Lecture 8 Practice. Multiple Choice Identify the choice that best completes the statement or answers the question.

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1 Lecture 8 Practice Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which field of economics studies how the number of firms affects the prices in a market and the efficiency of market outcomes? a. macroeconomics b. industrial organization c. labor economics d. monetary economics 2. An entrepreneur s motivation to start a business arises from a. an innate love for the type of business that he or she starts. b. a desire to earn a profit. c. an altruistic desire to provide the world with a good product. d. All of the above could be correct. 3. Economists assume that the goal of the firm is to maximize total a. revenue. b. profits. c. costs. d. satisfaction. 4. Trevor s Tire Company produced and sold 500 tires. The average cost of production per tire was $50. Each tire sold for a price of $65. Trevor s Tire Company s total costs are a. $7,500. b. $25,000. c. $32,500. d. $67, The amount of money that a firm pays to buy inputs is called a. total cost. b. variable cost. c. marginal cost. d. fixed cost. 6. Total cost is the a. amount a firm receives for the sale of its output. b. fixed cost less variable cost. c. market value of the inputs a firm uses in production. d. quantity of output minus the quantity of inputs used to make a good. 7. Joy sells 200 glasses of iced tea at $0.50 each. Her total costs are $25. Her profits are a. $25. b. $75. c. $100. d. $ The things that must be forgone to acquire a good are called a. implicit costs. b. opportunity costs.

2 c. explicit costs. d. accounting costs. 9. John has decided to start his own lawn-mowing business. To purchase the mowers and the trailer to transport the mowers, John withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is John's annual opportunity cost of the financial capital that has been invested in the business? a. $30 b. $140 c. $170 d. $ The value of a business owner's time is an example of a. an opportunity cost. b. a fixed cost. c. an explicit cost. d. total revenue. 11. An example of an opportunity cost that is also an implicit cost is a. a lease payment. b. the cost of raw materials. c. the value of the business owner s time. d. All of the above are correct. 12. Explicit costs a. do not require an outlay of money by the firm. b. enter into the accountant's measurement of a firm's profit. c. enter into the economist's measurement of a firm's profit. d. Both b and c are correct. 13. Which of the following would be an example of an implicit cost? (i) forgone investment opportunities (ii) wages of workers (iii) raw materials costs a. (i) only b. (ii) only c. (ii) and (iii) only d. (i) and (iii) only 14. Pete owns a shoe-shine business. Which of the following costs would be implicit costs? (i) shoe polish (ii) rent on the shoe stand (iii) wages Pete could earn delivering newspapers (iv) interest that Pete s money was earning before he spent his savings to set up the shoe-shine business a. (i) and (ii) only b. (iv) only c. (iii) and (iv) only d. (i), (ii), (iii), and (iv)

3 15. Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business? a. $-55,000 b. $-5,000 c. $5,000 d. $20, Katherine gives piano lessons for $15 per hour. She also grows flowers, which she arranges and sells at the local farmer s market. One day she spends 5 hours planting $50 worth of seeds in her garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer s market. Katherine s accounting profits are a. $100, and her economic profits are $25. b. $100, and her economic profits are $75. c. $25, and her economic profits are $100. d. $75, and her economic profits are $ Economic profit a. will never exceed accounting profit. b. is most often equal to accounting profit. c. is always at least as large as accounting profit. d. is a less complete measure of profitability than accounting profit. 18. When calculating a firm's profit, an economist will subtract only a. explicit costs from total revenue because these are the only costs that can be measured explicitly. b. implicit costs from total revenue because these include both the costs that can be directly measured as well as the costs that can be indirectly measured. c. the opportunity costs from total revenue because these include both the implicit and explicit costs of the firm. d. the marginal cost because the cost of the next unit is the only relevant cost. 19. Total revenue minus only implicit costs is called a. accounting profit. b. economic profit. c. opportunity cost. d. None of the above is correct. 20. Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom's first year in business his total revenue equaled $150,000. Tom's explicit cost during the year totaled $85,000. What is Tom s economic profit for his first year in business? a. $0 b. $20,000 c. $65,000 d. $85, Which of the following expressions is correct? a. accounting profit = economic profit + implicit costs b. accounting profit = total revenue - implicit costs c. economic profit = accounting profit + explicit costs d. economic profit = total revenue - implicit costs 22. Suppose that for a particular business there are no implicit costs. Then

