Economy Today 14th Edition Schiller Test Bank Download

Economy Today 14th Edition by Schiller
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Chapter 21 Test Bank

Student: ___________________________________________________________________________
1. Which of the following are factors of production?

A. Output in a production function.
B. Productivity.
C. Land, labor, capital, and entrepreneurship.
D. Implicit and explicit costs.
2. Which of the following is a factor of production for the Little Biscuit Bread Company?
A. Flour.
B. Bread.
C. Productivity.
D. Money.
3. A production function shows the

A. Minimum amount of output that can be obtained from alternative combinations of inputs.
B. Maximum quantity of inputs required to produce a given quantity of output.
C. Maximum output that can be produced with varying combinations of factor inputs.
D. Output capacity of the entire economy.
4. A production function shows

A. How a firm's production changes as quantity of labor and other inputs changes.
B. How a firm's costs of production increase as it produces more goods.
C. How production changes as its unit costs go up.
D. How total costs increase as labor is added.
5. Greater labor productivity means

A. Lower output per labor-hour.
B. Higher labor cost per unit of output.
C. Lower output per worker.
D. Higher output per worker.
6. Labor productivity will increase in response to
A. Lower wages.
B. An increase in the amount of physical capital per worker.
C. Higher resource costs.
D. An increase in diminishing returns.
7. Technical efficiency is achieved when a firm produces

A. At an amount indicated by a point on the production function.
B. Below the opportunity cost for the resources it uses.
C. Enough output to cover the opportunity cost of resources.
D. An amount less than or equal to the production function.
8. When a firm produces at a technically efficient output level, it is

A. Producing the output at the minimum MC curve.
B. Using the fewest resources to produce a good or service.
C. Producing the output where the AVC curve is at a minimum.
D. Producing the best combination of goods and services.
9. The most desired goods and services that are given up in order to get more of another good are the
A. Average total cost.
B. Variable cost.
C. Marginal cost.
D. Opportunity cost.
10. The short-run production function shows how output changes when
A. The quantity of labor changes.
B. The quantity of land changes.
C. Technology changes.
D. The fixed inputs change.
11. The period in which at least one input is fixed in quantity is the
A. Long run.
B. Production run.
C. Short run.
D. Investment decision.
12. Which of the following statements is not true regarding the production function and the production possibilities
curve?
A. Both the production function and the production possibilities curve maximize the amount of output attainable.
B The production function describes the capacity of a single firm, whereas the production function summarizes the
. output capacity of the entire economy.
C. A production function tells us the maximum amount of output attainable from the use of all resources.
D. The production possibilities curve expresses the ability to produce various combinations of goods given the use
of all resources.
13.
The marginal physical product of the third unit of labor in Figure 21.1 is
A. 40.0 units per day.

B. 12.0 units per day.
C. 13.3 units per day.
D. 4.0 units per day.
14.
The marginal physical product of labor in Figure 21.1 is negative for the
A. Third worker.
B. Fourth worker.
C. Fifth worker.
D. Sixth worker.
15.
In Figure 21.1, diminishing marginal returns first occur with the
A. Fifth worker.
B. Fourth worker.
C. Third worker.
D. Second worker.
16. The change in total output associated with one additional unit of input is the
A. Opportunity cost of the output.
B. Average productivity.
C. Marginal physical product.
D. Marginal cost.
17. The marginal physical product is the

A. Change in total input required to produce one additional unit of output.
B. Change in total output associated with one additional unit of the variable input.
C. Number of units of output obtained from all units of input employed.
D. Additional cost of an additional unit of output.
18. Which of the following is the slope of the production function with respect to an input?
A. The marginal physical product of the input.
B. The average product of the input.
C. The unit cost of the input.
D. The input price.
19. If a firm could hire all the workers it wanted at a zero wage (i.e., the workers are volunteers), the firm should
hire
A. Enough workers to produce the output where diminishing returns begin.
B. Enough workers to produce the output where worker productivity is the highest.
C. Enough workers to produce where the MPP equals zero.
D. All the workers that can fit into the factory.
20. Ceteris paribus, the law of diminishing returns states that beyond some point, the
A. Returns on stocks and bonds diminish with higher security prices.
B. Addition to total utility diminishes as more units of a good are consumed.
C. Marginal physical product of a factor of production diminishes as more of that factor is used.
D. Output of any good increases as more of a variable input is used.
21. In the short run, the law of diminishing returns

A. Occurs for only a few economies.
B. Can be observed in every production process.
C. Does not occur in command economies.
D. Can be overcome by using more variable inputs.
22. Diminishing returns occur because

A. Of inefficiency in the production process.
B. Of the use of inferior factors of production.
C. A firm increases the amount of a variable input without changing a fixed input.
D. Of lower opportunity costs of the factors of production.
23. Which of the following is the best explanation of why the law of diminishing returns does not apply in the long run?
A. In the long run, firms can increase the availability of space and equipment to keep up with the increase in
variable inputs.
B. The MPP does not change in the long run.
C. In the long run, firms have enough time to find the most qualified workers.
D. All factors of production are fixed in the long run.
24. As an In and Out Burger restaurant increases the number of employees for a specific restaurant,
A. Total production of hamburgers will fall.
B. Costs of production will fall.
C. Efficiency will suffer as the restaurant becomes too crowded with employees.
D. The production function will increase.
25. Profit is
A. The difference between total cost and variable cost.
B. The difference between total revenue and total cost.
C. Earned at all points along the production function.
D. Possible only with technical efficiency.
26. The most desirable rate of output for a firm is the output that
A. Minimizes total costs.
B. Maximizes total profit.
C. Minimizes marginal costs.
D. Maximizes total revenue.
27. The shape of the marginal cost curve reflects the

A. Law of diminishing returns.
B. Competitiveness of the firm.
C. Law of diminishing marginal utility.
D. Law of demand.
28. Marginal cost

A. Is the change in total output from hiring one more factor of production.
B. Is the change in total cost from producing one additional unit of output.
C. Falls when there are diminishing returns.
D. Is the change in the total cost when hiring one more factor of production.
29. If an additional unit of labor costs $20 and has a MPP of 15 units of output, the marginal cost is
A. $0.75.
B. $1.33.
C. $30.00.
D. $300.00.
30. Marginal cost

A. Rises as a direct result of diminishing returns.
B. Falls whenever marginal physical product decreases.
C. Falls in the short run because some resources are fixed.
D. Rises whenever marginal revenue product rises.
31. If the marginal physical product (MPP) is falling, then the
A. Marginal cost of each unit of output is falling.
B. Marginal cost of each unit of output is rising.
C. Total cost of each unit of output is falling.
D. Total cost of each unit of output is rising.
32. The sum of fixed cost and variable cost at any rate of output is
A. Total variable cost.
B. Total cost.
C. Average total cost.
D. Average marginal cost.
33. An increase in production in the short run definitely results in an increase in

A. Average total costs.
B. Marginal costs.
C. Total costs.
D. Average fixed costs.
34. In the short run, when a firm produces zero output, total cost equals
A. Zero.
B. Variable costs.
C. Fixed costs.
D. Marginal costs.
35. Which of the following costs do not change when output changes in the short run?
A. Average variable costs.
B. Variable costs.
C. Average fixed costs.
D. Fixed costs.
36. Which of the following is most likely a fixed cost?

A. Raw materials cost.
B. Labor cost.
C. Energy cost.
D. Property taxes.

A. The material used to make jackets.
B. The labor on an automotive assembly line.
C. The rent for a factory.
D. The electricity used to run packaging equipment.
38. At any given rate of output, the difference between total cost and fixed cost is
A. Marginal cost.
B. Average variable cost.
C. Zero in the short run.
D. Variable cost.
39. Changes in short-run total costs result from changes in

A. Variable costs.
B. Fixed costs.
C. Profit.
D. The price elasticity of demand.
40. Average total cost is equal to

A. Total cost divided by fixed cost.
B. Total cost multiplied by quantity.
C. The sum of average variable cost and marginal cost.
D. Total cost divided by quantity produced.
41. Marginal cost is equal to

A. The change in total costs divided by the change in quantity produced.
B. The change in fixed costs as more units are produced.
C. Total cost divided by quantity produced.
D. Average total cost multiplied by quantity produced.
42. In the short run, which of the following is most likely a variable cost?
A. Contractual lease payments.
B. Labor and raw materials costs.
C. Property taxes.
D. Interest payments on borrowed funds.
43. In the short run, when a firm produces zero output, variable cost equals
A. Zero.
B. Total cost.
C. Fixed cost.
D. Marginal cost.
44. In the long run, which of the following is likely to be a variable cost?
A. Factory rental but not wage costs.
B. Wage costs but not costs for equipment.
C. Interest payments on borrowed funds but not utilities.
D. Rent, wages, and all other costs are variable in the long run.
45. Sam's surf shop has total costs of $2,000 when it is not producing any surfboards. This means that
A. Variable costs are $2000.
B. Fixed costs are $2,000.
C. The shop is very inefficient in its production.
D. Fixed costs are zero.
46. Which of the following is always downward-sloping?

