Multiple Choice Tutorial Chapter 7 Production and Cost

Multiple Choice Tutorial Chapter 7 Production and Cost of the Firm

1. The supply curve of a product is based primarily on a. consumer behavior b. product decision making c. government spending d. none of the above B. The supply curve represents those who are doing the supplying, which explains why supply curves are upward sloping (positive slope). As the price of a product increases the supplier has a greater incentive to supply the product because more money can be made at the higher prices. As the price declines, the supplier has less incentive to supply as less 2 money can be made.

2. Economists assume that producers try to maximize a. revenue b. utility c. sales d. profit D. Profit is the difference between total revenue (TR) and total cost (TC). 3

3. The opportunity cost of a resource a. includes both explicit and implicit costs b. includes explicit costs only c. includes implicit costs only A. Explicit costs are opportunity costs of a firm’s resources that take the form of cash payments, for example, rent, mortgage, supplies, utilities, raw materials etc. Implicit costs are a firm’s opportunity cost of using its own resources without corresponding cash payments. For example, when a firm uses money to pay for raw materials that it could charge interest free, the interest that the money could have made earning interest is an implicit cost. 4

4. When resources are owned by the firm, and no payment is made for their use, they a. are considered to be free resources b. have no alternative uses c. represent implicit costs d. represent explicit costs C. Everything has an opportunity cost. What else could be done and how much money could be earned in regards to an owned resource? Whatever money could be earned in the best alternative endeavor is the implicit cost of owning a resource. 5

5. Explicit costs are a. 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 D. You have explicit and implicit costs while attending college. Your explicit costs are things like tuition, books, travel, baby sitting and the like. Your implicit cost is the money you gave up by not working full time at a higher paying job than you now have. For example, if you earn $300 a week now but could earn $700 a week in the best 6 alternative, your implicit cost is $400 a week.

6. Accounting profit is a. equal to economic profit b. always smaller than economic profit c. equal to total revenue minus both implicit and explicit costs d. equal to total revenue minus explicit costs D. Accountants consider money that is actually paid to run a business as costs. Economists consider these costs as well as money that is foregone by not pursuing a more profitable alternative use of the money. Therefore, there is a difference between profit (economic profit), normal profit, and accounting profit. 7

7. Economic profit is a. equal to accounting profit b. always greater than accounting profit c. equal to total revenue minus explicit costs d. equal to total revenue minus both implicit and explicit costs D. When a firm makes a profit we mean that it is making an economic profit. When total revenue exceeds costs (in economics costs are both implicit and explicit), the firm is making a profit. 8

8. A normal profit means that a. economic profit is zero b. accounting profit is zero c. economic profit is positive d. accounting profit is negative A. Economic profit is zero when total revenue equals total costs, by definition this is where a normal profit is made. When a business owner is making a normal profit he is making the minimum amount of money that will give him an incentive to stay in business. 9

9. Fixed inputs are resources a. whose quantities do not change in the short run b. whose quantities do not change in the long run c. whose quantities can be changed at any time d. which are too large and bulky to be moved easily A. Once a firm buy a machine that machine has to be paid for regardless of the level of output. Even if the output were zero the payments on the machine still have to be made. The machine is therefore a fixed cost. 10

10. The short run is defined as the period of time a. in which all inputs are fixed b. in which at least one input is fixed c. in which no inputs are fixed d. of one year or less B. In the short run a business cannot change its plant capacity. For example, a firm can hire new workers (or lay off workers), have its workers work longer hours (or fewer hours), or change the organization of its operations in the short run. Once it changes its plant capacity, it moves into the long run. Retiring machinery or taking on new machines, moving into larger (or smaller) buildings are long run occurrences. 11

11. Total product is the same as a. total resources used b. total revenue c. total utility d. total output D. This is just definition. Total product is defined as the total output produced by a firm. 12

12. The marginal product of labor is defined as the a. cost of one worker b. average output per worker c. change in revenue from using one more unit of labor d. change in output from using one more unit of labor D. The word margin always means the last unit, the incremental change of something. For example, if a firm hires an additional worker and its output increases by 100 units a day, its marginal product of labor is 100 units. 13