4 a. accounting profit will be greater than economic profit. b. accounting profit will be the same as economic profit. c. accounting profit will be less than economic profit. d. the relationship between accounting profit and economic profit cannot be determined without more information. Scenario 13-1 Calvin wants to start his own business making candles. He can purchase a candle factory that costs $400,000. Calvin currently has $500,000 in the bank earning 3 percent interest per year. 23. Refer to Scenario Suppose Calvin purchases the factory using $200,000 of his own money and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Calvin s annual opportunity cost of purchasing the factory? a. $3,000 b. $6,000 c. $15,000 d. $18,000 Scenario 13-3 Gary is a senior majoring in computer network development at Smart State University. While he has been attending college, Gary started a computer consulting business to help senior citizens set up their network connections and teach them how to use . Gary charges $25 per hour for his consulting services. Gary also works 5 hours a week for the Economics Department to maintain that department's Web page. The Economics Department pays Gary $20 per hour. 24. Refer to Scenario If Gary can work additional hours at either job, what is the opportunity cost if Gary spends one hour reading a novel? a. $20 b. $25 c. $100 d. $125 Scenario 13-4 Suppose that Abdul opens a coffee shop. He receives a loan from a bank for $100,000. He withdraws $50,000 from his personal savings account. The interest rate on the loan is 8%, and the interest rate on his savings account is 2%. 25. Refer to Scenario Abdul s implicit cost of capital is a. $8,000. b. $4,000. c. $2,000. d. $1,000. Scenario 13-5 Suppose that Emily opens a restaurant. She receives a loan from a bank for $200,000. She withdraws $100,000 from her personal savings account. The interest rate on the loan is 6%, and the interest rate on her savings account is 2%. 26. Refer to Scenario Emily s total opportunity cost of capital is a. $2,000.

5 b. $4,000. c. $12,000. d. $14,000. Scenario 13-7 Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons, $0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300 glasses for $0.50 each. 27. Refer to Scenario What are Wanda s total economic costs per glass? a. $0.18 b. $0.10 c. $0.08 d. $0.02 Scenario Walter builds birdhouses. He spends $5 on the materials for each birdhouse. He can build one in 30 minutes. He is semi-retired but earns $8 per hour at the local hardware store. He can sell a birdhouse for $20 each. 28. Refer to Scenario An accountant would calculate the total profit for one birdhouse to be a. $7. b. $11. c. $12. d. $ Refer to Scenario An economist would calculate the total profit for one birdhouse to be a. $7. b. $11. c. $12. d. $ Suppose that a doggie day care firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers a. both labor and capital to be fixed. b. both labor and capital to be variable. c. labor to be variable and capital to be fixed. d. capital to be variable and labor to be fixed. 31. If a firm uses labor to produce output, the firm s production function depicts the relationship between a. the number of workers and the quantity of output. b. marginal product and marginal cost. c. the maximum quantity that the firm can produce as it adds more capital to a fixed quantity of labor. d. fixed inputs and variable inputs in the short run. Figure 13-1

6 Output TP2 TP1 Inputs 32. Refer to Figure Which of the following could explain why the total product curve would shift from TP1 to TP2? a. There is less capital equipment available to the firm. b. Labor skills have become rusty and outdated in the firm. c. The firm has developed improved production technology. d. The firm is now receiving a higher price for its product. 33. Refer to Figure Which of the following could explain why the total product curve would shift from TP2 to TP1? a. There is additional capital equipment available to the firm. b. Labor skills have become rusty and outdated in the firm. c. The firm has developed improved production technology. d. The firm is now receiving a higher price for its product. 34. Grace is a self-employed artist. She can make 20 pieces of pottery per week. She is considering hiring her sister Kate to work for her. Both she and Kate can make 35 pieces of pottery per week. What is Kate s marginal product? a. 55 pieces of pottery b. 35 pieces of pottery c pieces of pottery d. 15 pieces of pottery 35. The marginal product of labor can be defined as the change in a. profit divided by the change in labor. b. output divided by the change in labor. c. labor divided by the change in output. d. labor divided by the change in total cost. 36. Eldin is a house painter. He can paint three houses per week. He is considering hiring his friend Murphy. Together, Eldin and Murphy can paint five houses per week. What is Murphy s marginal product? a. 2 houses b. 3 houses c. 5 houses d. 8 houses 37. On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product?

7 a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers. b. The farmer is able to produce 5,400 bushels of wheat when he hires 4 workers. c. The farmer is able to produce 5,200 bushels of wheat when he hires 4 workers. d. Any of the above could be correct. 38. When the marginal product of an input declines as the quantity of that input increases, the production function exhibits a. increasing marginal product. b. diminishing marginal product. c. diminishing total product. d. Both b and c are correct. 39. As Bubba's Bubble Gum Company adds workers while using the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Bubba s Bubble Gum Company encounters a. economies of scale. b. diseconomies of scale. c. increasing marginal product. d. diminishing marginal product. Table 13-4 Charles s Math Tutoring Number of Output (number Workers of students tutored per week) Refer to Table Suppose that Charles s math tutoring company has a fixed cost of $50 per month for his cell phone. Each worker costs Charles $60 per day. As output increases from 45 to 70 students, Charles s total cost curve a. increases but gets flatter. b. increases and gets steeper. c. decreases and gets flatter. d. decreases but gets steeper. Table 13-5 Number of Output Workers , , , , , ,600

