of the following statements is true?a. Explicit costs always equal implicit costs.b. Zero economic profit is a smaller dollar figure than normal profit.c. Zero economic profit is a larger dollar figure than normal profit.d. Saying that a firm earned zero economic profit is the same as saying it earned normal

profit.e. none of the above



10. If a firm earns normal profit, then it has generated revenuesa. equal to the sum of implicit and explicit costs.b. greater than total opportunity costs.c. sufficient to cover explicit costs, but not implicit costs.d. sufficient to cover implicit costs, but not explicit costs.


11. An unrecoverable cost that should be disregarded in any current or future decision is also called a(n) __________ cost.a. sunkb. explicitc. implicitd. variable


12. You paid $25 for your ticket to the football game, only to see your favorite team losing 28-0 at the end of the first quarter. That $25 should now be regarded as a(n) __________ cost that economists say should be __________ in your decision on whether or not to stay at the game or leave.a. explicit; includedb. explicit; disregardedc. sunk; includedd. sunk; disregarded

ANS: D PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

13. Carol says the following to an economist: "I hate playing the guitar, but I have taken lessons for 10 years, so I might as well continue. There is a chance I will become a professional guitarist one day." An economist would probably make which of the following statements?a. In a world of scarcity and unhappy alternatives, guitar playing may be your best bet.b. You're right; it is better not to let all that time, energy, and money on guitar lessons go to

waste. That would be uneconomical and irrational.c. The music made by a guitar is nice; maybe you should stay with it, you may come to like

it.d. The cost you have incurred for guitar lessons is sunk. You should not allow something that

can't be undone to influence a current decision.

ANS: D PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

14. A fixed input is an input whose quantitya. can be changed as output changes in the short run.b. cannot be changed as output changes in the short run.


c. cannot be changed as output changes in the long run.d. a and ce. b and c

ANS: B PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

15. Which of the following statements is true?a. The short run is always somewhere between six and twelve months.b. In the short run, changes in output can only be brought about by a change in the quantity

of variable inputs.c. The long run is any period of time over one year.d. In the short run, there are variable costs but no fixed costs.e. b and d


16. Average fixed costa. is greater at lower levels of output than at higher levels.b. does not change as output changes.c. exists only in the short run.d. is usually greater at higher levels of output than at lower levels of output.e. a and c

ANS: E PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

17. Cy recently went into the business of producing and selling cardboard boxes. For this business, which of the following is most likely to be a fixed cost?a. fire insuranceb. labor costsc. paper costsd. adhesive costse. b, c, and d are equally likely to be fixed costs

ANS: A PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

18. Costs that do not change with output are called __________ costs.a. marginalb. averagec. fixedd. variable

ANS: C PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Knowledge


19. Fixed costsa. are equal to explicit costs plus implicit costs.b. do not vary as output varies.c. are the same as total costs for any level of output greater than zero.d. are another name for sunk costs.


20. Which of the following statements is false?a. Since (total) fixed costs are constant as output changes in the short run, it follows that

average fixed cost is constant in the short run.b. Marginal cost is the cost of producing an additional unit of output.c. Changes in variable costs are reflected dollar-for-dollar in changes in total cost.d. Fixed costs exist in the short run, but not in the long run.


21. At 100 units of output, total cost is $22,000 and total variable cost is $14,000. At 100 units of output, what is the value of average total cost, average variable cost, and average fixed cost, respectively?a. $22; $14; $8b. $220; $140; $80c. $740; $340; $400d. $340; $740; $60e. $400; $340: There is not enough information provided to determine the average fixed cost.

ANS: B PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New

22. At 500 units of output, total cost is $35,000 and total variable cost is $22,000. What does total fixed cost equal at 500 units?a. $57,000b. $900c. $13,000d. $34e. There is not enough information provided to answer this question.

ANS: C PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New

23. Which of these statements is false?a. There are no fixed costs in the long run.b. Total costs are equal to total fixed costs plus total variable costs.c. In the short run, all inputs are fixed inputs.d. A fixed cost is a cost that does not change as output changes.

ANS: C PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of production


KEY: Bloom's: Comprehension

24. The change in total cost that results from a change in output is __________ cost.a. average fixedb. average variablec. average totald. marginal

ANS: D PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Knowledge

25. The law of diminishing marginal returns holds for a situation in whicha. all inputs are variable.b. all inputs are fixed.c. some inputs are variable and some inputs are fixed.d. all inputs are increased in the same proportion.

ANS: C PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

26. "As additional units of a variable input are added to a fixed input, eventually the marginal physical product of the variable input will decline." This is a statement of thea. law of supply.b. average-marginal rule.c. law of diminishing marginal utility.d. law of diminishing marginal returns.


27. A rising marginal cost curve is a reflection of aa. rising marginal physical product curve.b. falling marginal physical product curve.c. falling average fixed cost curve.d. rising average variable cost curve.


28. The law of diminishing marginal returns isa. the same concept as economies of scale.b. another name for the law of diminishing marginal utility.c. important for long-run economic analysis.d. relevant to the production of goods, but not services.e. none of the above

ANS: E PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application


29. As the marginal physical product curve rises,a. the marginal cost curve rises.b. the marginal cost curve falls.c. the total cost curve rises.d. the total cost curve falls.


30. The change in output that results from changing a variable input by one unit, holding all other inputs fixed, is called the marginal __________ product of the variable input.a. physicalb. valuec. averaged. explicit


31. The marginal physical product (MPP) of a variable input isa. total output divided by the quantity of the input used.b. the change in total output that results from changing the variable input by one unit.c. the change in total revenue that results from changing the variable input by one unit.d. the change in total output that results from changing the fixed input by one unit.e. the change in total costs that results from a change in output.


32. Which of the following curves should one look at to observe the law of diminishing marginal returns?a. the average fixed cost curveb. the total fixed cost curvec. the marginal physical product curved. the long run average total cost curve


33. Suppose that a firm produces hard candies using both machines and labor, and that its quantity of machines is currently fixed but it can vary the number of workers. As more workers are added to operate the machines, output increases. Is this a refutation of the law of diminishing marginal returns?a. Yes, because the law definitely states that output will decrease as more workers are added.b. No, because we must be observing output in the long run if the stated scenario is

occurring.c. Yes, because the only way that this could occur is if the number of machines being used is

also increasing.d. No, because it is entirely possible for output to increase even when the law is in operation.


ANS: D PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

Exhibit 22-1

(1) (2) (3) (4)Variable

InputFixedInput

Quantityof Output

MPP ofVariable Input

0 1 01 1 20 (A)2 1 50 (B)3 1 75 (C)4 1 95 (D)5 1 110 (E)6 1 120 (F)

34. Refer to Exhibit 22-1. The numbers that go in blanks (A) and (B) are, respectively,a. 20 and 30.b. 0 and 21.c. 20 and 25d. 1 and 2.e. 20 and 21.