A. The marginal cost curve when it is below the average total cost curve.
B. The marginal cost curve when it is above the average total cost curve.
C. The average total cost curve when it is below the marginal cost curve.
D. The average total cost curve when it is above the marginal cost curve.
47. The average fixed cost (AFC) curve

A. Is U-shaped as a result of diminishing returns.
B. Declines as long as output increases.
C. Is intersected at its minimum point by marginal cost.
D. Intersects the marginal cost curve at its minimum point.
48. The average variable cost curve slopes upward with a higher rate of output in the short run because of
A. The effect of diminishing returns.
B. The shape of the average fixed cost curve.
C. Diseconomies of scale.
D. Implicit but not explicit costs.
49. A U-shaped average total cost curve implies

A. First diminishing returns, and then increasing returns.
B. First marginal cost below average total cost, and then marginal cost above average total cost.
C. That total costs are at a minimum at the minimum of the average cost curve.
D. A linear total cost curve.
50. Average total cost is important to a business because

A. It tells the firm what the profit per unit produced is.
B. It always declines as more output is produced.
C. It tells the firm what its fixed costs are.
D. It is an indicator of the production function.
51. The marginal cost curve intersects the minimum of the curve representing
A. TC.
B. ATC.
C. AFC.
D. MPP.
52. If the marginal cost curve is rising, which of the following must be true?
A. The average total cost curve must be rising.
B. The average total cost curve must be below the marginal cost curve.
C. The average total cost curve must be above the marginal cost curve.
D. Total costs must be rising.
53. When the average total cost curve is rising, the marginal cost curve will be
A. Below the average fixed cost curve.
B. Falling with greater output.
C. Above the average total cost curve.
D. Below the average total cost curve.
54. The average total cost (ATC) curve will be negatively sloped so long as
A. Average variable cost is less than average total cost.
B. Marginal cost is greater than average total cost.
C. Average fixed cost is less than average total cost.
D. Marginal cost is less than average total cost.
55.
th
What is the marginal cost of the 120 unit of output in Figure 21.2?
A. $1.20.
B. $200.00.
C. $208.00.
D. $288.00.
56.
What is the total fixed cost in Figure 21.2?
A. $80.
B. $10,000.
C. $9,600.
D. $29,600.
57.
What is the total cost of 120 units in Figure 21.2?
A. $34,560.
B. $9,600.
C. $24,960.
D. $10,560.
58.
What is the average fixed cost when output is 120 units in Figure 21.2?
A. $0.67.
B. $80.00.
C. $96.00.
D. $208.00.
59.
What is the total variable cost when output is 100 units in Figure 21.2?
A. $9,600.
B. $296.
C. $200.
D. $20,000.
60.
At what output level do diminishing marginal returns begin in Figure 21.2?
A. 40 units.
B. 100 units.
C. 120 units.
D. Only the production function will indicate when diminishing marginal returns begin.
61.
In Figure 21.2, at what output does this firm maximize technical efficiency?
A. 0 units.
B. 40 units.
C. 100 units.
D. 120 units.
62.
Refer to Figure 21.3. The vertical difference between the total cost curve and the total fixed cost curve represents
A. Total variable costs.

B. Total marginal costs.
D. Average variable costs.
63.
Refer to Figure 21.3. The best estimate of where diminishing marginal returns begin is at an output level of
A. 10.
B. 20.
C. 30.
D. 40.
64.
Explicit costs
A. Include only payments to labor.

B. Are the sum of actual monetary payments made for resources used to produce a good.
C. Include the market value of all resources used to produce a good.
D. Are the total value of resources used to produce a good but for which no monetary payment is made.
65. Implicit costs

C. Include the value of all resources used to produce a good.
D. Are the value of resources used to produce a good but for which no monetary payment is made.
66. Economic cost

A. Includes both implicit and explicit costs.
B. Is the sum of actual monetary payments made for resources used to produce a good.
C. Includes only implicit costs.
D. Decreases as the level of production increases.
67. Accounting costs and economic costs differ because
A. Economic costs include implicit costs and accounting costs do not.
B. Accounting costs include implicit costs and economic costs do not.
C. Economic costs include explicit costs and accounting costs do not.
D. Accounting costs include explicit costs and economic costs do not.
68. Which of the following statements about the relationship between economic costs and accounting costs is true?
A. Accounting costs are always less than or equal to economic costs.
B. Accounting costs must always equal economic costs.
C. Accounting costs are always greater than economic costs.
D. Accounting costs are equal to or greater than economic costs.
69. Megan used to work at the local pizzeria for $15,000 per year but quit in order to start her own deli. To buy the
necessary equipment, she withdrew $20,000 from her inheritance (which paid 8 percent interest). Last year
she paid $25,000 for ingredients and $500 per month rent but had revenue of $50,000. She asked her dad the
accountant and her mom the economist to calculate her costs for her.
A. Dad says her cost is $9,000 and Mom says her cost is $2,400.
B. Dad says her cost is $31,000 and Mom says her cost is $35,000.
C. Dad says her cost is $25,000 and Mom says her cost is $16,600.
D. Dad says her cost is $31,000 and Mom says her cost is $47,600.
70. In economics, the long run is considered to be

A. The time period when all costs are variable.
B. The time period when all costs are explicit.
C. One year.
D. More than two years.
71. The period in which there are no fixed costs is the

A. Production run.
B. Long run.
C. Short run.
D. Implicit run.
72. The long-run average total cost curve is constructed from the
A. Minimum points of the short-run marginal cost curves.
B. Minimum points of the short-run average variable cost curves.
C. Lowest average total cost for producing each level of output.
D. Minimum points of the long-run marginal cost curves.
73. Intel's chief executive says the company might expand the technology it is using in its planned $2.5 billion chip-
manufacturing factory in China if the U.S. government allows it, underscoring the technology giant's ambitions in
the world's fourth-biggest economy. The Intel executive is making a
A. Long-run decision, and therefore an investment decision.
B. Long-run decision, and therefore a production decision.
C. Decision that would definitely increase costs.
D. Decision that would cause ATC to increase.
74. Economies of scale are reductions in average

A. Total cost that result from declining average fixed costs.
B. Fixed cost that result from reducing the firm's scale of operations.
C. Total cost that result from using operations of larger size.
D. Fixed cost resulting from improved technology and production efficiency.
75. Assume a given amount of output can be produced by several small plants or one large plant with identical
minimum per-unit costs. This long-run situation reflects the existence of
A. Economies of scale.
B. Diseconomies of scale.
C. Constant returns to scale.
D. Diminishing returns.
76. When the size of a factory (and all its associated inputs) doubles and, as a result, output more than doubles,
A. The law of diminishing returns must not apply in the smaller factory.
B. Economies of scale must exist.
C. The short-run ATC curve must be declining.
D. Marginal costs must be declining.
77. Economies of scale
A. Exist in both the short run and the long run.
B. Explain why average variable and average total costs decline in the short run.
C. Explain why average total costs decline as output increases in the long run.
D. Explain why average total costs increase as output increases in the long run.
78. Diseconomies of scale are reflected in

A. The downward-sloping segment of the long-run average total cost curve.
B. The downward-sloping segment of the long-run marginal cost curve.
C. A downward shift of the long-run average total cost curve.
D. The upward-sloping segment of the long-run average total cost curve.
79. Which of the following is a long-run concept?

A. Diminishing marginal productivity.
B. Diminishing returns.
D. Fixed costs.
80.
What is the marginal physical product of the second unit of labor in Table 21.1?
A. 20.
B. 17.
C. 35.
D. 5.
81.
With which unit of labor do diminishing marginal returns first appear in Table 21.1?
A. The first.
B. The second.
C. The third.
D. The fourth.
82.
If a fifth unit of labor was added to Table 21.1, its MPP would most likely be
A. Zero.
B. 7.
C. Less than 7.
D. Greater than 7.
83.
If workers are paid $10, what is the labor cost per unit of output in Table 21.1 when output is increased from 15 to
35 units of output?
A. $0.28 per unit.

B. $0.50 per unit.
C. $10 per unit.
D. $20 per unit.
84.
Average fixed cost at 20 units of output in Table 21.2 is
A. $1.00.
B. $2.00.
C. $2.50.
D. $4.00.
85.
The marginal cost between 20 and 30 units of output in Table 21.2 is
A. $1.60.
B. $4.00.
C. $1.80.
D. $18.00.
86.
Above 10 units of output, the average fixed cost in Table 21.2
A. Rises above $2.00.

B. Remains constant.
C. Stays below $0.50.
D. Continues to decline.
87.
At 20 units of output in Table 21.2, the average variable cost is
A. $1.10 per unit.

B. $1.75 per unit.
C. $2.00 per unit.
D. $3.10 per unit.
88.
For the output levels in Table 21.2, the minimum of the average variable cost curve occurs at a production rate of
A. Zero units per day.

B. 10 units per day.
C. 20 units per day.
D. 30 units per day.
89.
At 10 units of output in Table 21.2, the total fixed cost is
A. $44.
B. $14.
C. $40.
D. $54.
90.
At 30 units of output in Table 21.2, the total variable cost is
A. $30.
B. $40.
C. $50.
D. $80.
91.
Complete Table 21.3 below:
A. 66.
B. 36.
C. 33.
D. 18.
92.
What is the marginal physical product of the fourth unit of labor in Table 21.3?
A. 116.
B. 29.
C. 20.
D. 5.
93.
How many units of output can be produced when one unit of labor is employed in Table 21.3?
A. 0.
B. 30.
C. 36.
D. 66.
94.
How many units of output can be produced when three units of labor are employed in Table 21.3?
A. 30.
B. 31.
C. 66.
D. 96.
95.
What is the unit labor cost in Table 21.3 for the second unit of labor if the MPP represents daily output and the
wage rate is $72 per day?
A. $0.50 per unit of output.

B. $2.00 per unit of output.
C. $36.00 per unit of output.
D. $72.00 per unit of output.
96.
At 4 units of output in Table 21.4, total fixed costs are
A. $78.00.
B. $19.50.
C. $16.00.
D. $20.00.
97.
The marginal cost of the fourth unit of output in Table 21.4 is
A. $4.00.
B. $20.00.
C. $16.00.
D. $19.50.
98.
A. $13.
B. $6.
C. $12.
D. $21.
99.
A. $5.00.
B. $20.00.
C. $19.50.
D. $62.00.
100.
At 3 units of output in Table 21.4, average fixed costs are
A. $16.00.
B. $19.50.
C. $5.33.
D. $15.50.
101.
For the output levels in Table 21.4, the minimum of the average total cost curve occurs at a production rate of
A. 2 units per day.

B. 3 units per day.
C. 4 units per day.
D. Zero units per day.
102.
For the output levels in Table 21.4, the minimum of the average variable cost curve occurs at a production rate of
A. 3 units per day.

B. 2 units per day.
C. 4 units per day.
103.
Complete Table 21.5:
Total fixed costs in Table 21.5 are equal to
A. $0 because the problem involves the long run.