8 41. Refer to Table The marginal product of the third worker is a. 1,000 units. b. 900 units. c. 700 units. d. 500 units. 42. Refer to Table Assume that fixed costs are $500, and variable costs are $100 per worker. For this firm, what are the shapes of the production function and the total-cost curve? a. Both the production function and total-cost curve are increasing at an increasing rate. b. Both the production function and total-cost curve are increasing at a decreasing rate. c. The production function is increasing at a decreasing rate, whereas the total-cost function is increasing at an increasing rate. d. The production function is increasing at an increasing rate, whereas the total-cost function is increasing at a decreasing rate. Table 13-6 Wooden Chair Factory Number of Workers Number of Machines Output (chairs produced per hour) Marginal Product of Labor of Workers of Machines Total 43. Refer to Table Each worker at the Wooden Chair Factory costs $12 per hour. The cost of each machine is $20 per day regardless of the number of chairs produced. If the factory produces at a rate of 70 chairs per hour and operates 8 hours per day, what is the factory s total labor cost per day? a. $72 b. $112 c. $576 d. $ Refer to Table Each worker at the Wooden Chair Factory costs $12 per hour. The cost of each machine is $20 per day regardless of the number of chairs produced. Assume the number of machines does not change. If the factory produces at a rate of 78 chairs per hour, what is the total machine cost per day? a. $20 b. $40 c. $240 d. We are unable to determine total machine costs from the information given. 45. Refer to Table The Wooden Chair Factory experiences diminishing marginal product of labor with the addition of which worker? a. the third worker b. the fourth worker c. the fifth worker d. the sixth worker

9 46. A total-cost curve shows the relationship between the a. quantity of an input used and the total cost of production. b. quantity of output produced and the total cost of production. c. total cost of production and profit. d. total cost of production and total revenue. 47. Some costs do not vary with the quantity of output produced. Those costs are called a. marginal costs. b. average costs. c. fixed costs. d. explicit costs. 48. Fixed costs can be defined as costs that a. vary inversely with production. b. vary in proportion with production. c. are incurred only when production is large enough. d. are incurred even if nothing is produced. 49. For a construction company that builds houses, which of the following costs would be a fixed cost? a. the $50,000 per year salary paid to a construction foreman b. the $30,000 per year salary paid to the company's bookkeeper c. the $10,000 per year premium paid to an insurance company d. All of the above are correct. 50. Suppose Jan started up a small lemonade stand business last month. Variable costs for Jan's lemonade stand now include the cost of a. lemons and sugar. b. paper cups. c. the wages paid to her hourly workers. d. All of the above are correct. 51. For a large firm that produces and sells automobiles, which of the following costs would be a variable cost? a. the $20 million payment that the firm pays each year for accounting services b. the cost of the steel that is used in producing automobiles c. the rent that the firm pays for office space in a suburb of St. Louis d. All of the above are correct. 52. Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that marginal cost of the third worker hired is $40, and the average total cost when three workers are hired is $50. What is the total cost of production when three workers are hired? a. $50 b. $90 c. $120 d. $ The Wacky Widget company has total fixed costs of $100,000 per year. The firm's average variable cost is $5 for 10,000 widgets. At that level of output, the firm's average total costs equal a. $10 b. $15 c. $100 d. $150

10 54. Suppose that a firm has only one variable input, labor, and firm output is zero when labor is zero. When the firm hires 6 workers the firm produces 90 units of output. Fixed costs of production are $6 and the variable cost per unit of labor is $10. The marginal product of the seventh unit of labor is 4. Given this information, what is the average total cost of production when the firm hires 7 workers? a. $10.06 b. $9.64 c. 81 cents d. 70 cents 55. A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000, a. average fixed cost is 50 cents. b. average variable cost is $2. c. average total cost is $2.50. d. average total cost is 50 cents. 56. A firm produces 300 units of output at a total cost of $1,000. If fixed costs are $100, a. average fixed cost is $10. b. average variable cost is $3. c. average total cost is $4. d. average total cost is $ Variable cost divided by quantity produced is a. average total cost. b. marginal cost. c. profit. d. None of the above is correct. Table 13-7 The Flying Elvis Copter Rides Quantity Total Fixed Variable Marginal Average Fixed Average Variable 0 $50 $50 $ $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R 58. Refer to Table What is the value of C? a. $25 b. $50 c. $100 d. $ Refer to Table What is the value of D? a. $25 b. $50 c. $100 d. $ Refer to Table What is the value of F? a. $50 Average Total