35. Refer to Exhibit 22-l. The numbers that go in blanks (C) and (D) are, respectively,a. 25 and 20.b. 20 and 22.c. 25 and 24.d. 22 and 20.e. none of the above


36. Refer to Exhibit 22-l. The numbers that go in blanks (E) and (F) are, respectively,a. 25 and 20.b. 20 and 22.c. 15 and 10.d. 22 and 20.e. none of the above

ANS: C PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application


37. Refer to Exhibit 22-1. Diminishing marginal returns set in with the addition of which unit of the variable input?a. the fourthb. the fifthc. the sixthd. the seconde. the third


38. As the marginal physical product of a variable input __________, the marginal cost __________.a. increases; increasesb. increases; decreasesc. decreases; increasesd. b and c


39. If labor is the variable input, then marginal cost equalsa. MPP divided by the wage rate.b. average variable (labor) costs divided by MPP.c. average variable (labor) costs multiplied by MPP.d. the wage rate divided by MPP.e. the wage rate multiplied by MPP.


40. Suppose that one fixed and one variable input are used to produce good X. As the marginal physical product of the variable input increases, the marginal costa. increases.b. decreases.c. remains constant.d. There is not enough information to answer the question.

ANS: B PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

41. Suppose a given marginal cost curve starts out downward sloping and at some level of output turns upward and becomes upward sloping. The point at which it turns upward is the point at whicha. marginal physical product increases.b. total cost rises.c. average fixed cost declines.d. average variable cost is below marginal cost.e. diminishing marginal returns set in.

ANS: E PTS: 1 DIF: Difficulty: Moderate© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

NAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

42. The average-marginal rule states that if the marginal magnitude isa. less than the average magnitude, the average magnitude falls.b. greater than the average magnitude, the average magnitude falls.c. rising, the average magnitude is necessarily above it.d. falling, the average magnitude is necessarily below it.e. c and d

ANS: A PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

43. There are 30 students in a class. The average grade for the first 29 students is 87. The grade of the remaining student is 84. Given this student's grade, the average grade of the 30-student class will bea. 87.b. higher than 87.c. lower than 87.d. 84.

ANS: C PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

44. If the average variable cost curve is falling,a. the MC curve must be below it.b. marginal cost is greater than average variable cost.c. the MC curve is necessarily falling.d. the MC curve is necessarily horizontal (neither rising nor falling).e. the MC curve is necessarily rising.


45. If the wage rate is constant and diminishing marginal returns have already set in, thena. the wage rate must increase.b. marginal cost increases.c. marginal cost decreases.d. the wage rate must decrease.


46. Which of the following statements is true?a. If the marginal cost curve is above the AFC curve, the AFC curve must be rising.b. Average total cost equals average variable cost minus average fixed cost.c. As output increases, the average variable cost curve gets closer to the average total cost

curve.d. The AFC curve is horizontal as output increases.



47. If the marginal cost (MC) curve is rising and is above the average fixed cost (AFC) curve, thena. the AFC curve is rising.b. the AFC curve is declining, although the MC curve has nothing to do with this.c. the AFC curve is at its minimum point.d. the AFC curve is at its maximum point.e. Nothing certain can be said about the AFC curve without additional information.


48. In the long run,a. all costs are variable costs.b. all costs are fixed costs.c. there are no variable costs.d. b and c


49. Which of the following statements is true?a. In the short run, there are no fixed costs, only variable costs.b. In the short run, there are fixed and variable costs, but in the long run there are only fixed

costs.c. In the short run, there are fixed and variable costs, but fixed costs are the only costs a firm

is concerned with.d. In the long run, there are no costs, fixed or variable.e. none of the above


50. The marginal cost curve passes through the __________ curve at its lowest point.a. average variable costb. average total costc. average fixed costd. a and be. a, b, and c


51. Which of the following cost curves is never U-shaped?a. the average total cost curveb. the average fixed cost curve


c. the marginal cost curved. the average variable cost curve


52. Economies of scale are said to exist when inputs are increased by some percentage and output increases by a(n) __________ percentage, causing unit costs to __________.a. greater; fallb. smaller; fallc. greater; rised. smaller; risee. equal; fall


53. Diseconomies of scale are said to exist when inputs are increased by some percentage and output increases by a(n) __________ percentage, causing unit costs to __________.a. greater; fallb. smaller; fallc. greater; rised. smaller; risee. equal; fall


Exhibit 22-2

(1) (2) (3) (4) (5)Variable

InputTotal Variable

CostTotal Fixed

Cost OutputMarginal

Cost1 $30 $100 202 $60 $100 50 (A)3 $90 $100 90 (B)4 $120 $100 120 (C)5 $150 $100 140 (D)

54. Refer to Exhibit 22-2. The dollar amounts that go in blanks (A) and (B) are, respectively,a. $30.00 and $40.00.b. $3.33 and $2.50.c. $1.00 and $0.75.d. $10.00 and $10.00.e. $6.67 and $5.00.

ANS: C PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New


55. Refer to Exhibit 22-2. The dollar amounts that go in blanks (C) and (D) are, respectively,a. $10.00 and $1.00.b. $30.00 and $34.00.c. $3.00 and $4.00.d. $6.67 and $10.00.e. $1.00 and $1.50.

ANS: E PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New

56. Refer to Exhibit 22-2. Diminishing marginal returns set in with the addition of which unit of the variable input?a. the firstb. the secondc. the thirdd. the fourthe. the fifth

ANS: D PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New

57. Refer to Exhibit 22-2. What is the average total cost of producing 140 units of output?a. $1.79b. $7.33c. $4.23d. $10.00e. There is not enough information provided to answer the question.

ANS: A PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New


ANS: B PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New



ANS: D PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New

60. Refer to Exhibit 22-2. What is the average variable cost of producing 90 units of output?a. $1.00b. $1.17c. $1.59d. $1.44e. There is not enough information provided to answer the question.

ANS: A PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New

61. Refer to Exhibit 22-2. What is the average variable cost of producing 120 units of output?a. $0.67b. $1.17c. $1.00d. $1.44e. There is not enough information provided to answer the question.

ANS: C PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application NOT: New

Situation 22-1Diane's Donuts will begin selling donuts next week. Diane figures that the average variable cost to make each donut will be constant at $0.30. She has already paid $20,000 for the donut-making machinery and one year's rent.

62. Refer to Situation 22-1. What will Diane's total variable costs be if she sells 36,500 donuts in one year?a. $10,950b. $18,450c. $22,080d. $12,500


63. Refer to Situation 22-l. What will Diane's total costs be if she sells 2,500 donuts in her first week and then goes out of business?a. $20,750b. $10,950c. $20,880d. $30,500

ANS: A PTS: 1 DIF: Difficulty: Moderate



64. Refer to Situation 22-l. What will Diane's approximate average fixed costs be if she sells 36,500 donuts in one year?a. $0.30b. $0.088c. $0.138d. $0.55


65. Refer to Situation 22-l. What will Diane's average total costs be if she sells 2,500 donuts in her first week and then goes out of business?a. $8.30b. $1.81c. $1.08d. $9.71

ANS: A PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

66. If inputs are increased by 10 percent and output increases by 10 percent, then __________ are said to exist.a. economies of scaleb. constant returns to scalec. diseconomies of scaled. diminishing marginal returns

ANS: B PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

67. If inputs are increased by 10 percent and output increases by 20 percent, then __________ are said to exist.a. economies of scaleb. constant returns to scalec. diseconomies of scaled. diminishing marginal returns

ANS: A PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

68. Average variable cost equalsa. average total cost minus average fixed cost.b. total variable cost divided by the change in output.c. total variable cost divided by output.d. price of the variable input times the quantity of the variable input.


e. a and c


69. Constant returns to scale are said to exist when inputs are increased by some percentage and output increases by a(n) __________ percentage, causing unit costs to __________.a. greater; fallb. smaller; fallc. greater; rised. smaller; risee. equal; remain constant


70. Minimum efficient scale refers to thea. smallest plant size a firm can utilize and still maintain production.b. lowest point on a given SRATC curve.c. output level at which the LRATC curve touches each SRATC curve.d. lowest output level at which average total costs are minimized.