B. $15.
C. $30.
D. $60.
104.
The marginal cost of the third unit of output in Table 21.5 is
A. $4.
B. $3.
C. $30.
D. $15.
105.
The total cost of 3 units of output in Table 21.5 is
A. $30.
B. $15.
C. $23.
D. $38.
106.
The total variable cost of 2 units of output in Table 21.5 is
A. $15.
B. $27.
C. $8.
D. $12.
107.
The average variable cost of the second unit of output in Table 21.5 is
A. $6.00.
B. $4.00.
C. $8.00.
D. $15.00.
108.
The total variable cost of the first unit of output in Table 21.5 is
A. $15.00.
B. $12.00.
C. $8.00.
D. $6.00.
109.
In Figure 20.4, a firm that produces over 800 units of output should choose a plant with which short-run average
total cost function?
A. ATC1 only.
B. ATC2 only.
C. ATC3 only.
D. Either ATC2 or ATC3.
110.
In Figure 21.4, a firm that produces between 600 and 800 units per period should choose a plant with a short-
run average total cost function of
A. ATC2 only.
B. ATC1 only.
C. ATC3 only.
D. ATC2 or ATC3.
111.
In Figure 21.4, the long-run average total cost curve is given by the curved line segment
A. ACE.
B. ABFDGE.
C. ABF only.
D. BFD.
112.
Refer to Figure 21.5. Economies of scale occur in the following range of factory sizes
A. #1 to #2.
B. #1 to #3.
C. #3 only.
D. #1 to #5.
113.
Refer to Figure 21.5. Diseconomies of scale begin to occur
A. At the minimum points on all five ATC curves.

B. After the third factory.
C. After the fourth factory.
D. After the first factory.
114. Which of the following is least likely to increase productivity?

A. Technological advances.
B. Increased managerial capabilities.
C. A higher wage rate.
D. Improved labor skills.
115. Unit labor cost is equal to the

A. Wage rate.
B. Wage rate divided by MPP.
C. The change in labor cost divided by the change in output.
D. Marginal cost.
116. When the wage rate is $10 per hour and the MPP of a worker is 15 units per hour, the unit labor cost is
A. $0.67 per unit.
B. $10.00 per hour.
C. $15.00 per unit.
D. $150.00 per hour.
117. Which of the following would cause a firm's production function to shift upward?
A. An increase in production by the firm.
B. Hiring more workers.
C. Increased training for the firm's workers.
D. An increase in factor costs.
118. Assuming labor is a variable input, an increase in labor productivity will result in
A. A downward shift in the MPP curve.
B. A downward shift in the MC curve.
C. An upward shift in the ATC curve.
D. A downward shift in the production function.
119. Technological changes that increase productivity shift the
A. Production function downward.
B. Average total cost curve downward.
C. Marginal cost curve upward.
D. Marginal physical product curve downward.
120. Higher education levels and better management

A. Cause MPP to slope downward.
B. Shift the long-run ATC curve downward.
C. Lead to greater diseconomies of scale.
D. Shift the MC curve upward.
121. The creation of the World Wide Web has contributed to all of the following except
A. Reduced information costs.
B. Reduced transaction costs.
C. Increased marginal costs.
D. Increased productivity.
122. One In the News article titled "Funeral Giant Moves In on Small Rivals" reports that profit for a Houston-based
funeral giant is 31 cents on every dollar versus a profit of 12 cents for the funeral industry in general. Such profits
are most likely the result of
A. Constant returns to scale.
B. Economies of scale.
C. Higher minimum average costs.
123. According to the World View article titled "United States Gains Cost Advantage," during the last decade, unit labor
costs in the United States declined
A. And the United States was less competitive in world markets.
B. Because productivity advances were small and wage increases were high.
C. Because productivity advances were greater than wage increases.
D. And cost curves shifted upward.
124. The World View article titled "United States Gains Cost Advantage" says productivity advances have contributed to
U.S. competitiveness in world markets. When improvements in productivity reduce costs, the production function
shifts
A. Upward and cost curves shift upward.
B. Upward and cost curves shift downward.
C. Downward and cost curves shift upward.
D. Downward and cost curves shift downward.
125. The In The News article "Ford Pumps $400 Million into Kansas City Plant" says that
A. This investment by Ford is a long-run production decision, and the company plans to enjoy economies of scale.
B. The $400 million investment is a short-run production decision.
C. The $400 million investment will be a variable expense.
D. The new plant will likely result in diseconomies of scale.
126. Actual output will always equal the limit described in the production function.
True False
127. The productivity of any input is independent and is not affected by the other resources that are used.
True False
128. When a firm is able to achieve the output indicated by a production function, it is producing with technical
efficiency.
True False
129. Short-run choices imply that at least one factor of production is fixed.
True False
130. Total output may continue to rise even though marginal physical product is declining.
True False
131. Marginal physical product is the change in total output associated with one additional unit of input.
True False
132. Total output may continue to rise even though marginal physical product is negative.
True False
133. The law of diminishing returns indicates that the marginal physical product of a variable input declines as more of it
is employed, ceteris paribus.
True False
134. Total revenue plus total cost equals profit.

True False
135. Marginal cost always reflects the cost of variable factors.

True False
136. If MPP declines with greater output, then MC must increase.

True False
137. Total cost refers to the market value of all resources used in producing a good or service.
True False
138. The total cost at a zero level of output is always equal to the variable cost.
True False
139. When the marginal cost curve is below the average total cost curve, the average total cost curve must be falling.
True False
140. The marginal cost curve intersects the minimum of the average total cost curve and also the minimum of the
average variable cost curve.
True False
141. The vertical distance between a firm's ATC and AVC curves grows smaller as output increases.
True False
142. The difference between the accountant's and the economist's measurement of cost equals implicit costs.
True False
143. There are still some fixed costs in the long run, such as rent.
True False
144. In the long run, a company should choose the plant size that yields the lowest average total cost for the desired
rate of output.
True False
145. The long-run ATC curve is simply a composite of the best short-run ATC possibilities.
True False
146. If choosing a larger plant will reduce minimum average costs, there are economies of scale.
True False
147. If a firm has constant returns to scale, the long-run cost curve will be downward-sloping.
True False
148. Diseconomies of scale imply that the average total cost curve is downward-sloping in the long run.
True False
149. More education and better technology contribute to an increase in productivity, ceteris paribus.
True False
150. Unit labor cost represents the increase in output because an additional worker is hired.
True False
151. If the MPP of a worker is 12 units per hour and the wage rate is $10 per hour, the unit labor cost is equal to $1.20
per unit of output.
True False
152. Better management shifts the production function downward and the total cost curve upward.
True False
153. Economists point out that if it were not for diminishing returns, we could grow enough food to feed the world in a
flowerpot. Explain what they mean.
154. Explain the concepts of explicit costs and implicit costs. Why do economists include implicit costs in their
calculation of profits?
155. Compare production costs in the short run with production costs in the long run.
156. Explain the concept of economies of scale. Identify two reasons why economies of scale exist.
157. Explain how firms'production functions and cost curves will change as science and technology advance and as the
knowledge of how to organize and manage resources improves.
Chapter 21 Test Bank Key
1. Which of the following are factors of production?
A. Output in a production function.
B. Productivity.
C. Land, labor, capital, and entrepreneurship.
D. Implicit and explicit costs.
Factors of production are resources used to produce goods and services, such as land, labor, capital, and
entrepreneurship.
AACSB: Reflective Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 01 Easy
Learning Objective: 21-01 What the production function represents.
Topic: THE PRODUCTION FUNCTION
2. Which of the following is a factor of production for the Little Biscuit Bread Company?
A. Flour.
B. Bread.
C. Productivity.
D. Money.
Factors of production are resources used to produce goods and services. Productivity is a measurement of
how much output we get from an input such as labor.

Blooms: Understand
Difficulty: 02 Medium
3. A production function shows the
A. Minimum amount of output that can be obtained from alternative combinations of inputs.
B. Maximum quantity of inputs required to produce a given quantity of output.
C. Maximum output that can be produced with varying combinations of factor inputs.
D. Output capacity of the entire economy.
The production function is a technological relationship expressing the maximum quantity of a good
attainable from different combinations of factor inputs.

Blooms: Remember
Difficulty: 01 Easy
4. A production function shows
A. How a firm's production changes as quantity of labor and other inputs changes.
B. How a firm's costs of production increase as it produces more goods.
C. How production changes as its unit costs go up.
D. How total costs increase as labor is added.
Production increases as a firm adds more inputs such as labor. Given a certain level of technology, the
production function shows the relationship between total output and how much labor a firm is using.

Blooms: Understand
5. Greater labor productivity means
A. Lower output per labor-hour.
B. Higher labor cost per unit of output.
C. Lower output per worker.
D. Higher output per worker.
When labor productivity increases, it means that each worker can add more to the total output than before.

Blooms: Understand
6. Labor productivity will increase in response to
A. Lower wages.
B. An increase in the amount of physical capital per worker.
C. Higher resource costs.
D. An increase in diminishing returns.
The productivity of any factor of production depends on the amount of other resources available to
it. For example, a snow removal worker will be more productive with a show shovel than without.

Blooms: Understand
7. Technical efficiency is achieved when a firm produces
A. At an amount indicated by a point on the production function.
B. Below the opportunity cost for the resources it uses.
C. Enough output to cover the opportunity cost of resources.
D. An amount less than or equal to the production function.
The production function represents maximum technical efficiency-that is, the most output attainable from any
given level of factor inputs.

Blooms: Remember
Difficulty: 01 Easy
8. When a firm produces at a technically efficient output level, it is
A. Producing the output at the minimum MC curve.
B. Using the fewest resources to produce a good or service.
C. Producing the output where the AVC curve is at a minimum.
D. Producing the best combination of goods and services.
Technical efficiency is getting the most output attainable from any given level of factor inputs. In other words, no
resources are being wasted.

Blooms: Understand
9. The most desired goods and services that are given up in order to get more of another good are the
A. Average total cost.
B. Variable cost.
C. Marginal cost.
D. Opportunity cost.
The opportunity cost of a product is measured by the most desired goods and services that could have
been produced with the same resources. For example, the opportunity cost of doing your economics
homework might be the haircut that you could have received during that time.