11 b. $100 c. $150 d. $ Refer to Table What is the value of H? a. $0 b. $50 c. $220 d. $ Refer to Table What is the value of K? a. $25 b. $50 c. $110 d. $ Refer to Table What is the value of N? a. $50 b. $140 c. $360 d. $ Refer to Table What is the value of O? a. $40 b. $140 c. $360 d. $ Refer to Table What is the value of P? a. $50 b. $140 c. $360 d. $ Refer to Table What is the value of R? a. $16.67 b. $50 c. $ d. $360 Table 13-9 Measures of for Very Brady Poster Factory Quantity of Posters Variable s Total s Fixed s 0 $10 1 $ 1 2 $ 3 $13 3 $ 6 $16 4 $10 5 $25 6 $21 $10

12 67. Refer to Table The average variable cost of producing 4 posters is a. $2.00. b. $2.50. c. $3.33. d. $ Refer to Table The total cost of producing 1 poster is a. $1.00. b. $ c. $ d. $ Refer to Table The marginal cost of producing the 6th poster is a. $1.00. b. $3.50. c. $5.00. d. $6.00. Table Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled children in public school districts. The owner rents several small rooms in an office building in the suburbs for $600 a month and has leased computer equipment that costs $480 a month. Output (Instructional Modules per Month) Fixed s Variable s Total Average Fixed Average Variable Average Total Marginal 0 $1,080 1 $1,080 $ 400 $1,480 $400 2 $965 $450 3 $1,350 $2,430 4 $1,900 $475 5 $2,500 $216 6 $4,280 $700 7 $4,100 8 $5,400 $135 9 $7, $10,880 $ Refer to Table What is the average variable cost for the month if 6 instructional modules are produced? a. $ b. $ c. $ d. $ Refer to Table What is the average fixed cost for the month if 9 instructional modules are produced? a. $ b. $ c. $ d. $811.11

13 72. Refer to Table One month, Teacher's Helper produced 18 instructional modules. What was the average fixed cost for that month? a. $60 b. $108 c. $811 d. It can't be determined from the information given. Table Betty s Bakery Quantity of cakes Fixed Variable Total 1 $13 $38 2 $28 3 $70 4 $64 5 $110 6 $108 7 $133 8 $185 Average Fixed Average Variable Average Total Marginal 73. Refer to Table What is the variable cost of producing 5 cakes at Betty s Bakery? a. $64 b. $85 c. $90 d. $ Refer to Table What is the average total cost of producing 6 cakes at Betty s Bakery? a. $16.34 b. $22.00 c. $22.17 d. $ Refer to Table What is the marginal cost of the 2nd cake at Betty s Bakery? a. $14 b. $15 c. $28 d. $34 Table Output Total 0 $40 10 $60 20 $90 30 $ $ $ Refer to Table What is the total fixed cost for this firm? a. $20

14 b. $30 c. $40 d. $ Refer to Table What is average variable cost when output is 50 units? a. $3.60 b. $4.00 c. $4.40 d. $4.80 Scenario If Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are his only cost. 78. Refer to Scenario Farmer Brown s marginal cost of producing 9 units of output (using 2 bags of seed) is a. $240. b. $120. c. $40. d. $30. Scenario Farmer Jack is a watermelon farmer. If Jack plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 30 watermelons. If he plants 2 bags of seeds, he gets 50 watermelons. If he plants 3 bags of seeds he gets 60 watermelons. A bag of seeds costs $100, and the costs of seeds are his only costs. 79. Refer to Scenario Which of the following statements is (are) true? (i) Farmer Jack experiences decreasing marginal product. (ii) Farmer Jack's production function is nonlinear. (iii) Farmer Jack's total cost curve is linear. a. (i) only b. (i) and (ii) only c. (ii) only d. (i) and (iii) only 80. Refer to Scenario Farmer Jack's marginal cost (i) curve is U-shaped. (ii) decreases with increased watermelon output. (iii) reflects diminishing marginal product. a. (ii) only b. (iii) only c. (i) and (iii) only d. (i) and (ii) only 81. Refer to Scenario Farmer Jack's production function will a. decrease at a decreasing rate. b. decrease at an increasing rate. c. increase at a decreasing rate.