71. If the LRATC curve is falling, thena. the law of diminishing marginal returns is operating.b. economies of scale are present.c. constant returns to scale are present.d. diseconomies of scale are present.


72. Which of the following is probably not an acceptable solution to the problem of diseconomies of scale?a. reorganizationb. building a larger plantc. dividing operationsd. hiring new managers


73. If the "minimum efficient scale" in an industry is at 25 percent of market sales, what is the maximum number of efficient firms the economy can support in this industry?a. 75b. 25


c. 10d. 4


74. Economic profit isa. total revenue minus total cost (including both explicit and implicit costs).b. the same as accounting profit.c. accounting profit plus implicit costs.d. accounting profit minus implicit costs.e. a and d


75. Implicit cost is aa. cost that is incurred when a monetary payment is made.b. cost incurred in the past that cannot be changed by current decisions and therefore cannot

be recovered.c. cost that represents the value of resources used in production for which no monetary

payment is made.d. sunk cost.e. b and d


76. The short run isa. a period of time in which all inputs are fixed.b. a period of time in which all inputs are variable.c. a period of time in which some inputs are fixed.d. always less than a year.e. a and d


77. Marginal cost is the change ina. total cost that results from a change in output.b. total revenue that results from a change in output.c. fixed cost that results from a change in output.d. a and be. all of the above



78. The law of diminishing marginal returnsa. is a short run concept.b. is a long run concept.c. is both a short run and a long run concept.d. does not hold in the real world.


Exhibit 22-3

Variable Input

Fixed Input Output

Marginal Physical Product of

Variable Input

TotalFixed Cost

TotalVariable

CostMarginal

Cost(units) (units) (units) (units) (dollars) (dollars) (dollars)

0 1 0 $500 $01 1 10 (A) $500 $200 (F)2 1 25 (B) $500 $400 (G)3 1 45 (C) $500 $600 (H)4 1 60 (D) $500 $800 (I)5 1 70 (E) $500 $1000 (J)

79. Refer to Exhibit 22-3. The average fixed cost of producing 10 units of output isa. $50.00.b. $10.00.c. $2.50.d. $1.00.e. $500.00.


80. Refer to Exhibit 22-3. The average fixed cost of producing 25 units of output isa. $500.00.b. $20.00.c. $50.00.d. $2.50.e. indeterminable with the information given.


81. Refer to Exhibit 22-3. The average variable cost of producing 10 units of output isa. $2.00.b. $1.75.c. $20.00.d. $2.25.e. $2.50.



82. Refer to Exhibit 22-3. The average variable cost of producing 45 units of output isa. $1.33.b. $1.60.c. $2.00.d. $2.44.e. $13.33.


83. Refer to Exhibit 22-3. The total cost of producing 45 units of output isa. $1,100.b. $950.c. $1,050.d. $900.e. $1,000.


84. Refer to Exhibit 22-3. The marginal physical product figures in blanks (B) and (C) are, respectively,a. 10 and 15.b. 15 and 20.c. 20 and 15.d. 15 and 10.e. 10 and 10.


85. Refer to Exhibit 22-3. The marginal physical product figures in blanks (D) and (E) are, respectively,a. 10 and 10.b. 10 and 15.c. 15 and 20.d. 20 and 15.e. 15 and 10.


86. Refer to Exhibit 22-3. Diminishing marginal returns set in with the addition of the __________ unit of the variable input.a. firstb. second


c. thirdd. fourthe. fifth


87. Refer to Exhibit 22-3. The marginal cost figures in blanks (F) and (G) are, respectively,a. $2.00 and $1.33.b. $2.00 and $1.60.c. $20.00 and $13.33.d. $2.00 and $2.66.e. none of the above

ANS: C PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

88. Refer to Exhibit 22-3. The marginal cost figures in blanks (I) and (J) are, respectively,a. $5.33 and $10.00.b. $1.33 and $2.00.c. $1.33 and $1.43.d. $13.33 and $20.e. none of the above


89. Refer to Exhibit 22-3. What is the average total cost of producing 45 units of output?a. $25.11b. $24.44c. $21.11d. $21.33


90. Refer to Exhibit 22-3. What is the average total cost of producing 60 units of output?a. $21.67b. $1.33c. $24.17d. $12.50


91. Refer to Exhibit 22-3. What level of output exhibits the lowest average total cost?a. 10 unitsb. 25 units


c. 45 unitsd. 60 unitse. 70 units

ANS: E PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

92. The law of diminishing marginal returns states that as ever larger amounts of a variable input are combined witha. fixed inputs, the marginal physical product of the variable input rises.b. other variable inputs, the marginal physical product of the variable input declines.c. fixed inputs, eventually the marginal physical product of the variable input declines.d. other variable inputs, eventually the marginal physical product of the variable input

declines.


Exhibit 22-4

93. Refer to Exhibit 22-4. Curve A is a(n) __________ cost curve.a. marginalb. average variablec. average totald. average fixed


94. Refer to Exhibit 22-4. Curve B is a(n) __________ cost curve.a. marginalb. average variable


c. average totald. average fixed


95. Refer to Exhibit 22-4. Curve C is a(n) __________ cost curve.a. marginalb. average variablec. average totald. average fixed


96. Refer to Exhibit 22-4. Curve D is a(n) __________ cost curve.a. marginalb. average variablec. average totald. average fixed


97. Diseconomies of scale are present when the __________ average total cost curve is __________.a. short-run; fallingb. short-run; risingc. long-run; fallingd. long-run; risinge. b and d


Exhibit 22-5


98. Refer to Exhibit 22-5. The minimum efficient scale is ata. point A.b. point B.c. point C.d. point D.e. points B and C.


99. Refer to Exhibit 22-5. Economies of scale are present betweena. points A and B.b. points A and C.c. points B and C.d. points B and D.e. points C and D.


100. Refer to Exhibit 22-5. Constant returns to scale are present betweena. points A and B.b. points A and C.c. points B and C.d. points B and D.e. points C and D.


101. Refer to Exhibit 22-5. Diseconomies of scale are present betweena. points A and B.b. points A and C.c. points B and C.


d. points B and D.e. points C and D.


102. The main difference between the short run and the long run is thata. firms earn losses in the long run, but not in the short run.b. the long run always refers to a time period of one year or longer.c. in the long run, only one input can be fixed.d. in the short run, one or more inputs are fixed.e. none of the above


103. Total costs area. fixed costs plus average total costs.b. average fixed costs plus variable costs.c. fixed costs plus variable costs.d. fixed costs minus variable costs.e. fixed costs divided by total variable costs.