Blooms: Understand
10. The short-run production function shows how output changes when
A. The quantity of labor changes.
B. The quantity of land changes.
C. Technology changes.
D. The fixed inputs change.
In the short run some inputs (e.g., land and capital) are fixed in quantity. Output then depends on how much of
a variable input (e.g., labor) is used.

Blooms: Understand
11. The period in which at least one input is fixed in quantity is the
A. Long run.
B. Production run.
C. Short run.
D. Investment decision.
The short run is the period in which the quantity (and quality) of some inputs can't be changed, or in other
words inputs are fixed.

Blooms: Remember
Difficulty: 01 Easy
12. Which of the following statements is not true regarding the production function and the production possibilities
curve?
A. Both the production function and the production possibilities curve maximize the amount of output
attainable.
B. The production function describes the capacity of a single firm, whereas the production function summarizes
the output capacity of the entire economy.
C. A production function tells us the maximum amount of output attainable from the use of all resources.
D. The production possibilities curve expresses the ability to produce various combinations of goods given the
use of all resources.
A production function tells us the maximum amount of output attainable from alternative combinations of factor
inputs for a single firm.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
13.
The marginal physical product of the third unit of labor in Figure 21.1 is
A. 40.0 units per day.

B. 12.0 units per day.
C. 13.3 units per day.
D. 4.0 units per day.
The marginal physical product is the difference in total output associated with one additional unit of input, which
is 12 (40 - 28).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Learning Objective: 21-02 Why the law of diminishing returns applies to production processes.
14.
The marginal physical product of labor in Figure 21.1 is negative for the
A. Third worker.
B. Fourth worker.
C. Fifth worker.
D. Sixth worker.
If total output decreases with the addition of a new worker, the marginal physical product is not only diminishing
but is actually negative.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
15.
In Figure 21.1, diminishing marginal returns first occur with the
A. Fifth worker.
B. Fourth worker.
C. Third worker.
D. Second worker.
The third worker adds less to total output than the second worker, adding only 12 units of output to the second
worker's 16.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
16. The change in total output associated with one additional unit of input is the
A. Opportunity cost of the output.
B. Average productivity.
C. Marginal physical product.
D. Marginal cost.
The marginal physical product (MPP) is the change in total output associated with one additional unit of input.

Blooms: Remember
Difficulty: 01 Easy
Topic: MARGINAL PRODUCTIVITY
17. The marginal physical product is the
A. Change in total input required to produce one additional unit of output.
B. Change in total output associated with one additional unit of the variable input.
C. Number of units of output obtained from all units of input employed.
D. Additional cost of an additional unit of output.
The marginal physical product (MPP) is the change in total output associated with one additional unit of input.

Blooms: Remember
Difficulty: 01 Easy
18. Which of the following is the slope of the production function with respect to an input?
A. The marginal physical product of the input.
B. The average product of the input.
C. The unit cost of the input.
D. The input price.
The slope of the production function shows how output changes as we employ more workers in fixed-
resource factory.

Blooms: Understand
19. If a firm could hire all the workers it wanted at a zero wage (i.e., the workers are volunteers), the firm should
hire
A. Enough workers to produce the output where diminishing returns begin.
B. Enough workers to produce the output where worker productivity is the highest.
C. Enough workers to produce where the MPP equals zero.
D. All the workers that can fit into the factory.
The marginal physical product (MPP) is the change in total output that results from employing one more
unit of input. As long as the MPP is positive, a firm can add to its total output by employing the worker.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
20. Ceteris paribus, the law of diminishing returns states that beyond some point, the
A. Returns on stocks and bonds diminish with higher security prices.
B. Addition to total utility diminishes as more units of a good are consumed.
C. Marginal physical product of a factor of production diminishes as more of that factor is used.
D. Output of any good increases as more of a variable input is used.
The law of diminishing returns says that the marginal physical product of a variable input declines as more of it
is employed along with a constant quantity of other (fixed) inputs.

Blooms: Remember
Difficulty: 01 Easy
21. In the short run, the law of diminishing returns
A. Occurs for only a few economies.
B. Can be observed in every production process.
C. Does not occur in command economies.
D. Can be overcome by using more variable inputs.
In the short run, a production process is characterized by a fixed amount of available land and capital. Typically
the only factor that can be varied in the short run is labor. Yet as more labor is hired, each unit of labor has less
capital and land to work with. At some point, this constraint begins to pinch any business.

Blooms: Understand
22. Diminishing returns occur because
A. Of inefficiency in the production process.
B. Of the use of inferior factors of production.
C. A firm increases the amount of a variable input without changing a fixed input.
D. Of lower opportunity costs of the factors of production.
In the short run, a production process is characterized by a fixed amount of available land and capital. Typically
the only factor that can be varied in the short run is labor. Yet as more labor is hired, each unit of labor has less
capital and land to work with.

Blooms: Understand
23. Which of the following is the best explanation of why the law of diminishing returns does not apply in the long
run?
A. In the long run, firms can increase the availability of space and equipment to keep up with the increase in
variable inputs.
B. The MPP does not change in the long run.
C. In the long run, firms have enough time to find the most qualified workers.
D. All factors of production are fixed in the long run.
The problems of crowded facilities apply to most production processes in the short run because of
fixed resources. In the long run, all resources can be changed.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
24. As an In and Out Burger restaurant increases the number of employees for a specific restaurant,
A. Total production of hamburgers will fall.
B. Costs of production will fall.
C. Efficiency will suffer as the restaurant becomes too crowded with employees.
D. The production function will increase.
In the short run, when one input is fixed (here it is the size of the restaurant) and a variable input increases
(the number of workers), marginal production will fall. Restaurants such as In and Out Burger know the
efficient amount of labor to use, given their size.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
25. Profit is
A. The difference between total cost and variable cost.
B. The difference between total revenue and total cost.
C. Earned at all points along the production function.
D. Possible only with technical efficiency.
The most desirable rate of output is the one that maximizes total profit-the difference between total revenue and
total costs.

Blooms: Remember
Difficulty: 01 Easy
Learning Objective: 21-03 How the various measures of cost relate to each other.
Topic: RESOURCE COSTS
26. The most desirable rate of output for a firm is the output that
A. Minimizes total costs.
B. Maximizes total profit.
C. Minimizes marginal costs.
D. Maximizes total revenue.
The most desirable rate of output is the one that maximizes total profit-the difference between total revenue and
total costs.

Blooms: Understand
27. The shape of the marginal cost curve reflects the
A. Law of diminishing returns.
B. Competitiveness of the firm.
C. Law of diminishing marginal utility.
D. Law of demand.
Whenever marginal physical product is increasing, the marginal cost of producing a good must be falling, so
the marginal cost curve will be downward-sloping. At the point of diminishing marginal returns, the marginal
physical product declines and the marginal cost increases, so the marginal cost curve will be upward-sloping.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
28. Marginal cost
A. Is the change in total output from hiring one more factor of production.
B. Is the change in total cost from producing one additional unit of output.
C. Falls when there are diminishing returns.
D. Is the change in the total cost when hiring one more factor of production.
Marginal cost is the increase in total cost associated with a one-unit increase in production.

Blooms: Remember
Difficulty: 01 Easy
29. If an additional unit of labor costs $20 and has a MPP of 15 units of output, the marginal cost is
A. $0.75.
B. $1.33.
C. $30.00.
D. $300.00.
Marginal cost is the increase in total cost associated with a one-unit increase in production and can be found by
dividing the change in total cost by the MPP. If an additional unit of labor costs $20 and has a MPP of 15 units
of output, the marginal cost is 20/15 or $1.33.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
30. Marginal cost
A. Rises as a direct result of diminishing returns.
B. Falls whenever marginal physical product decreases.
C. Falls in the short run because some resources are fixed.
D. Rises whenever marginal revenue product rises.
Whenever marginal physical product is increasing, the marginal cost of producing a good must be falling. At the
point of diminishing marginal returns, the marginal physical product declines and the marginal cost increases.

Blooms: Understand
31. If the marginal physical product (MPP) is falling, then the
A. Marginal cost of each unit of output is falling.
B. Marginal cost of each unit of output is rising.
C. Total cost of each unit of output is falling.
D. Total cost of each unit of output is rising.
At the point of diminishing marginal returns, the marginal physical product declines and the marginal
cost increases.

Blooms: Understand
32. The sum of fixed cost and variable cost at any rate of output is
A. Total variable cost.
B. Total cost.
C. Average total cost.
D. Average marginal cost.
Total cost includes both fixed and variable costs.

Blooms: Remember
Difficulty: 01 Easy
Topic: DOLLAR COSTS
33. An increase in production in the short run definitely results in an increase in
A. Average total costs.
B. Marginal costs.
C. Total costs.
D. Average fixed costs.
Total cost rises as output increases because additional variable costs must be incurred.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: DOLLAR COSTS
34. In the short run, when a firm produces zero output, total cost equals
A. Zero.
B. Variable costs.
C. Fixed costs.
D. Marginal costs.
Fixed costs must be paid even if no output is produced. Variable costs start at zero; therefore when a firm
produces zero, total costs are equal to fixed costs.

Blooms: Understand
Topic: DOLLAR COSTS
35. Which of the following costs do not change when output changes in the short run?
A. Average variable costs.
B. Variable costs.
D. Fixed costs.
Fixed costs such as the cost of the basic plants and equipment do not vary with the rate of output.

Blooms: Understand
Topic: DOLLAR COSTS
A. Raw materials cost.
B. Labor cost.
C. Energy cost.
D. Property taxes.
Property tax is an example of a fixed cost. Once you purchase land, you're obligated to pay for it whether or not
you use it. Labor, energy, and raw material costs will vary with output.

Blooms: Understand
Topic: DOLLAR COSTS
A. The material used to make jackets.
B. The labor on an automotive assembly line.
C. The rent for a factory.
D. The electricity used to run packaging equipment.
The factory lease is an example of a fixed cost. Once you lease a factory, you're obligated to pay for it whether
or not you use it. Labor, energy, and raw material costs will vary with output.