15 d. increase at an increasing rate. 82. Refer to Scenario What is the shape of Farmer Jack s marginal cost curve? a. upward sloping b. downward sloping c. U-shaped d. constant Scenario A certain firm produces and sells staplers. Last year, it produced 7,000 staplers and sold each stapler for $6. In producing the 7,000 staplers, it incurred variable costs of $28,000 and a total cost of $45, Refer to Scenario The firm's fixed cost was a. $7,000. b. $17,000. c. $28,000. d. $42, Refer to Scenario In producing the 7,000 staplers, the firm's average fixed cost was a. $1.00. b. $1.32. c. $2.21. d. $ Refer to Scenario In producing the 7,000 staplers, the firm's average total cost was a. $2.43. b. $4.00. c. $6.00. d. $ The amount by which total cost rises when the firm produces one additional unit of output is called a. average cost. b. marginal cost. c. fixed cost. d. variable cost. 87. The cost of producing an additional unit of output is the firm's a. marginal cost. b. productivity offset. c. variable cost. d. average variable cost. 88. A firm has a fixed cost of $500 in its first year of operation. When the firm produces 100 units of output, its total costs are $4,500. The marginal cost of producing the 101st unit of output is $300. What is the total cost of producing 101 units? a. $46.53 b. $800 c. $4,800 d. $5,300

16 89. Suppose that a firm has only one variable input, labor, and firm output is zero when labor is zero. When the firm hires 6 workers the firm produces 90 units of output. Fixed costs of production are $6 and the variable cost per unit of labor is $10. The marginal product of the seventh unit of labor is 4. Given this information, what is the marginal cost of production when the firm hires the 7th worker? a. $1.50 b. $2.50 c. $5 d. $ Diminishing marginal product suggests that the marginal a. cost of an extra worker is unchanged. b. cost of an extra worker is less than the previous worker's marginal cost. c. product of an extra worker is less than the previous worker's marginal product. d. product of an extra worker is greater than the previous worker's marginal product. 91. The average-fixed-cost curve a. is constant. b. is always decreasing. c. intersects marginal cost at the minimum of average fixed cost. d. intersects marginal cost at the minimum of marginal cost. Scenario Suppose that a given firm experiences decreasing marginal product of labor with the addition of each worker regardless of the current output level. 92. Refer to Scenario Average total cost will be a. rising at all points. b. falling at all points. c. constant. d. U-shaped. 93. Refer to Scenario Average variable cost will be a. rising at all points. b. falling at all points. c. U-shaped. d. constant. Figure 13-5

17 D C B A Quantity 94. Refer to Figure Curve A represents which type of cost curve? a. marginal cost b. average total cost c. average variable cost d. average fixed cost 95. Refer to Figure Curve D represents which type of cost curve? a. marginal cost b. average total cost c. average variable cost d. average fixed cost 96. Refer to Figure Curve A is always declining because a. of diminishing marginal product. b. we are dividing fixed costs by higher and higher levels of output. c. marginal product first increases, then decreases. d. marginal product first decreases, then increases. Figure Refer to Figure Which of the figures represents the marginal cost curve for a typical firm? a. Figure 1 b. Figure 2 c. Figure 3 d. Figure 4

18 Figure 13-8 MC ATC AVC A B C D Quantity 98. Refer to Figure Quantity C represents the output level where the firm a. maximizes profits. b. minimizes total costs. c. produces at the efficient scale. d. minimizes marginal costs. 99. When marginal cost is less than average total cost, a. marginal cost must be falling. b. average variable cost must be falling. c. average total cost is falling. d. average total cost is rising When marginal cost exceeds average total cost, a. average fixed cost must be rising. b. average total cost must be rising. c. average total cost must be falling. d. marginal cost must be falling Which of the following statements about costs is correct? a. When marginal cost is less than average total cost, average total cost is rising. b. The total cost curve is U-shaped. c. As the quantity of output increases, marginal cost eventually rises. d. All of the above are correct When marginal cost is rising, average variable cost a. must be rising. b. must be falling. c. must be constant. d. could be rising or falling When marginal cost is greater than average cost, average cost is a. rising. b. falling. c. constant.

19 d. The direction of change in average cost cannot be determined from this information If marginal cost is greater than average total cost, then a. profits are increasing. b. economies of scale are becoming greater. c. average total cost remains constant. d. average total cost is increasing The minimum points of the average variable cost and average total cost curves occur where the a. marginal cost curve lies below the average variable cost and average total cost curves. b. marginal cost curve intersects those curves. c. average variable cost and average total cost curves intersect. d. slope of total cost is the smallest The marginal cost curve crosses the average total cost curve at a. the efficient scale. b. the minimum point on the average total cost curve. c. a point where the marginal cost curve is rising. d. All of the above are correct When a factory is operating in the short run, a. it cannot alter variable costs. b. total cost and variable cost are usually the same. c. average fixed cost rises as output increases. d. it cannot adjust the quantity of fixed inputs In the short run, a firm that produces and sells cell phones can adjust a. how many workers to hire. b. the size of its factories. c. where to produce along its long-run average-total-cost curve. d. All of the above are correct When comparing short-run average total cost with long-run average total cost at a given level of output, a. short-run average total cost is typically above long-run average total cost. b. short-run average total cost is typically the same as long-run average total cost. c. short-run average total cost is typically below long-run average total cost. d. the relationship between short-run and long-run average total cost follows no clear pattern When a firm is experiencing economies of scale, long-run a. average total cost is minimized. b. average total cost is greater than long-run marginal cost. c. average total cost is less than long-run marginal cost. d. marginal cost is minimized Economies of scale occur when a. long-run average total costs rise as output increases. b. long-run average total costs fall as output increases. c. average fixed costs are falling. d. average fixed costs are constant Economies of scale arise when a. an economy is self-sufficient in production. b. individuals in a society are self-sufficient.