104. Economies of scale refer toa. the minimum point on the short-run average total cost curve.b. the flat portion of the long-run average total cost curve.c. a decrease in the long-run average total cost of production as output increases.d. a and be. none of the above


105. Minimum efficient scale refers to thea. minimum size plant in any given industry.b. minimum point on the short-run average total cost curve.c. output level when economies of scale first set in.d. output level when diseconomies of scale first set in.e. lowest output level at which average total costs are minimized.


Exhibit 22-6


106. Refer to Exhibit 22-6. The curve labeled "I" represents the firm's __________ cost curve.a. totalb. average variablec. average fixedd. marginale. average total


107. Refer to Exhibit 22-6. The curve labeled "J" represents the firm's __________ cost curve.a. marginalb. average fixedc. average variabled. total variablee. average total


108. Refer to Exhibit 22-6. The curve labeled "K" represents the firm's __________ cost curve.a. marginalb. total variablec. average fixedd. average variablee. average total


109. Refer to Exhibit 22-6. The curve labeled "L" represents the firm's __________ cost curve.a. average variableb. total fixedc. average fixed


d. total variablee. marginal


110. Economies of scale, constant returns to scale and diseconomies of scale account for the shape of the __________ cost curve.a. average variableb. average fixedc. long-run average totald. short-run average totale. marginal


Exhibit 22-7

Output Total Cost0 $301 $402 $603 $904 $1105 $1256 $1357 $140

111. Refer to Exhibit 22-7. The total variable cost of producing 3 units isa. $31.00.b. $51.00.c. $17.00.d. $60.00.e. There is not enough information to answer this question.


112. Refer to Exhibit 22-7. The average total cost of producing 4 units of output isa. $11.25.b. $5.00.c. $3.50.d. $27.50.e. There is not enough information to answer this question.



113. Refer to Exhibit 22-7. The average fixed cost of producing 5 units of output isa. $16.25.b. $4.00.c. $11.15.d. $6.00.e. There is not enough information to answer this question.


114. Refer to Exhibit 22-7. The marginal cost of producing the seventh unit of output isa. $85.00.b. $12.14.c. $21.00.d. $5.00.


115. John purchases a baseball card for $10 that turns out to be so rare that a collector offers to buy it from him for $2,000. Instead, John decides to give the card to his sister (an avid baseball-card collector) as a birthday present. The opportunity cost of John's generosity isa. $10, the purchase price.b. $0, because at the time the decision is made, $10 are sunk cost, i.e., at that point there is

no cost to John of giving the card away.c. $2,000, the amount offered by the collector.d. $1,005, the average of $10 and $2,000.


Exhibit 22-8

Units of Labor

Units of Output

0 01 502 1103 1554 1855 205

116. Exhibit 22-8 shows how output varies with the only variable input used in its production. Marginal physical product of the fifth unit of labor isa. 0.b. 20.c. 50.d. 172.



117. Exhibit 22-8 shows how output varies with the only variable input used in its production. The table indicates that diminishing marginal returns set in with the hiring of which unit of labor?a. firstb. secondc. thirdd. fourthe. fifth


118. Exhibit 22-8 shows how output varies with the only variable input used in its production. If the cost of a unit of labor is $500, what is the approximate marginal cost of the 185th unit of output?a. $2.50b. $16.67c. $12.50d. $50.00e. $100.00

ANS: B PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

Situation 22-2Alejandro is one of the leading widget producers in the country. His total costs amount to $5,000, total fixed costs are $2,000, and average total costs are $250.

119. Refer to Situation 22-2. How many widgets is Alejandro producing?a. 10b. 15c. 20d. 25e. There is not enough information to answer the question.


120. Refer to Situation 22-2. What are Alejandro's average variable costs at the present level of production?a. $60b. $150c. $100d. $200e. There is not enough information to answer the question.

ANS: B PTS: 1 DIF: Difficulty: Challenging© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


121. Refer to Situation 22-2. What is Alejandro's marginal cost at the present level of production?a. $60b. $80c. $100d. $200e. There is not enough information to answer the question.


Situation 22-3Gizmos, Inc. produces gizmos at an average total cost of $13 and an average variable cost of $12. The only fixed input used in the production of gizmos costs $20.

122. Refer to Situation 22-3. How many gizmos does Gizmos, Inc. produce?a. 7b. 8c. 20d. 25e. There is not enough information to answer the question.


123. Refer to Situation 22-3. What are the total variable costs?a. $140b. $240c. $250d. $260e. There is not enough information to answer the question.


124. Refer to Situation 22-3. What are the total costs?a. $140b. $240c. $250d. $260e. There is not enough information to answer the question.



125. What is the relationship between the average fixed cost (AFC) curve and the marginal cost (MC) curve?a. The MC curve intersects the AFC curve at its minimum point.b. When the MC curve is above the AFC curve, AFC must be increasing.c. Both a and b are true.d. There is no relationship between the AFC curve and the MC curve..


Exhibit 22-9

126. Refer to Exhibit 22-9. Let MC1 and ATC1 represent the initial cost curves of a peanut butter producer. In which of the following cases is it most likely that the firm’s curves will shift leftward to MC2 and ATC2?a. The market price of peanuts decreases.b. The market price of peanuts increases.c. The government lowers taxes paid by peanut butter producers.d. a and c


127. Refer to Exhibit 22-9. Let MC1 and ATC1 represent the initial cost curves of an aluminum can producer. In which of the following cases is it most likely that the curves will shift rightward from MC1, and ATC1 to MC3 and ATC3?a. A new tax of $0.03 per can is imposed on the producer.b. There is an increase in energy costs.c. A new supplier offers to supply aluminum to the firm at a lower price.d. a and b

ANS: C PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of production


KEY: Bloom's: Application

128. Refer to Exhibit 22-9. Let MC1 and ATC1 represent the initial cost curves of a peanut butter producer. In which of the following cases is it most likely that the firm’s curves will shift leftward to MC2 and ATC2?a. The market price of peanuts decreases.b. There is an improvement in technology in the production of peanut butter.c. The government raises taxes paid by peanut butter producers.d. a and b


Situation 22-4Joe is the owner-operator of Joe's Haircuts Unlimited. Last year he earned $200,000 in total revenues and paid $125,000 to his employees and suppliers. During the course of the year, he received three offers to work for other barbers, with the highest offer being $50,000 per year.

129. Refer to Situation 22-4. What are Joe's explicit costs?a. $125,000b. $175,000c. $35,000d. $200,000e. $50,000


130. Refer to Situation 22-4. What are Joe's implicit costs?a. $150,000b. $175,000c. $35,000d. $200,000e. $50,000


131. Refer to Situation 22-4. What are Joe's accounting profits?a. $0b. -$75,000c. -$25,000d. $25,000e. $75,000

ANS: E PTS: 1 DIF: Difficulty: Moderate



132. Refer to Situation 22-4. What are Joe's economic profits?a. $0b. $25,000c. -$25,000d. $40,000e. $75,000


133. Refer to Situation 22-4. Is Joe earning a normal profit?a. No, he is earning an above-normal profit.b. No, but he is earning an accounting profit and that is all that matters.c. Yes, but his economic profit is $0 and that is not good.d. We cannot be sure, because "normal" profit is a subjective judgment.e. No, his economic profit is negative.