Blooms: Understand
Topic: DOLLAR COSTS
38. At any given rate of output, the difference between total cost and fixed cost is
A. Marginal cost.
B. Average variable cost.
C. Zero in the short run.
D. Variable cost.
Total costs include both fixed and variable costs; therefore, if you subtract fixed costs from total costs, you can
determine the value of variable costs.

Blooms: Remember
Difficulty: 01 Easy
Topic: DOLLAR COSTS
39. Changes in short-run total costs result from changes in
A. Variable costs.
B. Fixed costs.
C. Profit.
D. The price elasticity of demand.
Total costs rise as output increases because additional variable costs must be incurred.

Blooms: Understand
Topic: DOLLAR COSTS
40. Average total cost is equal to
A. Total cost divided by fixed cost.
B. Total cost multiplied by quantity.
C. The sum of average variable cost and marginal cost.
D. Total cost divided by quantity produced.
Average total cost or unit cost per item is total cost divided by the quantity produced.

Blooms: Understand
Topic: DOLLAR COSTS
41. Marginal cost is equal to
A. The change in total costs divided by the change in quantity produced.
B. The change in fixed costs as more units are produced.
C. Total cost divided by quantity produced.
D. Average total cost multiplied by quantity produced.
Marginal cost is the change in total cost divided by the change in quantity produced. It is equivalent to
the rate of change in total costs as output increases. It is also equal to the change in variable costs.

Blooms: Understand
Topic: DOLLAR COSTS
42. In the short run, which of the following is most likely a variable cost?
A. Contractual lease payments.
B. Labor and raw materials costs.
C. Property taxes.
D. Interest payments on borrowed funds.
Variable costs are the costs of production that change when the rate of output is altered, such as labor or
material costs.

Blooms: Understand
Topic: DOLLAR COSTS
43. In the short run, when a firm produces zero output, variable cost equals
A. Zero.
B. Total cost.
C. Fixed cost.
D. Marginal cost.
Variable costs start at zero when a firm produces zero.

Blooms: Understand
Topic: DOLLAR COSTS
44. In the long run, which of the following is likely to be a variable cost?
A. Factory rental but not wage costs.
B. Wage costs but not costs for equipment.
C. Interest payments on borrowed funds but not utilities.
D. Rent, wages, and all other costs are variable in the long run.
In the long run, all costs are variable.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: DOLLAR COSTS
45. Sam's surf shop has total costs of $2,000 when it is not producing any surfboards. This means that
A. Variable costs are $2000.
B. Fixed costs are $2,000.
C. The shop is very inefficient in its production.
D. Fixed costs are zero.
The initial dominance of falling AFC, combined with the later resurgence of rising AVC (due to increasing
MC), is what gives the ATC curve its characteristic U shape.

Blooms: Understand
Topic: DOLLAR COSTS
46. Which of the following is always downward-sloping?
A. The marginal cost curve when it is below the average total cost curve.
B. The marginal cost curve when it is above the average total cost curve.
C. The average total cost curve when it is below the marginal cost curve.
D. The average total cost curve when it is above the marginal cost curve.
If the marginal cost is less than the average total cost, the average total cost must be decreasing. For
instance, if you have a 3.5 GPA (grade point average) and get only a 3.0 in your last (marginal) accounting
class, your GPA will fall.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: DOLLAR COSTS
47. The average fixed cost (AFC) curve
A. Is U-shaped as a result of diminishing returns.
B. Declines as long as output increases.
C. Is intersected at its minimum point by marginal cost. D.
Intersects the marginal cost curve at its minimum point.
The numerator (fixed costs) is constant and the denominator (quantity) increases as output expands; therefore
any increase in output will lower average fixed cost.

Blooms: Understand
Topic: DOLLAR COSTS
48. The average variable cost curve slopes upward with a higher rate of output in the short run because of
A. The effect of diminishing returns.
B. The shape of the average fixed cost curve.
D. Implicit but not explicit costs.
At some point the average variable cost rises because of diminishing returns in the production process.

Blooms: Understand
Topic: DOLLAR COSTS
49. A U-shaped average total cost curve implies
A. First diminishing returns, and then increasing returns.
B. First marginal cost below average total cost, and then marginal cost above average total cost.
C. That total costs are at a minimum at the minimum of the average cost curve.
D. A linear total cost curve.
So long as the marginal cost of producing one more unit is less than the previous average cost, average
cost must fall. Average total costs must increase whenever marginal cost exceeds average cost.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: DOLLAR COSTS
50. Average total cost is important to a business because
A. It tells the firm what the profit per unit produced is.
B. It always declines as more output is produced.
C. It tells the firm what its fixed costs are.
D. It is an indicator of the production function.
The initial dominance of falling AFC, combined with the later resurgence of rising AVC (due to increasing
MC), is what gives the ATC curve its characteristic U shape.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: DOLLAR COSTS
51. The marginal cost curve intersects the minimum of the curve representing
A. TC.
B. ATC.
C. AFC.
D. MPP.
The MC curve will always intersect both the ATC and AVC curves at their lowest points.

Blooms: Understand
Topic: DOLLAR COSTS
52. If the marginal cost curve is rising, which of the following must be true?
A. The average total cost curve must be rising.
B. The average total cost curve must be below the marginal cost curve.
C. The average total cost curve must be above the marginal cost curve.
D. Total costs must be rising.
Marginal cost is the increase in total cost associated with a one-unit increase in production. So as long as MC is
positive, the total costs must be rising. Average total cost can be decreasing and can be either above or below
the marginal cost curve when the marginal cost curve is upward-sloping.

Blooms: Understand
Topic: DOLLAR COSTS
53. When the average total cost curve is rising, the marginal cost curve will be
A. Below the average fixed cost curve.
B. Falling with greater output.
C. Above the average total cost curve.
D. Below the average total cost curve.
If the marginal cost is greater than the average total cost, the average total cost must be increasing. For
instance, if you have a 3.5 GPA (grade point average) and get a 4.0 in your last (marginal) economics class,
your GPA will rise.

Blooms: Understand
Topic: DOLLAR COSTS
54. The average total cost (ATC) curve will be negatively sloped so long as
A. Average variable cost is less than average total cost.
B. Marginal cost is greater than average total cost.
C. Average fixed cost is less than average total cost.
D. Marginal cost is less than average total cost.

Blooms: Understand
Topic: DOLLAR COSTS
55.
th
What is the marginal cost of the 120 unit of output in Figure 21.2?
A. $1.20.
B. $200.00.
C. $208.00.
D. $288.00.
According to the graph, marginal cost is equal to $288 at the quantity 120.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Topic: DOLLAR COSTS
56.
What is the total fixed cost in Figure 21.2?
A. $80.
B. $10,000.
C. $9,600.
D. $29,600.
AFC can be found at any quantity of output by taking the difference between ATC and AVC. Once you have
AFC, you can multiply it by quantity to get FC. For example, at the quantity of 120, AFC is equal to $80 ($288
- $208) and FC is equal to $9,600 ($80 ×120).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Topic: DOLLAR COSTS
57.
What is the total cost of 120 units in Figure 21.2?
A. $34,560.
B. $9,600.
C. $24,960.
D. $10,560.
TC can be found by multiplying ATC by quantity at any output level. So at an output level of 120, TC is equal to
$34,560 ($288 ×120).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Topic: DOLLAR COSTS
58.
What is the average fixed cost when output is 120 units in Figure 21.2?
A. $0.67.
B. $80.00.
C. $96.00.
D. $208.00.
AFC can be found at any quantity of output by taking the difference between ATC and AVC. For example, at
the quantity of 120, AFC is equal to $80 ($288 - $208).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Topic: DOLLAR COSTS
59.
What is the total variable cost when output is 100 units in Figure 21.2?
A. $9,600.
B. $296.
C. $200.
D. $20,000.
VC can be found by multiplying AVC by quantity at any output level. So at an output level of 100, VC is equal to
$20,000 ($200 ×100).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Topic: DOLLAR COSTS
60.
At what output level do diminishing marginal returns begin in Figure 21.2?
A. 40 units.
B. 100 units.
C. 120 units.
D. Only the production function will indicate when diminishing marginal returns begin.
When diminishing returns set in, MC begins rising, as it does in Figure 21.2 after the output rate of 40 units is
exceeded.

Blooms: Understand
Topic: DOLLAR COSTS
61.
In Figure 21.2, at what output does this firm maximize technical efficiency?
A. 0 units.
B. 40 units.
C. 100 units.
D. 120 units.
The point where ATC is at its minimum is the most efficient-least cost-production level.

Blooms: Understand
Topic: DOLLAR COSTS
62.
Refer to Figure 21.3. The vertical difference between the total cost curve and the total fixed cost
curve represents
A. Total variable costs.

B. Total marginal costs.
D. Average variable costs.
Total cost minus total fixed cost is total variable cost.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: DOLLAR COSTS
63.
Refer to Figure 21.3. The best estimate of where diminishing marginal returns begin is at an output level of
A. 10.
B. 20.
C. 30.
D. 40.
The best estimate of where diminishing marginal returns begin is 20 because that is the output level where the
total cost curve begins getting steeper, which means the costs are rising faster as output increases.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: DOLLAR COSTS
64.
Explicit costs

C. Include the market value of all resources used to produce a good.
D. Are the total value of resources used to produce a good but for which no monetary payment is made.
An explicit cost is a payment made for the use of a resource.

Blooms: Remember
Difficulty: 01 Easy
Learning Objective: 21-04 How economic and accounting costs differ.
Topic: ECONOMIC VS. ACCOUNTING COSTS
65. Implicit costs
C. Include the value of all resources used to produce a good.
D. Are the value of resources used to produce a good but for which no monetary payment is made.
Implicit costs are the value of resources used, even when no direct payment is made.

Blooms: Remember
Difficulty: 01 Easy
66. Economic cost
A. Includes both implicit and explicit costs.
B. Is the sum of actual monetary payments made for resources used to produce a good.
C. Includes only implicit costs.
D. Decreases as the level of production increases.
Economic cost is the value of all resources used to produce a good or service; it includes both explicit
and implicit costs.