20 c. fixed costs are large relative to variable costs. d. workers are able to specialize in a particular task In the long run Firm A incurs total costs of $1,200 when output is 30 units and $1,400 when output is 40 units. Firm A exhibits a. diseconomies of scale because total cost is rising as output rises. b. diseconomies of scale because average total cost is rising as output rises. c. economies of scale because total cost is rising as output rises. d. economies of scale because average total cost is falling as output rises Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys its goods in large quantities and, therefore, at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that a. consumers do not react to changing prices. b. there are diseconomies of scale in retail sales. c. there are economies of scale in retail sales. d. there are diminishing returns to producing and selling retail goods In the long run Irene s Ice Cream Parlor incurs total costs of $2,500 when output is 1,250 units and $4,000 when output is 1,500 units. For this range of output, Irine s exhibits a. economies of scale. b. constant returns to scale. c. diseconomies of scale. d. efficient scale When a firm s long-run average total costs do not vary as output increases, the firm exhibits a. economies of scale. b. constant returns to scale. c. diseconomies of scale. d. an efficient use of resources When a firm experiences diseconomies of scale, a. short-run average total cost is minimized. b. long-run average total cost is minimized. c. long-run average total cost increases as output increases. d. long-run average total cost decreases as output increases In the long run, when marginal cost is above average total cost, the average total cost curve exhibits a. economies of scale. b. diseconomies of scale. c. constant returns to scale. d. efficient scale Firms may experience diseconomies of scale when a. they are too small to take advantage of specialization. b. large management structures are bureaucratic and inefficient. c. there are too few employees, and managers do not have enough to do. d. average fixed costs begin to rise again. Figure 13-9 The figure below depicts average total cost functions for a firm that produces automobiles.

21 120. Refer to Figure Which of the curves is most likely to characterize the short-run average total cost curve of the smallest factory? a. ATC A b. ATC B c. ATC C d. ATC D 121. Refer to Figure Which curve represents the long-run average total cost? a. ATC A b. ATC B c. ATC C d. ATC D 122. Refer to Figure The firm experiences constant returns to scale at which output levels? a. output levels less than M b. output levels between M and N c. output levels greater than N d. All of the above are correct as long as the firm is operating in the long run. Figure 13-10

22 123. Refer to Figure The three average total cost curves on the diagram labeled ATC 1, ATC 2, and ATC 3 most likely correspond to three different a. time horizons. b. products. c. firms. d. factory sizes. Table Listed in the table are the long-run total costs for three different firms. Quantity Firm A Firm B Firm C ,000 1, Refer to Table Which firm is experiencing diseconomies of scale? a. Firm A only b. Firm B only c. Firm C only d. Firm A and Firm B only Table Consider the following table of long-run total cost for four different firms: Quantity Firm 1 $210 $340 $490 $660 $850 $1,060 $1,290 Firm 2 $180 $350 $510 $660 $800 $930 $1,050 Firm 3 $120 $250 $390 $540 $700 $870 $1,050 Firm 4 $150 $300 $450 $600 $750 $900 $1, Refer to Table Which firm has constant returns to scale over the entire range of output? a. Firm 1 b. Firm 2 c. Firm 3 d. Firm 4

23 Short Answer 126. What are opportunity costs? How do explicit and implicit costs relate to opportunity costs? 127. A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain The production function depicts a relationship between which two variables? Also, draw a production function that exhibits diminishing marginal product How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph What effect, if any, does diminishing marginal product have on the shape of the marginal cost curve? 131. Bob Edwards owns a bagel shop. Bob hires an economist who assesses the shape of the bagel shop's average total cost (ATC) curve as a function of the number of bagels produced. The results indicate a U-shaped average total cost curve. Bob's economist explains that ATC is U-shaped for two reasons. The first is the existence of diminishing marginal product, which causes it to rise. What would be the second reason? Assume that the marginal cost curve is linear. (Hint: The second reason relates to average fixed cost) 132. If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the average total cost curve is rising, what is necessarily true of the marginal cost curve? 133. According to the mathematical laws that govern the relationship between average total cost and marginal cost, where must these two curves intersect?

24 Lecture 8 Practice Answer Section MULTIPLE CHOICE 1. ANS: B PTS: 1 DIF: 1 REF: 13-0 NAT: Analytic LOC: s of production TOP: Industrial organization MSC: Definitional 2. ANS: D PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Profit maximization 3. ANS: B PTS: 1 DIF: 1 REF: 13-1 NAT: Analytic LOC: s of production TOP: Profit maximization 4. ANS: B PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Total revenue 5. ANS: A PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Total cost MSC: Definitional 6. ANS: C PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Total cost MSC: Definitional 7. ANS: B PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Profit 8. ANS: B PTS: 1 DIF: 1 REF: 13-1 NAT: Analytic LOC: s of production TOP: Opportunity cost MSC: Definitional 9. ANS: C PTS: 1 DIF: 3 REF: 13-1 NAT: Analytic LOC: s of production TOP: Opportunity cost 10. ANS: A PTS: 1 DIF: 1 REF: 13-1 NAT: Analytic LOC: s of production TOP: Opportunity cost 11. ANS: C PTS: 1 DIF: 1 REF: 13-1 NAT: Analytic LOC: s of production TOP: Opportunity cost 12. ANS: D PTS: 1 DIF: 1 REF: 13-1 NAT: Analytic LOC: s of production TOP: Explicit costs 13. ANS: A PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Implicit costs 14. ANS: C PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Implicit costs

25 15. ANS: C PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Economic profit 16. ANS: A PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Economic profit Accounting profit 17. ANS: A PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Economic profit 18. ANS: C PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Economic profit MSC: Definitional 19. ANS: D PTS: 1 DIF: 1 REF: 13-1 NAT: Analytic LOC: s of production TOP: Economic profit MSC: Definitional 20. ANS: A PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Economic profit 21. ANS: A PTS: 1 DIF: 3 REF: 13-1 NAT: Analytic LOC: s of production TOP: Accounting profit 22. ANS: B PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Accounting profit Economic profit 23. ANS: D PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Opportunity cost 24. ANS: B PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Opportunity cost 25. ANS: D PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Implicit costs 26. ANS: D PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Opportunity cost 27. ANS: A PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Total cost 28. ANS: D PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Accounting profit 29. ANS: B PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Accounting profit 30. ANS: C PTS: 1 DIF: 1 REF: 13-2 NAT: Analytic LOC: s of production TOP: Production function Short run 31. ANS: A PTS: 1 DIF: 2 REF: 13-2

26 NAT: Analytic LOC: s of production TOP: Production function 32. ANS: C PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Production function 33. ANS: B PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Production function 34. ANS: D PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Marginal product 35. ANS: B PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Marginal product MSC: Definitional 36. ANS: A PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Marginal product 37. ANS: D PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Diminishing marginal product 38. ANS: B PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Diminishing marginal product MSC: Definitional 39. ANS: D PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Diminishing marginal product 40. ANS: B PTS: 1 DIF: 3 REF: 13-2 NAT: Analytic LOC: s of production TOP: Total-cost curve 41. ANS: C PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Marginal product 42. ANS: C PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Production function Total-cost curve 43. ANS: C PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Variable costs 44. ANS: B PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Fixed costs 45. ANS: D PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Diminishing marginal product 46. ANS: B PTS: 1 DIF: 1 REF: 13-2 NAT: Analytic LOC: s of production TOP: Total-cost curve MSC: Definitional 47. ANS: C PTS: 1 DIF: 1 REF: 13-3 NAT: Analytic LOC: s of production TOP: Fixed costs

27 MSC: Definitional 48. ANS: D PTS: 1 DIF: 1 REF: 13-3 NAT: Analytic LOC: s of production TOP: Fixed costs 49. ANS: D PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Fixed costs 50. ANS: D PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Variable costs 51. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Variable costs 52. ANS: D PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Total cost 53. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average total cost 54. ANS: C PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average total cost 55. ANS: A PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average fixed cost 56. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average variable cost 57. ANS: D PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average variable cost MSC: Definitional 58. ANS: C PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Marginal cost 59. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average fixed cost 60. ANS: C PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average total cost 61. ANS: B PTS: 1 DIF: 1 REF: 13-3 NAT: Analytic LOC: s of production TOP: Fixed costs 62. ANS: C PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average variable cost 63. ANS: A PTS: 1 DIF: 1 REF: 13-3 NAT: Analytic LOC: s of production TOP: Fixed costs

