Practice: Business and Cost of Production

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1 Practice: Business and Cost of Production Student: 1. Which of the following constitutes an implicit cost to the Johnston Manufacturing Company? A. payments of wages to its office workers B. rent paid for the use of equipment owned by the Schultz Machinery Company C. use of savings to pay operating expenses instead of generating interest income D. economic profits resulting from current production 2. Accounting profits equal total revenue minus: A. total explicit costs. B. total implicit costs. C. total economic costs. D. economic profits. 3. Normal profit is: A. determined by subtracting implicit costs from total revenue. B. determined by subtracting explicit costs from total revenue. C. the return to the entrepreneur when economic profits are zero. D. the average profitability of an industry over the preceding 10 years. The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6, Refer to the above data. Creamy Crisp's implicit costs, including a normal profit, are: A. $136,000. B. $150,000. C. $94,000. D. $156, Which of the following is a short-run adjustment? A. A local bakery hires two additional bakers. B. Six new firms enter the plastics industry. C. The number of farms in the United States declines by 5 percent. D. BMW constructs a new assembly plant in South Carolina. 6. The law of diminishing returns indicates that: A.as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point. B.because of economies and diseconomies of scale a competitive firm's long-run average total cost curve will be U-shaped. C. the demand for goods produced by purely competitive industries is downsloping. Dbeyond some point the extra utility derived from additional units of a product will yield the consumer. smaller and smaller extra amounts of satisfaction. 7. If you owned a small farm, which of the following would most likely be a fixed cost? A. harvest labor B. hail insurance C. fertilizer D. seed

2 8. Refer to the above diagram. At output levelqtotal cost is: A. 0BEQ. B. BCDE. C. 0BEQ plus BCDE. D. 0AFQ plus BCDE. Answer the question on the basis of the following information: 9. Refer to the above information. Average fixed cost is: A. B. C. D. 10. If a technological advance reduces the amount of variable resources needed to produce any level of output, then the: A. AVC curve will shift upward. B. MC curve will shift downward. C. ATC curve will shift upward. D. AFC curve will shift downward. 11. Suppose that, when producing 10 units of output, a firm's AVC is $22, its AFC is $5, and its MC is $30. This: A. firm's ATC is $35. B. firm's ATC is $57. C. firm's total cost is $270. D. firm's total cost is $ In comparing the changes in TC and TVC associated with an additional unit of output, we find that: A. the change in TVC is equal to MC, while the change in TC is equal to TFC. B. the change in TC exceeds the change in TVC. C. the change in TVC exceeds the change in TC. D. both are equal to MC. 13. If marginal cost is: A. falling, then average total cost must also be falling. B. rising, then average total cost must also be rising. C. rising, then average total cost could be either falling or rising. D. falling, then average total cost could be either falling or rising.

3 The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs (TVC) change with output as shown in the accompanying table. Use this information to answer the following question(s). 14. Refer to the above information. The total cost of producing 3 units of output is: A. $65. B. $105. C. $145. D. $ Refer to the above diagram. If labor is the only variable input, the average product of labor is at a: A. minimum at pointb. B. maximum at pointb. C. maximum at pointa. D. maximum at pointc. 16. Refer to the above diagram. The profit-maximizing level of output for this firm: A. is at pointa. B. is at pointb. C. is at pointc. D. cannot be determined from the information given. Answer the question on the basis of the accompanying table that shows average total costs (ATC) for a manufacturing firm whose total fixed costs are $10: 17. Refer to the above data. The total cost of producing 4 units of output is: A. $31. B. $87. C. $127. D. $ In the long run: A. all costs are variable costs. B. all costs are fixed costs. C. variable costs equal fixed costs. D. fixed costs are greater than variable costs.

4 19. Which of the following is not a source of economies of scale? A. learning-by-doing. B. labor specialization. C. use of larger machines. D. inelastic resource supply curves. 20. When a firm does more of something, it gets better at it. This learning-by-doing is: A. a source of diseconomies of scale. B. a source of economies of scale. C. called the principle of natural progression. D. called "spreading the overhead." Use the following data to answer the question. The letters A, B, and C designate three successively larger plant sizes. 21. Refer to the above data. In the long run the firm should use plant size "A" for: A. all possible levels of output. B. 10 to 30 units of output. C. 30 to 60 units of output. D. all outputs greater than Refer to the above diagram. For output levelq, per unit costs ofbare: A. unattainable and imply the inefficient use of resources. B. unattainable, given resource prices and the current state of technology. C. attainable, but imply the inefficient use of resources. D. attainable and imply least-cost production of this level of output.

5 23. Refer to the above diagram. Minimum efficient scale: A. occurs at some output greater thanq 3. B. is achieved atq 1. C. is achieved atq 3. D. cannot be identified in this diagram. 24. Refer to the above diagram. Constant returns to scale: A. occur over the 0Q 1 range of output. B. occur over theq 1 Q 3 range of output. C. begin at outputq 3. D. are in evidence at all output levels. 25. The long-run average total cost curve: A. displays declining unit costs so long as output is increasing. B. indicates the lowest unit costs achievable when a firm has had sufficient time to alter plant size. C. has a shape which is the inverse of the law of diminishing returns. D. can be derived by summing horizontally the average total cost curves of all firms in an industry.

Pre-Test Chapter 20 ed17

Pre-Test Chapter 20 ed17 Multiple Choice Questions 1. In the above diagram it is assumed that: A. some costs are fixed and other costs are variable. B. all costs are variable. C. the law of diminishing