Blooms: Remember
Difficulty: 01 Easy
67. Accounting costs and economic costs differ because
A. Economic costs include implicit costs and accounting costs do not.
B. Accounting costs include implicit costs and economic costs do not.
C. Economic costs include explicit costs and accounting costs do not.
D. Accounting costs include explicit costs and economic costs do not.
Accounting costs refer to the explicit dollar outlays made by a producer. Economic costs, in contrast, refer
to the value of all costs, both explicit and implicit.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
68. Which of the following statements about the relationship between economic costs and accounting costs is true?
A. Accounting costs are always less than or equal to economic costs.

B. Accounting costs must always equal economic costs.
C. Accounting costs are always greater than economic costs.
D. Accounting costs are equal to or greater than economic costs.
Accounting costs refer to the explicit dollar outlays made by a producer. Economic costs, in contrast, refer
to the value of all costs, both explicit and implicit. Therefore accounting costs will be less than economic
costs when implicit costs exist.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
69. Megan used to work at the local pizzeria for $15,000 per year but quit in order to start her own deli. To buy the
necessary equipment, she withdrew $20,000 from her inheritance (which paid 8 percent interest). Last year
she paid $25,000 for ingredients and $500 per month rent but had revenue of $50,000. She asked her dad the
accountant and her mom the economist to calculate her costs for her.
A. Dad says her cost is $9,000 and Mom says her cost is $2,400.
B. Dad says her cost is $31,000 and Mom says her cost is $35,000.
C. Dad says her cost is $25,000 and Mom says her cost is $16,600.
D. Dad says her cost is $31,000 and Mom says her cost is $47,600.
Profit is equal to revenue minus costs. An accountant will consider only explicit costs, whereas an
economist will consider economic costs, which include explicit and implicit costs.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
70. In economics, the long run is considered to be
A. The time period when all costs are variable.
B. The time period when all costs are explicit.
C. One year.
D. More than two years.
The long run is a period of time long enough for all inputs to be varied (no fixed costs).

Blooms: Remember
Difficulty: 01 Easy
Topic: LONG-RUN COSTS
71. The period in which there are no fixed costs is the
A. Production run.
B. Long run.
C. Short run.
D. Implicit run.
The long run is a period of time long enough for all inputs to be varied (no fixed costs).

Blooms: Remember
Difficulty: 01 Easy
72. The long-run average total cost curve is constructed from the
A. Minimum points of the short-run marginal cost curves.
B. Minimum points of the short-run average variable cost curves.
C. Lowest average total cost for producing each level of output.
D. Minimum points of the long-run marginal cost curves.
Long-run cost possibilities are determined by all possible short-run options. In the long run, we'd choose the
plant that yielded the lowest average cost for any desired rate of output. The LATC represents these choices.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
73. Intel's chief executive says the company might expand the technology it is using in its planned $2.5 billion chip-
manufacturing factory in China if the U.S. government allows it, underscoring the technology giant's ambitions
in the world's fourth-biggest economy. The Intel executive is making a
A. Long-run decision, and therefore an investment decision.
B. Long-run decision, and therefore a production decision.
C. Decision that would definitely increase costs.
D. Decision that would cause ATC to increase.
In the long run, a firm has no fixed costs and can select any desired plant size, which is an investment decision.
Once a plant is built, leased, or purchased, a firm has fixed costs and focuses on short-run output or production
decisions.

Blooms: Understand
74. Economies of scale are reductions in average
A. Total cost that result from declining average fixed costs.
B. Fixed cost that result from reducing the firm's scale of operations.
C. Total cost that result from using operations of larger size.
D. Fixed cost resulting from improved technology and production efficiency.
If the minimum average costs that come about through increases in the size (scale) of plants and equipment
decrease, then economies of scale exist.

Blooms: Remember
Difficulty: 01 Easy
Learning Objective: 21-05 What (dis)economies of scale are.
Topic: ECONOMIES OF SCALE
75. Assume a given amount of output can be produced by several small plants or one large plant with identical
minimum per-unit costs. This long-run situation reflects the existence of
A. Economies of scale.
B. Diseconomies of scale.
C. Constant returns to scale.
D. Diminishing returns.
When there is no economic advantage to a large plant, because a large plant is no more efficient than a
small plant, constant returns to scale exist.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
76. When the size of a factory (and all its associated inputs) doubles and, as a result, output more than
doubles,
A. The law of diminishing returns must not apply in the smaller factory.
B. Economies of scale must exist.
C. The short-run ATC curve must be declining.
D. Marginal costs must be declining.
Economies of scale (or increasing returns to scale) exist when all inputs double but output more than
doubles, which implies that the average costs have decreased.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
77. Economies of scale
A. Exist in both the short run and the long run.
B. Explain why average variable and average total costs decline in the short run.
C. Explain why average total costs decline as output increases in the long run.
D. Explain why average total costs increase as output increases in the long run.
Economies of scale (or increasing returns to scale) exist when all inputs double but output more than doubles,
which implies that the average costs have decreased.

Blooms: Remember
Difficulty: 01 Easy
78. Diseconomies of scale are reflected in
A. The downward-sloping segment of the long-run average total cost curve.
B. The downward-sloping segment of the long-run marginal cost curve.
C. A downward shift of the long-run average total cost curve.
D. The upward-sloping segment of the long-run average total cost curve.
When increasing the size (scale) of a plant reduces operating efficiency, the average total cost curve will
increase.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
79. Which of the following is a long-run concept?
A. Diminishing marginal productivity.
B. Diminishing returns.
D. Fixed costs.
Economies or diseconomies of scale occur when changes in the size (scale) of the plants and equipment
change the minimum average costs. In the short run, plant and equipments resources are fixed.
Therefore, economies and diseconomies of scale are long-run concepts.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
80.
A. 20.
B. 17.
C. 35.
D. 5.
is 20 (35 - 15).
AACSB: Analytic
Blooms: Apply Difficulty: 03 Hard Learning Objective: 21-03 How the various
measures of cost relate to each other.

81.
With which unit of labor do diminishing marginal returns first appear in Table 21.1?
A. The first.
B. The second.
C. The third.
D. The fourth.
The marginal physical product is 15, 20, 10, and 7 when you add each worker respectively, so diminishing
marginal returns appear with the third worker as 20 is less than 10.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
82.
If a fifth unit of labor was added to Table 21.1, its MPP would most likely be
A. Zero.
B. 7.
C. Less than 7. D.
Greater than 7.
The MPP of the fifth worker would likely be less than 7 because diminishing marginal returns have already set
in and the MPP of the fourth worker is 7.
AACSB: Analytic

83.
If workers are paid $10, what is the labor cost per unit of output in Table 21.1 when output is increased from 15
to 35 units of output?
A. $0.28 per unit.

B. $0.50 per unit.
C. $10 per unit.
D. $20 per unit.
The wage rate divided by the marginal physical product is equal to the unit labor cost. When the wage rate is
$10 per hour and the MPP is 20 units, the unit labor cost is $0.50 (10/20).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
84.
Average fixed cost at 20 units of output in Table 21.2 is
A. $1.00.
B. $2.00.
C. $2.50.
D. $4.00.
Average fixed cost is equal to fixed cost divided by quantity. Fixed cost of 40 (because total cost is $40 at
0 units of output) divided by 20 is equal to $2.00.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Learning Objective: 21-03 How the various measures of cost relate to each other. Topic:
ECONOMIES OF SCALE
85.
The marginal cost between 20 and 30 units of output in Table 21.2 is
A. $1.60.
B. $4.00.
C. $1.80.
D. $18.00.
Marginal cost is equal to the change in total cost ($80 - $62) divided by the change in quantity (30 - 20), which
is $1.80.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
86.
Above 10 units of output, the average fixed cost in Table 21.2
A. Rises above $2.00.

B. Remains constant.
C. Stays below $0.50.
D. Continues to decline.
The numerator (fixed costs) is constant and the denominator (quantity) increases as output expands; therefore
any increase in output will lower average fixed cost.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
ECONOMIES OF SCALE
87.
A. $1.10 per unit.

B. $1.75 per unit.
C. $2.00 per unit.
D. $3.10 per unit.
AVC is equal to VC ($62 - $40) divided by quantity (20), which is $1.10.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
88.
For the output levels in Table 21.2, the minimum of the average variable cost curve occurs at a production
rate of
A. Zero units per day.

B. 10 units per day.
C. 20 units per day.
D. 30 units per day.
The AVC is $1.40, $1.10, and $1.33 for 10, 20, and 30 units of output respectively. Therefore, AVC is
minimized at 20 units of output.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
ECONOMIES OF SCALE
89.
At 10 units of output in Table 21.2, the total fixed cost is
A. $44.
B. $14.
C. $40.
D. $54.
The total fixed cost is $40 at any unit of output because total cost is $40 at 0 units of output.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
90.
A. $30.
B. $40.
C. $50.
D. $80.
To find the total variable cost at 30 units of output, you must subtract the fixed cost ($40) from the total
cost ($80), which is $40.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
ECONOMIES OF SCALE
91.
A. 66.
B. 36.
C. 33.
D. 18.
is 33 (66 - 30).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
92.
What is the marginal physical product of the fourth unit of labor in Table 21.3?
A. 116.
B. 29.
C. 20.
D. 5.
is 20 (116 - 96).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
93.
How many units of output can be produced when one unit of labor is employed in Table 21.3?
A. 0.
B. 30.
C. 36.
D. 66.
Because the marginal physical product of the first worker is 30, the total units of output increased from 0 to
30 with the employment of one worker.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
94.
How many units of output can be produced when three units of labor are employed in Table 21.3?
A. 30.
B. 31.
C. 66.
D. 96.
Because the marginal physical product of the third worker is 30, the total units of output increased from 66 to
96 with the addition of the third worker.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
95.
What is the unit labor cost in Table 21.3 for the second unit of labor if the MPP represents daily output and the
wage rate is $72 per day?
A. $0.50 per unit of output.