28 64. ANS: C PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: Variable costs 65. ANS: B PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: Marginal cost 66. ANS: C PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average total cost 67. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average variable cost 68. ANS: C PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Total cost 69. ANS: D PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Marginal cost 70. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average variable cost 71. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average fixed cost 72. ANS: A PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average fixed cost 73. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Variable costs 74. ANS: C PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average total cost 75. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Marginal cost 76. ANS: C PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Fixed costs 77. ANS: B PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average variable cost 78. ANS: D PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: Marginal-cost curve 79. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Production function 80. ANS: B PTS: 1 DIF: 2 REF: 13-3

29 NAT: Analytic LOC: s of production TOP: Marginal cost 81. ANS: C PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Production function Marginal cost 82. ANS: A PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Marginal cost 83. ANS: B PTS: 1 DIF: 1 REF: 13-3 NAT: Analytic LOC: s of production TOP: Fixed costs 84. ANS: D PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average fixed cost 85. ANS: D PTS: 1 DIF: 1 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average total cost 86. ANS: B PTS: 1 DIF: 1 REF: 13-3 NAT: Analytic LOC: s of production TOP: Marginal cost MSC: Definitional 87. ANS: A PTS: 1 DIF: 1 REF: 13-3 NAT: Analytic LOC: s of production TOP: Marginal cost MSC: Definitional 88. ANS: C PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Marginal cost 89. ANS: B PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: Marginal cost 90. ANS: C PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Marginal cost Diminishing marginal product 91. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average-fixed-cost curve 92. ANS: D PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves Average total cost 93. ANS: A PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves Average variable cost 94. ANS: D PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves Average fixed cost 95. ANS: A PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves Marginal cost

30 96. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves Average fixed cost 97. ANS: A PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves Marginal cost 98. ANS: C PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Efficient scale 99. ANS: C PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves 100. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves 101. ANS: C PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves Marginal cost 102. ANS: D PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves 103. ANS: A PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves 104. ANS: D PTS: 1 DIF: 1 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves 105. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves 106. ANS: D PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: curves Efficient scale 107. ANS: D PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Short run 108. ANS: A PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Short run 109. ANS: A PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Average total cost 110. ANS: B PTS: 1 DIF: 3 REF: 13-4 NAT: Analytic LOC: s of production TOP: Economies of scale 111. ANS: B PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Economies of scale MSC: Definitional 112. ANS: D PTS: 1 DIF: 2 REF: 13-4

31 NAT: Analytic LOC: s of production TOP: Economies of scale 113. ANS: D PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Economies of scale 114. ANS: C PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Economies of scale 115. ANS: C PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Economies of scale 116. ANS: B PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Constant returns to scale 117. ANS: C PTS: 1 DIF: 1 REF: 13-4 NAT: Analytic LOC: s of production TOP: Diseconomies of scale MSC: Definitional 118. ANS: B PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Diseconomies of scale 119. ANS: B PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Diseconomies of scale 120. ANS: A PTS: 1 DIF: 1 REF: 13-4 NAT: Analytic LOC: s of production TOP: Average total cost 121. ANS: D PTS: 1 DIF: 1 REF: 13-4 NAT: Analytic LOC: s of production TOP: Average total cost 122. ANS: B PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Constant returns to scale 123. ANS: D PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Average total cost 124. ANS: C PTS: 1 DIF: 3 REF: 13-4 NAT: Analytic LOC: s of production TOP: Diseconomies of scale 125. ANS: D PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: s of production TOP: Constant returns to scale SHORT ANSWER 126. ANS: The opportunity cost of an item refers to all those things that must be forgone to acquire that item. Both explicit and implicit costs are included as opportunity costs. PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic

32 LOC: s of production TOP: Opportunity cost MSC: Definitional 127. ANS: An accountant would not include the forgone interest income that the money could have earned elsewhere if it had not been invested in the business. Therefore, an accountant's estimate of total cost will be less than an economist's. PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: s of production TOP: Economic profit Accounting profit 128. ANS: The production function depicts the relationship between output and a given input. The graph below shows output increasing but at a decreasing rate as the quantity of inputs increases. PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: s of production TOP: Production function 129. ANS: The total cost curve will increase at an increasing rate, or in other words, the total cost curve gets steeper as the amount produced rises. PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Diminishing marginal product Total-cost curve 130. ANS:

33 Diminishing marginal product causes the marginal cost curve to rise. PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Diminishing marginal product Marginal cost 131. ANS: Average fixed cost always declines as output rises because fixed cost is being spread over a larger number of units, thus causing the average total cost curve to fall. PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average total cost 132. ANS: When average total cost curve is falling, marginal cost is below ATC. If the average total cost curve is rising, marginal cost is above ATC. PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average total cost Marginal cost 133. ANS: The two curves will cross at the minimum point on the average total cost curve. PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: s of production TOP: Average total cost Marginal cost