134. For ABC, Inc., 250,000 units of output per year represent minimum efficient scale. If ABC, Inc. decides to produce 200,000 units this year, it will be operating in the region ofa. decreasing returns to scale.b. economies of scale.c. diseconomies of scale.d. constant returns to scale.e. none of the above


Exhibit 22-10

Hours of Studying

Total Number of Problems SolvedJose Paul Marisol

1 4 3 42 9 8 103 15 14 184 22 19 285 27 23 326 30 26 35

135. Refer to Exhibit 22-10. Paul's marginal productivity of the fourth hour of studying isa. 4 problems.b. 5 problems.c. 14 problems.


d. 19 problems.e. 23 problems.


136. Refer to Exhibit 22-10. Which of the students has the highest marginal productivity for the fifth hour of studying?a. Joseb. Paulc. Marisold. both Paul and Marisol


137. Refer to Exhibit 22-10. Jose is experiencing increasing marginal returnsa. only in the first hour of studying.b. up to the third hour of studying.c. up to the fourth hour of studying.d. during all six hours of studying.


138. Refer to Exhibit 22-10. Marisol encounters diminishing marginal returns in houra. 2.b. 3.c. 4.d. 5.e. 6.


139. Refer to Exhibit 22-10. Professor Jones, who is encouraging the three students to work together in order to be "more productive," is implicitly assuming that by working together they will be able toa. solve more problems in the same amount of time than they would by studying separately.b. solve the same number of problems in less time than they would by studying separately.c. decrease their marginal products through joint efforts.d. all of the abovee. a and b


140. Which of the following is true of average fixed costs in the long run?a. Average fixed costs start increasing.


b. Average fixed costs are above average variable costs.c. There are no fixed costs in the long run, so there are also no average fixed costs in the long

run.d. Average fixed costs intersect the marginal cost curve at its minimum point.e. a and b.


141. Which of the following is an implicit cost?a. Jones buys $100 worth of supplies from Smith.b. Brown pays the bill he received in the mail.c. Smith, who could work for someone else, works for himself.d. Williamson pays his income taxes on April 15.e. a, c, and d


142. If explicit costs equal $40,000, implicit costs equal $95,000, and accounting profit equals $23,000, it follows that total revenue equals __________ and economic profit equals __________.a. $75,000; $17,000b. $63,000; -$72,000c. $68,000; $25,000d. $22,000; -$68,000e. There is not enough information given to answer this question.


143. Accounting profit equals economic profit if __________ equals __________.a. explicit costs; implicit costsb. total revenue; marginal costc. implicit costs; zerod. explicit costs; zeroe. unit cost; marginal cost


144. As long as there are __________ costs, __________ profit will be greater than __________ profit.a. implicit; accounting; economicb. explicit; accounting; economicc. implicit; economic; accountingd. explicit; economic; accounting



145. If implicit costs equal accounting profit, economic profit must bea. negative.b. positive.c. zero.d. higher in the short run than in the long run.e. higher in the long run than in the short run.


146. If the owner of a firm earns zero economic profit, he or she has earned total revenue equal to his or hera. implicit costs.b. explicit costs.c. accounting profit.d. implicit costs plus explicit costs.e. none of the above


147. If the owners of a firm earn accounting profit, it follows thata. they will earn economic profit, too.b. their explicit costs are greater than their implicit costs.c. their implicit costs are greater than their explicit costs.d. they will not earn economic profit.e. none of the above


148. A person who does not ignore a sunk cost increases the probability thata. the past will influence the future.b. the future will influence the past.c. the future will be like the past.d. there will be no future.e. the future will be like the present.


149. As a firm produces more units of a good, itsa. fixed costs remain constant in the short run and its variable costs rise.b. variable costs decline in the short run and its fixed costs rise.c. fixed and variable costs remain constant in the short run.d. variable costs remain constant in the short run and its fixed costs fall.e. none of the above

ANS: A PTS: 1 DIF: Difficulty: Moderate© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

NAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

150. The owner of a firm signs a binding one-year lease on a factory for $10,000 rent a month and pays the first month's rent. The $10,000 rent isa. a fixed cost but not a sunk cost.b. a sunk cost but not a fixed cost.c. both a fixed cost and a sunk cost.d. neither a fixed cost nor a sunk cost.e. none of the above


151. Which of the following is false?a. Average fixed cost continually declines as output increases.b. Marginal cost is equal to the change in total cost divided by the change in quantity of

output.c. The law of diminishing marginal returns states that, in the long run, as ever larger amounts

of a variable input are combined with fixed inputs, eventually the marginal physical product of the variable input will decline.

d. The vertical distance between the AVC curve and the ATC curve declines as more output is produced.


152. If AFC is $9 at a quantity of output of 100 units, and ATC is $11 at the same quantity of output, it follows thata. marginal cost is $10.b. AVC is $200.c. total cost is $2,000.d. marginal cost is $100.e. none of the above


153. If the quantity of output rises as more of a variable input is added to a fixed input,a. the law of diminishing marginal returns does not hold.b. total fixed cost must be declining.c. marginal cost must be constant.d. marginal physical product of the variable input is necessarily rising.e. none of the above



154. A fixed input, X, and a variable input, Y, are used to produce good A. If the marginal physical product (MPP) of Y is constant, it follows that thea. marginal cost curve is upward sloping.b. total fixed cost curve is vertical.c. total variable cost curve is downward sloping.d. b and ce. none of the above

ANS: E PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

155. If the marginal cost curve for a firm first declines and then rises, it follows that the MPP of the variable inputa. is constant.b. first declines and then rises.c. first rises and then declines.d. continually declines.e. none of the above


156. Average productivity of labor equalsa. the change in output divided by the change in labor.b. output divided by the MPP of labor.c. output divided by marginal cost.d. output divided by the quantity of labor.e. the quantity of labor divided by output.


157. If the marginal productivity of labor is falling, it follows thata. the average productivity of labor is rising.b. marginal cost is falling.c. marginal cost is rising.d. average productivity of labor is falling.e. c and d


158. There is a link between production and cost. We know this becausea. there are two periods of production, the short run and the long run.b. what happens to MPP directs what happens to MC.c. average fixed cost continually declines as output increases.d. average productivity falls when marginal productivity is below it.e. none of the above



159. If output rises from 123 units to 143 units as another worker is hired, and the additional worker receives $15 in wages, it follows that marginal cost isa. $15.00b. $20.00c. $1.33d. $0.75e. none of the above


160. Which of the following is correct?a. Changes in marginal productivity change marginal cost, which changes average variable

and average total cost.b. Changes in marginal cost change marginal productivity, which changes average variable

and average total cost.c. Changes in average variable cost change marginal cost, which changes average total cost,

which changes marginal productivity.d. Changes in average variable and average total cost change marginal cost, which changes

marginal productivity.e. none of the above


161. Which of the following statements is false?a. If the MC curve is rising, the AVC curve must be rising.b. If MC is below ATC, ATC must be falling.c. If MC is above AVC, then AVC must be rising.d. If MC is above ATC, then ATC must be rising.


162. Which of the following statements is true?a. The marginal cost curve has an upward-sloping portion to it because of the law of

diminishing marginal returns.b. The marginal cost curve cuts the ATC curve at its highest point.c. When marginal cost is rising, so must average total cost be rising.d. A decline in marginal cost causes the MPP (of the variable input) to decline.e. none of the above



163. The average-marginal rule states:a. when the marginal magnitude is rising, so must the average magnitude be rising.b. when the marginal magnitude is falling, so must the average magnitude be falling.c. when the marginal magnitude is below the average magnitude, the average magnitude

falls.d. when the average magnitude rises, the marginal magnitude falls.e. a and b


164. Unit cost refers toa. average variable cost.b. average fixed cost.c. marginal cost.d. average total cost.e. c or d


165. Economies of scale are said to exist whena. inputs are increased by some percentage and output increases by the same percentage.b. inputs are increased by some percentage and output increases by a lesser percentage.c. inputs are increased by some percentage and output increases by a greater percentage.d. the LRATC curve slopes upward.e. none of the above


166. When a firm is experiencing constant returns to scale, it follows thata. unit costs are rising.b. average total cost is rising.c. unit costs are constant.d. average total cost is constant.e. c and d

ANS: E PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

167. The long-run average total cost (LRATC) curve shows thea. lowest average variable cost at which the firm can produce any given level of output.b. lowest unit cost at which the firm can produce any given level of output.c. highest average fixed cost at which the firm can produce any given level of output.d. lowest marginal cost at which the firm can produce any given level of output.e. none of the above



168. At any output of both 100 units and 120 units, unit costs are the same. Unit costs are higher at output levels lower than 100 units and at output levels higher than 120 units. It follows that minimum efficient scale existsa. somewhere between 100 and 120 units.b. at 100 units.c. at 120 units.d. below 100 units.e. above 100 units.


169. __________ scale exist when inputs are increased by some percentage and output increases by a smaller percentage, whereas __________ scale exist when inputs are increased by some percentage and output increases by the same percentage.a. Economies of; diseconomies ofb. Constant returns to; economies ofc. Diseconomies of; constant returns tod. Diseconomies of; economies of


170. Economies of scale are relevant to the __________, whereas the law of diminishing marginal returns is relevant to the __________.a. long run; short runb. short run; long runc. industry; firmd. firm; industrye. firm in the short run; industry in the long run


171. Suppose that minimum efficient scale as a percentage of U.S. consumption is 5 percent in industry X and it is 10 percent in industry Y. It follows that we would expect to finda. fewer firms in industry Y than X.b. fewer firms in industry X than Y.c. bigger firms in industry Y than X.d. bigger firms in industry X than Y.e. none of the above



172. A firm can use a given plant more intensively and it can change the size of a plant. When it uses a given plant more intensively, it is holding one factor __________ and therefore the time period of production is most likely the __________.a. fixed; short runb. fixed; long runc. more important than another; long rund. more important than another; short run


173. If the government places a $2 tax on each unit of good X that is produced by Firm A, it follows that the tax will not affect __________ cost, but will affect __________ cost.a. variable; fixedb. fixed; variablec. average fixed; average variabled. marginal; fixede. b and c


174. A rise in variable input prices will affecta. fixed costs.b. variable costs.c. marginal costs.d. a, b, and ce. b and c


175. The vertical distance between the AVC and ATC curves is equal toa. marginal cost.b. average fixed cost.c. accounting profit.d. economic profit.e. none of the above


176. The reason marginal cost is equal to the change in total cost divided by the change in output, or the change in total variable cost divided by the change in output, is becausea. total variable cost rises as output rises.b. of the law of diminishing marginal returns.c. total fixed cost does not change as output changes.


d. total cost does not change as output changes.e. none of the above


177. Which of the following will not change a firm's cost curves?a. change in the price of the good the firm producesb. change in input pricesc. change in taxesd. change in technologye. b and d


178. Which of the following is true?a. At some high level of output, AFC is zero.b. If the law of diminishing marginal returns did not exist, then the marginal cost curve

would not have an upward-sloping portion.c. The marginal cost curve cuts the average variable cost curve at its midpoint.d. There are no fixed costs in the short run.e. none of the above


179. When a firm earns zero economic profit, it hasa. not covered all its explicit costs.b. not covered all its implicit costs.c. not earned enough to stay in business.d. definitely earned an accounting profit if implicit costs are positive.e. none of the above


180. If the marginal physical product (MPP) of the variable input is constant over a range of output, then it follows that __________ cost will be constant over the same range of output.a. marginalb. average fixedc. average totald. a and be. a, b, and c



181. The firm negotiates a new agreement with its workers for lower wages. The ATC curve should be __________ and the AFC curve should be __________ after the agreement goes into effect.a. lower; lowerb. lower; unchangedc. higher; higherd. lower; highere. unchanged; lower


Exhibit 22-11

Quantity of Output Total Cost

0 $1001 $1702 $2203 $2804 $3555 $4456 $545

182. Refer to Exhibit 22-11. Marginal cost of the sixth unit of output isa. $100.b. $150.c. $90.d. $90.83.


183. Refer to Exhibit 22-11. Marginal cost of the first unit of output isa. $170.b. $150.c. $70.d. $90.83.


184. Refer to Exhibit 22-11. Average total cost of the sixth unit of output isa. $50.b. $100.c. $300.d. $90.83.

ANS: D PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of production



185. Refer to Exhibit 22-11. Average fixed cost at two units of output isa. $50.b. $60.c. $100.d. $110.e. There is not enough information provided to answer this question.


186. Refer to Exhibit 22-11. Average variable cost at two units of output isa. $50.b. $60.c. $100.d. $110.e. There is not enough information provided to answer this question.


187. Refer to Exhibit 22-11. Average variable cost at three units of output isa. $50.b. $60.c. $93.33.d. $110.e. There is not enough information provided to answer this question.


Exhibit 22-12

Variable Input

Fixed Input

Quantity of Output

Marginal PhysicalProduct

(units) (units) (units) (units)0 1 01 1 12 (A)2 1 25 (B)3 1 39 (C)4 1 51 (D)

188. Refer to Exhibit 22-12 above. The numbers that go in blanks (A), (B), (C), and (D), respectively, area. 12, 13, 14 and 12.b. 12, 25, 39 and 51.c. 12, 11, 10 and 9.d. 12, 14, 13 and 11.e. none of the above



Exhibit 22-13

Quantity of

Output, Q

Total Fixed Cost

(TFC)

Average Fixed Cost

(AFC)

Total Variable

Cost(TVC)

Average Variable

Cost(AVC)

Total Cost(TC)

Average Total Cost

(ATC)

Marginal Cost(MC)

0 $200 $0 $2001 $200 (A) 30 (H) 230 (M) (S)2 $200 (B) 50 (I) 250 (N) (T)3 $200 (C) (F) $26.67 (K) (P) (U)4 $200 (D) 130 (J) 330 (Q) (V)5 $200 (E) (G) $40 (L) (R) (W)

189. Refer to Exhibit 22-13. What dollar amounts go in blanks (A) and (B)?a. $200; $100b. $200; $200c. $50; $100d. $10; $100e. There is not enough information to answer this question.


190. Refer to Exhibit 22-13. What dollar amounts go in blanks (C) and (D)?a. $100; $50b. $25; $68c. $200; $200d. $66.67; $50e. There is not enough information to answer this question.


191. Refer to Exhibit 22-13. What dollar amounts go in blanks (E) and (F)?a. $200; $30b. $40; $80c. $200; $15d. $3; $40e. There is not enough information to answer this question.


192. Refer to Exhibit 22-13. What dollar amounts go in blanks (G) and (H)?


a. $100; $30b. $400; $50c. $200; $30d. $40; $20e. There is not enough information to answer this question.


193. Refer to Exhibit 22-13. What dollar amounts go in blanks (I) and (J)?a. $100; $50b. $25; $32.50c. $500; $40d. $50; $32e. There is not enough information to answer this question.


194. Refer to Exhibit 22-13. What dollar amounts go in blanks (K) and (L)?a. $280; $400b. $28; $40c. $260; $360d. $50; $400e. There is not enough information to answer this question.


195. Refer to Exhibit 22-13. What dollar amounts go in blanks (M) and (N)?a. $200; $125b. $120; $150c. $230; $125d. $150; $300e. There is not enough information to answer this question.


196. Refer to Exhibit 22-13. What dollar amounts go in blanks (P) and (Q)?a. $120; $125b. $10; 95c. $30; $80d. $93.33; $82.50e. There is not enough information to answer this question.



197. Refer to Exhibit 22-13. What dollar amounts go in blanks (R) and (S)?a. $80; $20b. $80; $30c. $30; $30d. $130; $50e. There is not enough information to answer this question.


198. Refer to Exhibit 22-13. What dollar amounts go in blanks (T) and (U)?a. $10; $10b. $20; $50c. $20; $30d. $42; $40e. There is not enough information to answer this question.


199. Refer to Exhibit 22-13. What dollar amounts go in blanks (V) and (W)?a. $50; $70b. $12.50; $14c. $140; $150d. $82.50; $80e. There is not enough information to answer this question.


200. An economist might say, "The market guides and coordinates individuals' actions." Which of the following is an example of this happening?a. An employer tells an employee to get to work early.b. As the price of oranges rises, more individuals begin to produce oranges.c. The manager of a plant issues a directive that there will be no more smoking in the

cafeteria.d. a and ce. a, b, and c


201. Which of the following is an example of market coordination?a. Bad weather wipes out half the pineapple crop in Hawaii, the price of pineapples rises, and

consumers cut back on their purchases of pineapples.b. The manager of a grocery store notices that his customers are buying tomato soup about as

quickly as he puts it on the shelves, so he orders more tomato soup from the wholesaler.


c. The manager of a grocery store tells her employees to put the sugar-free cereals on the top shelf where adults can find them more easily.

d. a and be. a, b, and c


202. The "visible hand" is a metaphor used to describea. market coordination.b. managerial coordination.c. the separation of ownership from control.d. how price changes motivate individual coordination.


203. Economists Alchian and Demsetz suggest that firms are formed whena. the sum of what individuals can produce alone is greater than what they can produce as a

team.b. someone wants to earn profits.c. someone comes up with the idea that customers will buy a new product.d. the sum of what individuals can produce as a team is greater than the sum of what they can

produce alone.


204. Carol works for Firm X. She takes long breaks and often daydreams when she is being paid to work. Carol isa. satisfying.b. shirking.c. monitoring.d. separating ownership from control.

ANS: B PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application

205. Shirking, being a form of __________, is a good that individuals may consume more of the __________ its cost.a. work; higherb. work; lowerc. leisure; higherd. leisure; lower



206. Making a manager a residual claimant is often a way ofa. forming a partnership.b. increasing the efficiency of a nonprofit firm.c. reducing the incentive of the manager to shirk.d. redirecting the firm to the objective of revenue maximization.

ANS: C PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

207. The Alchian and Demsetz theory of why business firms exist suggests thata. there are only advantages to team production.b. disadvantages of team production may outweigh the disadvantages of individual

production.c. individual production is more efficient than team production.d. the sum of team production is sometimes greater than the sum of individual production.

ANS: D PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

208. "Managerial coordination" refers to thea. behavior of a worker who is putting forth less than the agreed-to effort.b. process whereby individuals perform certain tasks based on changes in market forces.c. process whereby persons share in the profits of a business firm.d. process whereby managers direct employees to perform certain tasks.


209. According to economists Alchian and Demsetz, firms are formed whena. the sum of what individuals can produce as a team is greater than the sum of what

individuals can produce working alone.b. the sum of what individuals can produce working alone is greater than the sum of what

individuals can produce as a team.c. what each individual can produce as a member of a team is less than what each individual

can produce working alone.d. the sum of what individuals can produce as a team is equal to the sum of what individuals

can produce working alone.e. none of the above


210. Which of the following situations would prompt individuals to try to form a team (firm), according to Alchian and Demsetz.a. Jones, Smith, and Brown together produce 100 units of good X each day working alone

and 90 units of good X each day working together.b. Jones, Smith, and Brown together produce 100 units of good X each day working alone

and 120 units of good X each day working together.


c. Jones, Smith, and Brown together produce 100 units of good X each day working alone and 100 units of good X each day working together.

d. Jones produces more working alone than Smith or Brown produce working alone.e. Jones produces more working as a member of a team than Smith or Brown produce

working as a member of a team.


211. Working alone, a person who shirks receives __________ the benefits of shirking and pays __________ the costs of shirking.a. all; only some ofb. only part of; allc. all; alld. only part of; only part ofe. none of the above


212. There is a monitorless team (firm) of 10 persons. The 10 persons agree to work together and split the revenue (they earn) equally. In this setting, the cost of shirking to an individual isa. higher than it would be if the individual worked alone.b. the same as it would be if the individual worked alone.c. lower than it would be if the individual worked alone.d. necessarily greater than the benefits of shirking.e. necessarily less than the benefits of shirking.


213. The __________ hand is the metaphor used to refer to market coordination, whereas the __________ hand is the metaphor used to refer to managerial coordination.a. visible; fastb. invisible; visiblec. fast; lazyd. lazy; faste. none of the above


214. In the theory of the firm (as put forth by Alchian and Demsetz), trade or exchange pops up in the following situation:a. when individuals choose to form a teamb. when the monitor fires an employeec. when individuals in a team shirkd. a and c



215. Economists predict that the __________ the cost of shirking to an individual, the __________ shirking that individual will undertake, ceteris paribus.a. lower; lessb. higher; lessc. lower; mored. higher; moree. b and c


216. In a college course it is likely that there will be ___________ shirking in a group project than in an individual project because the costs of shirking are relatively _________ in the group project.a. less; higherb. more; higherc. less; lowerd. more; lower


217. As the marginal physical product of U.S. workers _________________, the marginal cost of goods produced in the U.S. ______________ and unit costs _____________. This makes American goods ________________ competitive in the global marketplace.a. rises; falls; fall; lessb. falls; falls; fall; morec. rises; falls; fall; mored. rises; falls; fall; more

ANS: C PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application MSC: Economics 24/7

Exhibit 22-14

Quantity of Labor Output

Marginal Physical

Product (MPP) Wage Marginal Cost 0 01 100 (C) $600 (E)

2 (A) 75 600 (F) 3 (B) 50 600 (G)

4 240 (D) 600 (H)


Assume that labor is the only variable input.

218. Refer to Exhibit 22-14. What is the MPP of the first unit of labor [blank (C)]?a. 700 unitsb. 600 unitsc. 100 unitsd. 50 units


219. Refer to Exhibit 22-14. What is the level of output with 2 and 3 laborers working [blanks (A) and (B)]?a. 175 units; 225 unitsb. 100 units; 175 unitsc. 100 units; 225 unitsd. 50 units; 175 unitse. none of the above


220. Refer to Exhibit 22-14. What is the MPP of the fourth unit of labor [blank (D)]?a. 70 unitsb. 60 unitsc. 100 unitsd. 15 units


221. Refer to Exhibit 22-14. What is the marginal cost of producing this good with 1 and 2 laborers working [blanks (E) and (F)], respectively?a. $600; $300b. $60; $30c. $8; $12d. $6; $8e. none of the above


222. Refer to Exhibit 22-14. What is the marginal cost of producing this good with 3 and 4 laborers working [blanks (G) and (H)], respectively?a. $200; $150b. $60; $30c. $12; $40d. $6; $8


e. none of the above


TRUE/FALSE

1. As marginal cost rises, average variable cost necessarily rises.

ANS: F PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

2. Accounting profit is always greater than or equal to economic profit.

ANS: T PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

3. In the long run, only variable costs exist.

ANS: T PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension

4. A firm that earns zero accounting profit is earning a normal profit.


5. The law of diminishing marginal returns helps to explain why the marginal cost curve typically has a downward-sloping portion.


6. One of the reasons why economies of scale exist is that the opportunity for labor specialization increases as the size of the firm grows.


7. An example of an implicit cost is the foregone income that a business owner-manager could have earned working for someone else.

ANS: T PTS: 1 DIF: Difficulty: ModerateNAT: BUSPROG: Analytic LOC: DISC: Costs of production



8. Given that fixed costs are constant as output increases, average fixed costs are also constant.


9. The marginal cost curve cuts through the AVC, ATC, and AFC curves at their lowest points.


10. If a firm is earning an economic profit, it is necessarily earning an accounting profit, too.


11. Economies of scale are exclusively a long-run phenomenon, while the law of diminishing returns applies to both the short-run and to the long-run.


12. Minimum efficient scale refers to the output level where short-run average total cost is lowest.


13. As the marginal physical product of a variable input increases, the marginal cost decreases.


14. Economic profit is the difference between total revenue and implicit costs.


15. One of the roles of the monitor in a firm is to reduce shirking.

ANS: T PTS: 1 DIF: Difficulty: EasyNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Comprehension


16. Noble Prizewinner Ronald Coase argued that firms exist in order to reduce transaction costs.

ANS: T PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Knowledge

17. As the marginal physical product of labor rises in the U.S., the marginal cost of goods produced in the U.S. rises which makes it harder for U.S. producers to compete in the global marketplace.

ANS: F PTS: 1 DIF: Difficulty: ChallengingNAT: BUSPROG: Analytic LOC: DISC: Costs of productionKEY: Bloom's: Application MSC: Economics 24/7

ESSAY

1. What is the typical shape of the AFC curve? Explain why it is shaped this way.

ANS:The formula for determining AFC is TFC/Q. Given that TFC is a constant for all levels of output, as output increases AFC is continually declining. Therefore, the AFC curve is downward sloping, approaching zero but never reaching it.

PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: AnalyticLOC: DISC: Costs of production KEY: Bloom's: Application

2. Define economies of scale and give two reasons why firms may experience economies of scale. Is economies of scale a long-run concept or a short-run concept?

ANS:Economies of scale exist in the long run when resources are increased by some percentage and output increases by a greater percentage. This causes unit costs to fall as output increases in the long run, so the LRATC curve is downward sloping. Economies of scale exist because the firm's ability to use specialized labor increases as the size of the firm grows and because growing firms are more likely to be able to use highly efficient mass production techniques or equipment.

PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: AnalyticLOC: DISC: Costs of production KEY: Bloom's: Application

3. Describe the law of diminishing marginal returns. How does it relate to the shape of the marginal cost (MC) curve?

ANS:The law of diminishing marginal returns states that as increasingly more units of a variable input (for example, labor) are added to a given amount of fixed inputs (for example, plant size), eventually marginal physical product (MPP) of the variable input will decline. Once diminishing marginal returns sets in, the MPP curve must have a declining portion. In addition, as the productivity of the variable input falls, we would expect costs to rise. Therefore, MPP and MC have an inverse relationship and the MC curve will be upward sloping as the MPP curve is falling.

PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic


LOC: DISC: Costs of production KEY: Bloom's: Application

4. Explain the difference between the law of diminishing marginal returns and diseconomies of scale.

ANS:The law of diminishing marginal returns states that as increasingly more units of a variable input (for example, labor) are added to a given amount of fixed inputs (for example, plant size), eventually marginal physical product (MPP) of the variable input will decline. Diminishing returns is strictly a short run phenomenon since it has to do, in part, with fixed resources. Diseconomies of scale are relevant to the long run. Diseconomies of scale occur when inputs are increased by some percentage and output increases by a smaller percentage, with no fixed inputs.


5. Give a numerical example that to illustrates the average-marginal rule.

ANS:A teacher has graded 10 exams and found that the average score thus far is 75. If the 11 th person's test score is less than 75, the average score of the first 11 tests will fall to less than 75. If the 11 th person's test score is equal to 75, the average score of the first 11 tests will remain unchanged at 75. If the 11 th person's score is greater than 75, the average score of the first 11 tests will rise to more than 75. Therefore, if a marginal variable is less than the average variable, the average will fall, and so on.


6. Describe the difference between market coordination and managerial coordination. Give an example of each to support your answer.

ANS:Market coordination is the process in which individuals engage in tasks based on changes in market forces. Managerial coordination is the process in which managers direct employees to perform certain tasks. (Examples will vary).

PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: AnalyticLOC: DISC: Costs of production KEY: Bloom's: Application

7. Describe the Alchian and Demsetz theory of why firms exist. How does this differ from the Coase theory of why firms exist?

ANS:Armen Alchian and Harold Demsetz argue that firms are formed when the sum of what individuals can produce as a team is greater than the sum of what individuals can produce alone. According to Ronald Coase, firms exist in order to reduce transaction costs. He asserts that firms exist in order to economize on buying and selling everything by being able to create a single contract, rather than the more costly alternative of negotiating and concluding a separate contract for each exchange.



8. Using the concept of marginal cost, explain how a parent could structure a teenager’s punishment for misbehavior so as to achieve the parent’s goal (for example, having the teen home by a certain time).

ANS:If the parent structures the punishment so that the marginal cost of continued misbehavior is zero (for example, stating that the teen will lose driving privileges for a week as a result of coming home any time after their curfew) then the teen is more likely to continue the bad behavior than if the marginal cost escalates as time passes. For example, the parent could tell the teen that they will lose one day of driving privileges for every 15 minutes that they arrive home late. Since the punishment (marginal cost) rises as the teen stays out later, the teen will tend to be more inclined to try to get home as close to their curfew as possible.

PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: AnalyticLOC: DISC: Costs of production KEY: Bloom's: ApplicationMSC: Economics 24/7


principle of economics : chapter 22

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