B. $2.00 per unit of output.
C. $36.00 per unit of output.
D. $72.00 per unit of output.
The wage rate divided by the marginal physical product is equal to the unit labor cost. When the wage
rate is $72 per day and the MPP is 36 additional units per day, the unit labor cost is $2.00 (72/36).

Blooms: Evaluate
Difficulty: 03 Hard
96.
At 4 units of output in Table 21.4, total fixed costs are
A. $78.00.
B. $19.50.
C. $16.00.
D. $20.00.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
ECONOMIES OF SCALE
97.
The marginal cost of the fourth unit of output in Table 21.4 is
A. $4.00.
B. $20.00.
C. $16.00.
D. $19.50.
is $20.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
98.
A. $13.
B. $6.
C. $12.
D. $21.
AVC is equal to VC ($42 - $16) divided by quantity (2), which is $13.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
ECONOMIES OF SCALE
99.
A. $5.00.
B. $20.00.
C. $19.50.
D. $62.00.
VC is equal to TC ($78) minus FC ($16), which is $62.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
100.
At 3 units of output in Table 21.4, average fixed costs are
A. $16.00.
B. $19.50.
C. $5.33.
D. $15.50.
AFC is equal to FC ($16) divided by quantity (3), which is $5.33.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
ECONOMIES OF SCALE
101.
For the output levels in Table 21.4, the minimum of the average total cost curve occurs at a production rate of
A. 2 units per day.

B. 3 units per day.
C. 4 units per day.
ATC is equal to TC divided by quantity. The ATC is $30, $21, $19.3, and $19.5 with output levels of 1 through 4
respectively. Therefore, ATC is minimized at 3 units of output.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
102.
For the output levels in Table 21.4, the minimum of the average variable cost curve occurs at a production
rate of
A. 3 units per day.

B. 2 units per day.
C. 4 units per day.
AVC is equal to VC divided by quantity. The AVC is $14, $13, $14, and $15.5 with output levels of 1 through
4 respectively. Therefore, AVC is minimized at 2 units of output.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
ECONOMIES OF SCALE
103.
Total fixed costs in Table 21.5 are equal to
A. $0 because the problem involves the long run.

B. $15.
C. $30.
D. $60.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
104.
The marginal cost of the third unit of output in Table 21.5 is
A. $4.
B. $3.
C. $30.
D. $15.
is $3.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
105.
The total cost of 3 units of output in Table 21.5 is
A. $30.
B. $15.
C. $23.
D. $38.
Total cost is equal to fixed cost plus variable cost, which is $30.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
106.
The total variable cost of 2 units of output in Table 21.5 is
A. $15.
B. $27.
C. $8.
D. $12.
Because the marginal cost of the second unit of output is $4, the variable cost increased from $8 to $12 with
the additional unit of output.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
107.
The average variable cost of the second unit of output in Table 21.5 is
A. $6.00.
B. $4.00.
C. $8.00.
D. $15.00.
AVC is equal to VC ($12) divided by quantity (2), which is $6.00.
AACSB: Analytic

108.
The total variable cost of the first unit of output in Table 21.5 is
A. $15.00.
B. $12.00.
C. $8.00.
D. $6.00.
VC is equal to TC ($23) minus FC ($15), which is $8.00.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
109.
In Figure 20.4, a firm that produces over 800 units of output should choose a plant with which short-run average
total cost function?
A. ATC1 only.
B. ATC2 only.
C. ATC3 only.
D. Either ATC2 or ATC3.
In the long run, the firm would choose the plant that yielded the lowest average cost for any desired rate of
output.

Blooms: Understand
110.
In Figure 21.4, a firm that produces between 600 and 800 units per period should choose a plant with a short-
run average total cost function of
A. ATC2 only.
B. ATC1 only.
C. ATC3 only.
D. ATC2 or ATC3.
output.

Blooms: Understand
111.
In Figure 21.4, the long-run average total cost curve is given by the curved line segment
A. ACE.
B. ABFDGE.
C. ABF only.
D. BFD.
The long-run cost curve is just a summary of our best short-run cost possibilities, using existing technology
and facilities.

Blooms: Understand
112.
Refer to Figure 21.5. Economies of scale occur in the following range of factory sizes
A. #1 to #2.
B. #1 to #3.
C. #3 only.
D. #1 to #5.
Reductions in minimum average costs that come about through increases in the size (scale) of plants
and equipment occur over the range of plant sizes 1 through 3.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
113.
Refer to Figure 21.5. Diseconomies of scale begin to occur
A. At the minimum points on all five ATC curves.

B. After the third factory.
C. After the fourth factory.
D. After the first factory.
Increases in minimum average costs that come about through increases in the size (scale) of plants and
equipment occur after the third factory.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
114. Which of the following is least likely to increase productivity?
A. Technological advances.
B. Increased managerial capabilities.
C. A higher wage rate.
D. Improved labor skills.
Advances in technological or managerial knowledge and human or physical capital increase our productive
capability.

Blooms: Understand
Topic: THE ECONOMY TOMORROW
115. Unit labor cost is equal to the
A. Wage rate.
B. Wage rate divided by MPP.
C. The change in labor cost divided by the change in output.
D. Marginal cost.
The wage rate divided by the marginal physical product is equal to the unit labor cost, which indicates the labor
cost to produce one unit.

Blooms: Remember
Difficulty: 01 Easy
116. When the wage rate is $10 per hour and the MPP of a worker is 15 units per hour, the unit labor cost is
A. $0.67 per unit.
B. $10.00 per hour.
C. $15.00 per unit.
D. $150.00 per hour.
$10 per hour and the MPP is 15 units per hour, the unit labor cost is $0.67 (10/15).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
117. Which of the following would cause a firm's production function to shift upward?
A. An increase in production by the firm.
B. Hiring more workers.
C. Increased training for the firm's workers.
D. An increase in factor costs.
capability and therefore cause the production function to shift upward.

Blooms: Understand
118. Assuming labor is a variable input, an increase in labor productivity will result in
A. A downward shift in the MPP curve.
B. A downward shift in the MC curve.
C. An upward shift in the ATC curve.
capability and therefore cause the production function to shift upward and the production cost curves to shift
downward-in particular the MC curve.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
119. Technological changes that increase productivity shift the
A. Production function downward.
B. Average total cost curve downward.
C. Marginal cost curve upward.
D. Marginal physical product curve downward.
downward-in particular the ATC curve.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
120. Higher education levels and better management
A. Cause MPP to slope downward.
B. Shift the long-run ATC curve downward.
C. Lead to greater diseconomies of scale.
D. Shift the MC curve upward.
downward-in particular the long-run ATC curve.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
121. The creation of the World Wide Web has contributed to all of the following except
A. Reduced information costs.
B. Reduced transaction costs.
C. Increased marginal costs.
D. Increased productivity.
The creation of the World Wide Web cut the cost of gathering information about markets and inputs, allowed
firms to engage in greater specialization, allowed firms to manage their inventories and supply chains much
more efficiently, and reduced transaction and communications costs.

Blooms: Understand
122. One In the News article titled "Funeral Giant Moves In on Small Rivals" reports that profit for a Houston-
based funeral giant is 31 cents on every dollar versus a profit of 12 cents for the funeral industry in general.
Such profits are most likely the result of
A. Constant returns to scale.
B. Economies of scale.
C. Higher minimum average costs.
As the size of a firm increases, it may be able to reduce the costs of doing business. Economies of scale
can give a large firm a competitive advantage over smaller firms.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: IN THE NEWS
123. According to the World View article titled "United States Gains Cost Advantage," during the last decade, unit
labor costs in the United States declined
A. And the United States was less competitive in world markets.
B. Because productivity advances were small and wage increases were high.
C. Because productivity advances were greater than wage increases.
D. And cost curves shifted upward.
Global competitiveness depends on unit labor costs. U.S. unit labor costs have declined in the last decade or
so, increasing America's competitiveness in world markets.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: WORLD VIEW
124. The World View article titled "United States Gains Cost Advantage" says productivity advances have
contributed to U.S. competitiveness in world markets. When improvements in productivity reduce costs, the
production function shifts
A. Upward and cost curves shift upward.
B. Upward and cost curves shift downward.
C. Downward and cost curves shift upward.
D. Downward and cost curves shift downward.
Advances in technological or managerial knowledge increase our productive capability. This is reflected in
upward shifts of the production function (because we get more output from each unit of labor) and downward
shifts of production cost curves (because each unit of output costs less to produce).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: IN THE NEWS
125. The In The News article "Ford Pumps $400 Million into Kansas City Plant" says that
A. This investment by Ford is a long-run production decision, and the company plans to enjoy economies of
scale.
B. The $400 million investment is a short-run production decision.
C. The $400 million investment will be a variable expense.
D. The new plant will likely result in diseconomies of scale.
The long run is a planning period when all inputs are variable. Because the plant is not built yet, Ford is in
a long-run planning period. Ford can spread the fixed costs of the plant over many cars and thus will enjoy
economies of scale.

Blooms: Understand
Topic: IN THE NEWS
126. Actual output will always equal the limit described in the production function.
FALSE
The purpose of a production function is to tell us how much output we can produce with varying amounts of
factor inputs, not necessarily how much we actually produce.

Blooms: Understand
127. The productivity of any input is independent and is not affected by the other resources that are used.
FALSE
The productivity of any factor of production depends on the amount of other resources available to it. For
example, a snow removal worker will be more productive with a show shovel than without one.

Blooms: Understand
128. When a firm is able to achieve the output indicated by a production function, it is producing with technical
efficiency.
TRUE
Technical efficiency is getting the most output attainable from any given level of factor inputs. The points on the
production function represent the output using the inputs efficiently.

Blooms: Understand
129. Short-run choices imply that at least one factor of production is fixed.
TRUE
The short run is the period in which the quantity (and quality) of some inputs can't be changed-in other words,
they are fixed.

Blooms: Understand
130. Total output may continue to rise even though marginal physical product is declining.
TRUE
Marginal physical product (MPP) is the change in total output that results from employing one more
unit of input. As long as MPP is positive, a firm can add to its total output by employing the worker.