13. To a firm facing constant input prices, increasing marginal returns a. means that each additional unit of output costs more to produce than the previous unit b. means that the marginal product of the variable input is decreasing as more of the input is used c. can occur due to specialization and division of labor d. can never occur C. If a firm’s costs (input prices) for raw materials, interest costs, labor etc. stay the same a firm can lower its costs by using what it has more efficiently. 14

14. The law of diminishing marginal returns states that, as additional unit of the variable input are combined with fixed inputs in the production process, total product a. decreases by larger and larger amounts b. decreases by smaller and smaller amounts c. remains constant d. increases by smaller and smaller amounts D. For example, if hiring a worker adds 50 units to total product and hiring one more worker adds 40 units to total product, the firm has experienced the law of diminishing returns. 15

15. Total product will decrease as more of an input is added to the production process only if a. marginal product is decreasing b. marginal product is negative c. the product is an inferior good d. marginal product is zero B. Marginal product is the change in total product that occurs when the usage of a particular resource increases by one unit, all other resources constant. For example, if a firm hires one more worker and its total product increases, marginal product is positive; if its total product declines when an additional worker is hired, the marginal product is negative. 16

16. Total product is greatest where a. marginal product is increasing b. marginal product is zero c. demand is unit elastic d. supply is unit elastic B. At the point where marginal product is zero means that the additional input, for example an additional worker, added nothing to the firm’s total product. 17

17. From the following table, determine the marginal product of labor when the firm increases from three to four units of labor input: Total Input 0 1 2 3 4 5 Total Product 0 15 35 50 60 65 a. 5 b. 10 c. 15 d. 60 e. 240 B. 60 minus 50 equals 10; 10 units have been added to total product as we went from three 18 units to four units.

18. The law of diminishing marginal returns is first evident in the following table Labor Input Total Product a. with the first 0 0 worker 1 10 b. with each 2 22 of the 3 33 workers 4 40 c. with the third 5 45 worker C. From 0 to 1 unit TP increases by 10, from 1 to 2 units TP increases by 12, from 2 to 3 units TP increases by 11. 19

Output Last slide viewed TP 0 Exhibit 20. 1 g h j Variable Input 20

19. In Exhibit 20 -1, the law of diminishing marginal returns becomes evident immediately after point a. 0 b. g c. h B. After point g as the variable input increases output increases but a a lower rate than previously. 21

20. The law of diminishing marginal returns is illustrated in Exhibit 20 -1 a. at point g b. at point h c. between points g and h d. the line from 0 to j C. The law of diminishing marginal returns exist when more and more of a variable resource is added to a fixed amount of a fixed resource, the resulting change in output will eventually diminish and eventually become negative. 22

21. In which segment of exhibit 20 -1 is there negative returns? a. after 0 units b. after g units c. after h units d. after j units C. After h units as more units of the variable resource is added total output decreases. We do not know what is happening after j units. 23

22. Fixed costs are a. the opportunity cost of all resources used in production b. the explicit costs of production c. the implicit costs of production d. independent of the firm’s rate of output D. A fixed cost is something that a firm has to pay regardless of the level of output. For example, if a firm owes payment on a loan, that payment stays the same regardless of the level of output by the firm. 24

23. Which of the following is not included in total cost? a. cost of the product to the buyer b. variable costs c. explicit costs d. implicit costs A. What the consumer pays for the product (the price) has nothing to do with what is costs the firm to produce the product in the first place. 25

24. Marginal cost is defined as a. total cost divided by output b. the additional cost of one more unit of an input c. the price of the product d. the change in total cost divided by the change in output D. The word margin signifies a change. Marginal cost is a measure of how much the last unit costs to produce. This is measured by measuring the change in costs by producing one more unit and dividing that number by how much output changed. 26

25. If input prices are constant, an increase in marginal product causes a. marginal cost to increase b. marginal cost to decrease c. marginal revenue to increase d. total product to decrease B. This would occur when a firm’s total costs would not change as output increased, therefore, its costs on the margin (also its average costs) would decrease as output increased. For example, if a firm’s total output depends exclusively on one machine and the one machine represents its total cost, the firm’s costs decline on the margin with 27 each additional unit of output.

26. Production functions such as marginal product and cost curves such as marginal cost tend to be a. unrelated b. directly related c. inversely related d. equal C. The rate of change for product as units of a resource are added tend to increase from zero units then decrease beyond a certain level of growth. The rate of change for costs as more units of a resource are used tends to decrease from zero units then increase beyond a certain level of growth. 28

27. As long as the firm is not operating inefficiently, which cost always increases with increases in output? a. marginal cost b. average fixed cost c. total fixed cost d. total variable cost D. Variable costs are costs which vary with the level of output. 29

$ Last slide viewed H J K Q Exhibit 20. 2 30

28. In Exhibit 20 -2, lines H, J, and K represent the following 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 C. Notice that the marginal cost curve intersects the average curves at their lowest point. The average total cost is above the average variable cost curve because variable 31 costs are a part of total costs.

29. In Exhibit 20 -2, average fixed cost (AFC) is a. line H b. the distance between lines H and J c. the distance between lines H and K d. the distance between lines J and K D. What is added to average variable costs (AVC) to equal average total costs (ATC)? Average fixed costs (AFC). Therefore, AFC is always the vertical distance between the AVC curve and the ATC curve. 32

30. In Exhibit 20 -2, the marginal product is a. line H b. line J c. line J minus line K d. none of these D. No marginal product curve is shown in figure 20 -2. 33

31. The short-run total fixed cost curve a. starts at the origin and always slopes upward b. is a vertical line intersecting the horizontal axis c. is a horizontal line intersecting the vertical axis d. is always downward-sloping C. The vertical axis represents money. Because fixed costs do not change as output changes it is represented by a horizontal line at the cost level. 34

32. The short-run total cost curve a. starts at the origin and always slopes upward b. starts above the origin and always slopes upward c. is a horizontal line intersecting the vertical axis d. is a vertical line intersecting the horizontal axis B. A firm’s total costs start above the margin (where the horizontal and vertical axis meet) because of its fixed costs. As it increases output, its total costs normally increase because of its variable costs. Variable costs 35 are costs which vary with the level of output.

33. The short-run marginal cost curve a. is always downward-sloping b. starts at the origin and always slopes upward c. starts above the origin and always slopes upward d. slopes downward at low rates of output, then slopes upward at higher rates of output D. This is because of the law of diminishing returns. As more and more of a resource is added to a given amount of a fixed resource, the resulting change in output will eventually diminish and eventually become negative. 36

34. The short-run average fixed cost curve a. 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 A. For example, if a firm’s fixed cost is $100 its average fixed cost is $100 at one unit of output. If the firm produces two units of output, its average fixed cost is $50, at four units it would be $25. There are no fixed costs in the long-run, so this is a short-run situation. 37

35. The short-run average variable cost curve a. is always downward-sloping b. starts at the origin and always slopes upward c. starts above the origin and always slopes upward d. slopes downward at low rates of output, then slopes upward at higher rates of output D. This is also because of the law of diminishing returns. The law of diminishing returns is a short-run term. Remember, in the short-run a firm cannot change its plant capacity, it therefore experiences fixed costs. 38

36. The slope of the short-run total cost curve a. is constant b. is never positive c. equals marginal cost at the level of output d. typically reflects diminishing returns at the lowest levels of output C. The slope of a line is defined as the change vertically divided by the change horizontally, or the rise divided by the run. Marginal cost is measured by a change in costs (the vertical axis) divided by the change in output (the horizontal axis). 39

37. Short-run average fixed cost equals a. the change in fixed cost from producing one more unit of output b. the change in variable cost from producing one more unit of output c. average total cost plus average variable cost d. average total cost minus average variable cost D. Average variable costs (AVC) plus average fixed costs (AFC) equals average total cost (ATC). This only occurs in the short-run because only in the short-run are there fixed costs. 40

38. 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 A. Each time the margin is greater than the average, the average will increase; if the margin in less than the average, the average will decrease. If the average score on the last exam was 80% and a student (the marginal student) takes a makeup test and scores a 90%, the class average increases; if the 41 student scores a 70%, the average decreases.

39. The shapes of the short-run cost curves reflect a. market demand b. returns to scale c. productivity of variable inputs d. all of the above C. If an added resource increases productivity the cost curves will have a negative slope showing that costs are declining as output increases. If an added resource decreases productivity the cost curves will have a positive slope showing that costs are increasing as output increases. 42

40. Which of the following results from the law of diminishing marginal returns? a. all of the following b. the slope of total cost becomes steeper in the short run as more is produced c. rising short-run marginal cost d. declining marginal product A. b, c and d would all occur as a firm’s total product diminished as it increased its inputs and outputs in the short-run. * Normally we would not mention the term short-run because the short-run is always assumed. If we are considering the long-run, we have to state “in the long-run. ” 43

41. With respect to the average cost curves, the marginal cost curve a. 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 C. To the left of the intersection the margin is below the average so the average decreases; to the right of the intersection the margin is above the average so the average increases. 44

42. The average total cost curve and the average variable cost curve a. move closer together as output increases, with average total cost reaching its minimum level first b. move farther apart as output increases, with average variable cost reaching its minimum level first c. move closer together as output increases, with average variable cost reaching its minimum level first C. As output increases the average fixed cost decreases because fixed costs do not change as the level of output changes. 45

Last slide viewed $ MC 40 ATC 20 15 AVC Q 0 1 Exhibit 20. 3 2 3 4 5 6 46

43. In Exhibit 20 -3, the total cost (TC) of producing 6 units o output would be a. $20 b. $40 c. $35 d. $120 D. At 6 units of output average total cost (ATC) is equal to $20, so total cost (TC) is 6 times $20 or $120. 47

44. In Exhibit 20 -3, the total fixed cost (FC) of producing 6 units of output would be a. $30 b. $20 c. $35 d. $15 A. At 6 units ATC is $20 and AVC is $15, so AFC is equal to $5. At 6 units FC is 6 times $5 or $30. 48

45. In Exhibit 20 -3, the total variable cost (VC) of producing 6 units of output would be a. $30 b. $240 c. $35 d. $90 D. At 6 units average variable cost (AVC) is equal to $15 so total variable cost (VC) is equal to 6 times $15 or $90. 49

46. If a firm shuts down in the short run and produces no output, its total cost will be a. zero b. equal to total variable cost c. equal to total fixed cost d. explicit costs only C. If a firm shuts down there are no variable costs, the only costs the firm has to pay are its fixed costs. It still has fixed costs because in the short-run a firm cannot change its plant capacity. There is a difference between shutting down (stopping production) and going out of business; when a firm goes out of business (long -run) it no longer has fixed costs. 50

47. The shape of the long-run average cost curve reflects a. market demand b. economies and diseconomies of scale c. increasing and diminishing marginal returns d. all of the above B. Economies of scale occurs when forces cause a reduction in a firm’s average cost as the scale of operations increases in the long-run. Diseconomies of scale occurs when forces cause a firm’s average cost to increase as the scale of operations increases in the long-run. These are long-run terms. 51

48. To maximize profits in the long-run, any firm must a. charge the highest price possible b. produce where demand is unit elastic c. sell the most possible output d. minimize the cost of producing any given amount of output D. The name of the game in business is volume. How does a firm increase volume? It increases sales by lowering prices. What does it have to do first before lowering prices over the long-run? It lowers its costs of production. 52

49. As output increases, diseconomies of scale a. 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 A. In the long-run all costs are variable. As a firm grows and experiences an increase in costs as a result, we say that the firm experiences diseconomies of scale. 53

50. Economies of scale can be caused by a. 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 C. For example, a small farmer cannot justify using the largest and most efficient tractor because it would not be cost effective. The money made on a small farm (say 5 acres) would not justify paying $100, 000 for the newest and largest tractor. Such a tractor would be cost effective on a large farm. 54

51. The minimum efficient scale for a firm is the a. 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 long-run average cost is at a maximum d. average of the rates of output at which long -run average cost is at a minimum A. When a firm produces at the level of output which coincides with the lowest point on its long-run ATC curve it is operating at the most efficient level possible. 55

52. When a firm triples all of its inputs and its output doubles, it is said to be experiencing a. diminishing marginal returns b. increasing marginal returns c. diseconomies of scale d. economies of scale C. Economies and diseconomies of scale are long-run terms. Economies of scale exists when a firm’s output increases more than its input increases. Diseconomies of scale exist when a firm’s output increases at a lower rate than it increases its inputs. 56

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