Blooms: Remember
Difficulty: 01 Easy
131. Marginal physical product is the change in total output associated with one additional unit of input.
TRUE
Marginal physical product (MPP) is the change in total output that results from employing one more unit of
input.

Blooms: Remember
Difficulty: 01 Easy
132. Total output may continue to rise even though marginal physical product is negative.
FALSE
Marginal physical product (MPP) is the change in total output that results from employing one more unit of
input. As long as MPP is positive, a firm can add to its total output by employing the worker. If MPP is
negative, total output will fall.

Blooms: Understand
133. The law of diminishing returns indicates that the marginal physical product of a variable input declines as more
of it is employed, ceteris paribus.
TRUE
The problems of crowded facilities apply to most production processes in the short run because of fixed
resources, so as an input increases the marginal output declines.

Blooms: Understand
134. Total revenue plus total cost equals profit.
FALSE
Total revenue minus total cost equals profit.

Blooms: Remember
Difficulty: 01 Easy
135. Marginal cost always reflects the cost of variable factors.
TRUE
Marginal cost is the change in total cost that occurs when more output is produced. However, fixed costs are
constant, so the change in total cost will be the result of a change in variable costs only.

Blooms: Understand
136. If MPP declines with greater output, then MC must increase.
TRUE
At the point of diminishing marginal returns, the marginal physical product declines, the marginal cost
increases, and the marginal cost curve will be upward-sloping.

Blooms: Understand
137. Total cost refers to the market value of all resources used in producing a good or service.
TRUE
Total cost includes both explicit and implicit costs.

Blooms: Understand
Topic: DOLLAR COSTS
138. The total cost at a zero level of output is always equal to the variable cost.
FALSE
The total cost at a zero level of output is always equal to the fixed cost.

Blooms: Understand
Topic: DOLLAR COSTS
139. When the marginal cost curve is below the average total cost curve, the average total cost curve must be
falling.
TRUE

Blooms: Understand
Topic: DOLLAR COSTS
140. The marginal cost curve intersects the minimum of the average total cost curve and also the minimum of the
average variable cost curve.
TRUE
The MC curve will always intersect both the ATC and AVC curves at their lowest points.

Blooms: Understand
Topic: DOLLAR COSTS
141. The vertical distance between a firm's ATC and AVC curves grows smaller as output increases.
TRUE
The difference between the ATC and the AVC is AFC, which declines as output increases.

Blooms: Understand
Topic: DOLLAR COSTS
142. The difference between the accountant's and the economist's measurement of cost equals implicit costs.
TRUE
Accounting cost refers to the explicit dollar outlays made by a producer. Economic cost, in contrast, refers to
the value of all costs, both explicit and implicit.

Blooms: Understand
143. There are still some fixed costs in the long run, such as rent.
FALSE
The long run is a period of time long enough for all inputs to be varied (no fixed costs); it is long enough for rent
contracts to be renegotiated.

Blooms: Understand
144. In the long run, a company should choose the plant size that yields the lowest average total cost for the desired
rate of output.
TRUE
output.

Blooms: Understand
145. The long-run ATC curve is simply a composite of the best short-run ATC possibilities.
TRUE
The long-run cost curve is just a summary of our best short-run cost possibilities, using existing technology and
facilities.

Blooms: Understand
146. If choosing a larger plant will reduce minimum average costs, there are economies of scale.
TRUE
If the minimum average costs that come about through increases in the size (scale) of plants and equipment
decrease, then economies of scale exist.

Blooms: Understand
147. If a firm has constant returns to scale, the long-run cost curve will be downward-sloping.
FALSE
When there is no economic advantage to a large plant and average costs remain constant with a change in the
size of the facility, constant returns to scale exist.

Blooms: Understand
148. Diseconomies of scale imply that the average total cost curve is downward-sloping in the long run.
FALSE
Diseconomies of scale imply that the average total cost curve is upward-sloping in the long run.

Blooms: Understand
149. More education and better technology contribute to an increase in productivity, ceteris paribus.
TRUE
capability and therefore cause the production function to shift upward.

Blooms: Understand
150. Unit labor cost represents the increase in output because an additional worker is hired.
FALSE
The wage rate divided by the marginal physical product is equal to the unit labor cost, which indicates the labor
cost to produce one unit.

Blooms: Understand
151. If the MPP of a worker is 12 units per hour and the wage rate is $10 per hour, the unit labor cost is equal to
$1.20 per unit of output.
FALSE
$10 per hour and the MPP is 12 units per hour, the unit labor cost is $0.83 (10/12).

Blooms: Understand
152. Better management shifts the production function downward and the total cost curve upward.
FALSE
downward-in particular the MC curve.

Blooms: Understand
153. Economists point out that if it were not for diminishing returns, we could grow enough food to feed the world in a
flowerpot. Explain what they mean.
If diminishing returns did not exist, we could increase food production indefinitely by simply adding more and
more inputs (e.g., seed, fertilizer, water) to the flowerpot. However, the reality is that as we add more and more
variable inputs to a fixed input (i.e., the flowerpot), marginal returns will eventually begin to decline, thereby
limiting food output. To feed the world we must increase the size of the flowerpot.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
154. Explain the concepts of explicit costs and implicit costs. Why do economists include implicit costs in their
calculation of profits?
Explicit costs equal the financial costs of a resource. Implicit costs are equal to that portion of the value of a
resource for which no financial payment is made. Accountants are interested in how money is being used,
while economists are interested in how economic resources are being used.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
155. Compare production costs in the short run with production costs in the long run.
The short run is characterized by fixed costs such as a specific plants and equipment. In the long run a firm has
no fixed costs because it is free to choose any desired plant size, level of equipment, and technology. Once a
firm commits to a given plant size, it has fixed costs and should focus on short-run output decisions.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
156. Explain the concept of economies of scale. Identify two reasons why economies of scale exist.
Economies of scale exist when larger scale operations reduce minimum average costs. This phenomenon
occurs because (1) larger plants can enjoy the benefits of greater specialization, (2) more efficient machinery
is often more costly, making it economical only in large operations, and (3) larger operations may be able to
acquire a cost advantage through the process of learning by doing.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
157. Explain how firms'production functions and cost curves will change as science and technology advance and as
the knowledge of how to organize and manage resources improves.
Advancements in science and technology and improvements in the knowledge of how to organize and
manage resources increase our productive capability. This shifts production functions upward and cost
curves downward for firms where these advancements and improvements occur.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Chapter 21 Test Bank Summary
Category # of Questions
AACSB: Analytic 71
AACSB: Reflective Thinking 86
Accessibility: Keyboard Navigation 106
Blooms: Analyze 29
Blooms: Apply 42
Blooms: Evaluate 1
Blooms: Remember 22
Blooms: Understand 63
Difficulty: 01 Easy 22
Difficulty: 02 Medium 63
Difficulty: 03 Hard 72
Learning Objective: 21-01 What the production function represents. 22
Learning Objective: 21-02 Why the law of diminishing returns applies to production processes. 19
Learning Objective: 21-03 How the various measures of cost relate to each other. 104
Learning Objective: 21-04 How economic and accounting costs differ. 6
Learning Objective: 21-05 What (dis)economies of scale are. 6
Topic: DOLLAR COSTS 37
Topic: ECONOMIC VS. ACCOUNTING COSTS 8
Topic: ECONOMIES OF SCALE 49
Topic: IN THE NEWS 3
Topic: LONG-RUN COSTS 7
Topic: MARGINAL PRODUCTIVITY 14
Topic: RESOURCE COSTS 10
Topic: THE ECONOMY TOMORROW 8
Topic: THE PRODUCTION FUNCTION 20
Topic: WORLD VIEW 1

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Chapter 21 Test Bank

1. Which of the following are factors of production?

3. A production function shows the

4. A production function shows

5. Greater labor productivity means

7. Technical efficiency is achieved when a firm produces

8. When a firm produces at a technically efficient output level, it is

A. 40.0 units per day.

In Figure 21.1, diminishing marginal returns first occur with the

17. The marginal physical product is the

21. In the short run, the law of diminishing returns

22. Diminishing returns occur because

27. The shape of the marginal cost curve reflects the

28. Marginal cost

30. Marginal cost

33. An increase in production in the short run definitely results in an increase in

36. Which of the following is most likely a fixed cost?

37. Which of the following is most likely a fixed cost?

39. Changes in short-run total costs result from changes in

40. Average total cost is equal to

41. Marginal cost is equal to

46. Which of the following is always downward-sloping?

47. The average fixed cost (AFC) curve

49. A U-shaped average total cost curve implies

50. Average total cost is important to a business because

What is the total fixed cost in Figure 21.2?

What is the total cost of 120 units in Figure 21.2?

At what output level do diminishing marginal returns begin in Figure 21.2?

A. Total variable costs.

A. Include only payments to labor.

65. Implicit costs

66. Economic cost

70. In economics, the long run is considered to be

71. The period in which there are no fixed costs is the

74. Economies of scale are reductions in average

78. Diseconomies of scale are reflected in

79. Which of the following is a long-run concept?

A. $0.28 per unit.

Average fixed cost at 20 units of output in Table 21.2 is

The marginal cost between 20 and 30 units of output in Table 21.2 is

Above 10 units of output, the average fixed cost in Table 21.2

A. Rises above $2.00.

At 20 units of output in Table 21.2, the average variable cost is

A. $1.10 per unit.

A. Zero units per day.

At 10 units of output in Table 21.2, the total fixed cost is

At 30 units of output in Table 21.2, the total variable cost is

Complete Table 21.3 below:

Complete Table 21.3 below:

Complete Table 21.3 below:

Complete Table 21.3 below:

Complete Table 21.3 below:

A. $0.50 per unit of output.

At 4 units of output in Table 21.4, total fixed costs are

The marginal cost of the fourth unit of output in Table 21.4 is

At 2 units of output in Table 21.4, the average variable cost is

At 4 units of output in Table 21.4, the total variable cost is

At 3 units of output in Table 21.4, average fixed costs are

A. 2 units per day.

A. 3 units per day.

Complete Table 21.5: