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Chapter 20 - Cost
Chapter 8
Cost
Multiple Choice Questions
1. In the short run, the ATC curve is _____ above the AVC curve.
A. always
B. sometimes
C. never
2. As output rises,
A. AFC rises.
B. AFC falls.
C. AFC remains the same.
D. there is no way of determining what happens to AFC.
3. When average total cost is declining, then

A. marginal cost must be less than average total cost.
B. marginal cost must be greater than average total cost.
C. average total cost must be greater than average fixed cost.
D. average variable cost must be declining.
4. Which statement is true?

A. The marginal cost curve intersects both the average variable cost curve and the average
total cost curve at their minimum points.
B. The marginal cost curve intersects neither the average variable cost curve nor the average
C. The marginal cost curve intersects the average variable cost curve at its minimum point,
but it does not intersect the average total cost curve at its minimum point.
D. The marginal cost curve intersects the average total cost curve at its minimum point, but it
does not intersect the average variable cost curve at its minimum point.
20-1
Chapter 20 - Cost
5. The law of diminishing returns states that as output rises, eventually _____ output will
decline.
A. total
B. average
C. fixed
D. marginal
6. The law of diminishing marginal returns implies

A. the more hours you spend studying economics the less you will know.
B. your understanding of economics will be increased by decreasing your marginal study
time.
C. after a certain point, the more hours you spend studying economics per day, the less you
will learn with each added hour.
D. the more hours you spend studying economics per day, the more you will learn with each
added hour.
7. The law of diminishing returns

A. is completely invalid.
B. states that if units of a resource are added to a fixed proportion of other resources,
eventually marginal output will decline.
C. states that if any two resources are combined, production will fall.
D. states that profit margins decline as output rises.
8. If marginal output is rising it is possible to have

A. diminishing returns.
B. negative returns.
C. both diminishing returns and negative returns.
D. neither diminishing returns nor negative returns.
20-2
Chapter 20 - Cost
9. If fixed cost is $5,000, and, at an output of 3 variable cost is $4,000, how much is average
total cost at an output of 3?
A. $1,333.33
B. $3,000
C. $4,500
D. $9,000
E. There is not enough information to determine ATC at an output of 3.
10. If fixed cost is $8,000, variable cost is $5,000 at an output of 2 and $9,000 at an output of
3, how much is marginal cost at an output of 3?
A. $3,000
B. $4,000
C. $5,000
D. $8,000
E. There is not enough information to determine marginal cost at an output of 3.
11. _______ is (are) the relationship between the maximum amounts of output a firm can
produce and various quantities of inputs.
A. A production function
B. The law of diminishing returns
C. Economies of scale
D. Diseconomies of scale
12. The MC curve intersects the AVC and ATC curves at their minimum points
A. none of the time.
B. some of the time.
C. most of the time.
D. all of the time.
20-3
Chapter 20 - Cost

A. AFC declines with output.
B. ATC declines with output.
C. AFC – AVC = ATC.
D. Output divided by fixed cost = AFC.
14. The phrase "spreading the overhead" refers to

A. the decrease in total cost that occurs as a firm reduces the size of its work force.
B. the decrease in average fixed cost that occurs as a firm increases its output.
C. the decrease in average variable cost that occurs as a firm increases its output.
D. the decrease in total fixed cost that occurs as a firm increases its output.
15. A firm has a fixed cost of $2,000, and at an output of one, variable cost is $1,500. How
much is marginal cost at an output of 1?
A. $1,000
B. $1,500
C. $2,000
D. $3,500
E. There is insufficient information to find marginal cost at an output of 1.
16. Which statement is false?

A. The AFC curve is U-shaped.
B. The AVC curve is U-shaped.
C. The ATC curve is U-shaped.
D. None of these statements are false.
17. In the short run, output

A. can be varied by changing the size of factories.
B. can be varied by changing the amount of equipment in factories.
C. can be varied by using the factories and equipment in the industry with more or less of
other inputs.
D. cannot be varied because inputs are fixed.
20-4
Chapter 20 - Cost

A. Fixed cost rises as output rises.
B. Variable cost falls as output rises.
C. In the short-run, at an output of zero, total cost = zero.
D. None of these statements are true.

A. Fixed costs and variable costs vary with output.
B. Neither fixed costs nor variable costs vary with output.
C. Only fixed cost varies with output.
D. Only variable cost varies with output.
20. In the long run

A. all costs become fixed.
B. all costs become variable.
C. all costs are a combination of fixed and variable.

A. The MC always intersects the ATC at its minimum point.
B. The MC always intersects the AVC at its minimum point.
C. The MC always intersects the AFC at its minimum point.
22. The average fixed cost curve

A. is a vertical line.
B. is a horizontal line.
C. slopes downward to the right as output rises.
D. is U-shaped (it declines as output rises, reaches a minimum, and then rises).
20-5
Chapter 20 - Cost
23. As output rises, average fixed cost

A. rises.
B. falls.
C. remains the same.
24. When the average total cost is at its minimum, it is

A. greater than MC.
B. equal to MC.
C. smaller than MC.
25. When MC is rising but still below AVC, then

A. AVC is declining.
B. AVC is constant.
C. AVC is rising.
D. There is not enough information to determine what AVC is doing.
26. As a firm's output expands, the

A. ATC will reach a minimum before the AVC.
B. AVC will reach a minimum before the ATC.
C. ATC and AVC will reach minimums at the same output.

A. Going out of business is a short run option.
B. Operating or shutting down are long run options.
C. Going out of business or not going out of business are long run options.
28. If a firm cannot cover its variable costs, it will

A. operate in the short run and stay in business in the long run.
B. operate in the short run and go out of business in the long run.
C. shut down in the short run and stay in business in the long run.
D. shut down in the short run and go out of business in the long run.
20-6
Chapter 20 - Cost
29. Average variable cost is equal to

A. average cost plus average fixed cost.
B. marginal cost plus average fixed cost.
C. marginal cost.
D. average total cost minus average fixed cost.
30. If average variable cost of production falls as output grows

A. marginal cost must also be declining.
B. fixed cost must also be declining.
C. total cost must also be declining.
D. marginal cost must be below average variable cost.
31. Both Jill and John own toothpick factories. Jill's factory has low fixed costs and high
variable costs. John's factory has high fixed costs and low variable costs. Currently each
factory is producing 1,000 boxes of toothpicks at the same total cost. Complete the following
statement with the correct answer. If each produces
A. more, their costs will be equal.
B. less, their costs will be equal.
C. less, the costs of Jill's factory will exceed those of John's factory.
D. more, the costs of Jill's factory will exceed those of John's factory.
32. Marginal cost may be defined as

A. the change in average total cost that results from producing one more unit of output.
B. the change in average variable cost that results from producing one more unit of output.
C. the change in total cost that results from producing one more unit of output.
D. the rate of change in total fixed cost that results from producing one more unit of output.
33. Fixed costs are best defined as

A. costs that will not vary with the firm's output level over some period of time.
B. costs that are paid on a yearly basis rather than a weekly or monthly basis.
C. costs of inputs that cannot be moved, such as real estate.
D. costs that will last as long as the firm exists.
20-7
Chapter 20 - Cost
34. A variable input is an input that can change

A. in the short run but not in the long run.
B. in the long run but not in the short run.
C. in both the long run and the short run.
D. without changing the level of output.
35. Which is most clearly a fixed cost?

A. Insurance premiums
B. Wages of production workers
C. Advertising
D. Shipping costs
E. Cost of raw materials
36. Which is most clearly a variable cost?

A. Rent
B. Insurance premiums
C. Salaries of employees under long-term contract
D. Interest payments
E. Wages of production workers
37. Fixed cost is sometimes referred to as

A. sunk cost.
B. variable cost.
C. total cost.
D. economic cost.
E. accounting cost.

A. Shutting down is a long run option.
B. Going out of business is a short run option.
C. Continuing to operate is a short run option.
20-8
Chapter 20 - Cost
39. Jimmy, Walter, Mike, and Bill run a school for political candidates. The school has fixed
costs of $10 million, variable costs of $4 million, and total revenue of $15 million. In the
short run the school will _____ and in the long run the school will ___.
A. operate; stay in business
B. operate; go out of business
C. shut down; stay in business
D. shut down; go out of business
40. The basic characteristic of the short run is that

A. a firm does not have sufficient time to change the amounts of any of the resources it
employs.
B. the firm does not have sufficient time to cut its rate of output to zero.
C. the firm does not have sufficient time to change the size of its plant.
D. the time frame is sufficient to allow new firms to enter the industry.
41. George and Dan's political consulting firm is losing money, but it is more than covering
its fixed costs. What is the most accurate statement we can make about it?
A. It will stay in business in the long run.
B. It will go out of business in the long run.
C. It will shut down in the short run.
D. None of these statements are correct.
42. Average total cost is found by dividing

A. variable cost by output.
B. output by variable cost.
C. total cost by output.
D. output by total cost.
43. At an output of zero, total cost is

A. zero.
B. equal to fixed cost.
C. equal to variable cost.
D. cannot be found.
20-9
Chapter 20 - Cost
44. Which of the following cost curves will NOT shift downward if the price of a variable
input decreases?
A. Total cost
B. Average cost
C. Marginal cost
D. Average fixed cost
45. In the long run, all costs are _____________.

A. fixed
B. variable
C. equal to zero
D. None of the choices are correct.
46. In the long run,

A. a firm can shut down, but it cannot exit the industry.
B. there are no fixed factors of production.
C. a firm can vary all inputs, but it cannot change the mix of inputs it uses.
47. Fixed costs are best defined as costs ____________ with the firm's output level over some
period.
A. that will not vary
B. which vary directly
C. which vary inversely
48. Firms taking advantage of ___________ accounts for the downward slope in the long-run
average cost curve.
A. diseconomies of scale
B. the production function
C. economies of scale
D. marginal cost
20-10
Chapter 20 - Cost

A. A firm will shut down when variable cost is greater than total revenue.
B. In the long run all costs become variable costs.
C. When the firm shuts down, output is zero.
D. None of the statements are false.

A. Total cost rises with output because variable cost rises.
B. A firm will operate when prospective sales are greater than variable cost.
C. When output falls, variable costs fall.
Use the above table and assume a fixed cost of $200.
51. At an output of 0, total cost is

A. 0.
B. $100.
C. $200.
D. $300.
E. $400.
F. cannot be found.
20-11
Chapter 20 - Cost
52. At an output of 4, AFC is

A. $50.
B. $100.
C. $200.
D. $400.
E. cannot be found.
53. At an output of 2, ATC is

A. $150.
B. $200.
C. $250.
D. $300.
E. $500.
54. At an output of 1, MC is
A. 0.
B. $100.
C. $200.
D. $300.
E. cannot be determined.
55. At an output of 3, AVC is

A. $133.
B. $167.
C. $200.
D. $500.
E. $800.
20-12
Chapter 20 - Cost

A. $200.
B. $225.
C. $250.
D. $400.
E. $500.

A. $200.
B. $250.
C. $500.
D. $1,000.

A. 0.
B. $400.
C. $1,000.
D. $1,400.
20-13
Chapter 20 - Cost

A. $250.
B. $300.
C. $333.
D. $400.
E. $667.
60. At an output of 1, marginal cost is

A. 0.
B. $200.
C. $300.
D. $400.

A. $250.
B. $400.
C. $600.
D. $800.
E. $1,000.

A. $350.
B. $700.
C. $850.
D. $1,000.
E. $1,700.
20-14
Chapter 20 - Cost
63. Statement I: In the short run, output can be varied by changing the size of factories.
Statement II: The MC curve intersects the AVC and ATC curves at their minimum points
most of the time.
A. Statement I is true and statement II is false.
B. Statement II is true and statement I is false.
C. Both statements are true.
D. Both statements are false.
64. The AVC curve is curve

A. J.
B. K.
C. L.
D. M.
65. The AFC curve is

A. J.
B. K.
C. L.
D. M.
20-15
Chapter 20 - Cost
66. The MC curve is

A. J.
B. K.
C. L.
D. M.
67. The ATC curve is

A. J.
B. K.
C. L.
D. M.

A. W.
B. X.
C. Y.
D. Z.
20-16
Chapter 20 - Cost
69. The MC curve is curve

A. W.
B. X.
C. Y.
D. Z.
70. The AFC curve is curve

A. W.
B. X.
C. Y.
D. Z.
71. The ATC curve is curve

A. W.
B. X.
C. Y.
D. Z.
72. Statement I: In the short run a firm has two options: stay in business or go out of business.
Statement II: In the short run there are no fixed costs.

73. Statement I: Shutting down and going out of business mean exactly the same thing.
Statement II: A firm will shut down if variable cost is greater than total revenue.
20-17
Chapter 20 - Cost
74. If marginal cost is less than average total cost,

A. average total cost is falling.
B. average total cost is constant.
C. average total cost is rising.
D. there is no way to determine if average total cost is falling, constant, or rising.
75. If marginal cost is less than average variable cost,

A. average variable cost is falling.
B. average variable cost is constant.
C. average variable cost is rising.
D. there is no way to determine if average variable cost is falling, constant, or rising.
76. Statement I: Average total cost can be found by dividing output by total cost.
Statement II: At one unit of output marginal cost is always zero.
77. Statement I: Average variable cost can be found by dividing output by variable cost.
Statement II: At an output of zero, total cost is always equal to fixed cost.
78. If variable cost is $15 million, fixed cost is $14 million, and total revenues are $13
million, in the short run the firm will _____ and in the long run the firm will ____.
A. shut down; go out of business
B. shut down; stay in business
C. operate; go out of business
D. operate; stay in business
20-18
Chapter 20 - Cost
79. As diseconomies of scale begin to outweigh the economies of scale,

A. the long-run average cost curve begins to slope upward.
B. the long-run average cost curve begins to slope downward.
C. the long-run average cost curve becomes horizontal and continues this way into infinity.
D. the long-run average cost curve is unaffected.
80. If a firm has a fixed cost of $200,000, and a variable cost of $130,000 at an output of one,
how much is marginal cost at an output of one?
A. $70,000
B. $130,000
C. $200,000
D. $270,000
E. There is insufficient information to answer the question.
81. When marginal cost is less than average variable cost, average variable cost is falling.
Statement II: As output rises, average fixed cost declines.
D. Both statements are false
82. Statement I: In the short run, when output is zero, total cost is zero.
Statement II: Average fixed cost plus average variable cost equals average total cost.
20-19
Chapter 20 - Cost
83. As output increases,

A. ATC reaches a minimum before AVC.
B. AVC reaches a minimum before ATC.
C. ATC and AVC reach a minimum at the same output.
D. there is no way to determine whether ATC or AVC will reach a minimum first.
84. When output is 1,

A. marginal cost equals variable cost.
B. total cost equals average total cost.
C. total cost equals fixed cost plus variable cost.
D. All of the choices are correct.
85. In the short-run, when output is zero,

A. fixed cost is zero.
B. variable cost is zero.
C. total cost is zero.
86. When the ATC curve is falling, MC is ____________ ATC.

A. less than
B. greater than
C. equal to
87. Average total cost is always ____________ average variable cost, but as output rises, the
difference between them ___________.
A. greater than; widens
B. less than; widens
C. greater than; narrows
D. less than; narrows
20-20
Chapter 20 - Cost
88. Which is the most accurate statement?

A. There is basically no real difference between shutting down and going out of business.
B. One big difference between shutting down and going out of business is that after you've
shut down you're still paying bills, but when you've gone out of business, there are no more
bills to pay.
C. When you shut down you must still pay your variable costs, but when you go out of
business you have no costs at all.
D. Shutting down is a long run option, while going out of business is a short run option.
89. Statement I: Variable costs vary with output.
Statement II: Fixed costs don't vary with output.

90. The reason that total cost rises with output is that ______ cost is rising.
A. variable
B. fixed
C. marginal
D. All of these choices are correct.
91. As output rises

A. fixed cost and average fixed cost both rise.
B. fixed cost and average fixed cost both fall.
C. fixed cost and average fixed cost are constant.
D. fixed cost falls and average fixed cost is constant.
E. fixed cost is constant and average fixed cost falls.
20-21
Chapter 20 - Cost
92. In the short run, when output is zero

A. total cost is zero.
B. total cost is equal to variable cost.
C. total cost is equal to fixed cost.
D. it is impossible to determine total cost.
93. Diseconomies of scale first become greater than economies of scale at

A. Q1.
B. Q2.
C. Q3.
D. Q4.
94. Output Q3 can be produced at the lowest cost by the size of firm represented by
A. ATC1.
B. ATC2.
C. ATC3.
D. ATC4.
20-22
Chapter 20 - Cost
95. Economies and diseconomies of scale explain

A. the distinction between fixed and variable costs.
B. why the firm's short-run marginal cost curve cuts the short-run average variable cost curve
at its minimum point.
C. why the firm's long-run average cost curve is U-shaped.
D. the profit-maximizing level of production.
96. Diseconomies of scale are associated with

A. an upward-sloping long-run average cost curve.
B. a horizontal long-run average cost curve.
C. a downward-sloping long-run average cost curve.
97. Economies of scale include each of the following except

A. quantity discounts.
B. increasing specialization.
C. lower selling costs.
D. the corporate bureaucracy working at cross purposes.
98. Adam Smith's pin factory illustrated the

A. advantages of economies of scale.
B. disadvantages of economies of scale.
C. importance of receiving quantity discounts.
D. dangers of corporate bureaucracies.
20-23
Chapter 20 - Cost
99. If you wanted to produce an output of 1,000 in the long run, you would choose a plant
whose size was represented by
A. ATC1.
B. ATC2.
C. ATC3.
D. ATC4.
E. ATC5.
100. If you wanted to produce an output of 3,000, in the long run you would choose a plant
A. ATC1.
B. ATC2.
C. ATC3.
D. ATC4.
E. ATC5.
20-24
Chapter 20 - Cost
A. ATC1.
B. ATC2.
C. ATC3.
D. ATC4.
E. ATC5.
102. Who said "Work expands so as to fill the time available for its completion," and "Work
expands to occupy people available for its completion"?
A. Adam Smith
B. C. Northcote Parkinson
C. Karl Marx
D. John Maynard Keynes
E. Alfred Marshall
20-25
Chapter 20 - Cost
103. If you wanted to produce at an output of 80, in the long run you would choose a plant
whose size is represented by
A. ATC1.
B. ATC2.
C. ATC3.
D. ATC4.
E. ATC5.
104. If output is rising then each of the following must be constant or rising except
A. total cost.
B. variable cost.
C. marginal cost.
D. fixed cost.
105. If a firm is operating beyond the minimum point of its ATC curve, then marginal cost is
A. greater than ATC and rising.
B. greater than ATC and falling.
C. less than ATC and rising.
D. less than ATC and falling.
106. If a firm is operating at an output that is a little less than the minimum point of its ATC
curve, the marginal cost is
107. The Fairlane Farm has total costs of $15,000 and total variable costs of $2,000. The
Fairlane Farm's total fixed costs are _________.
A. $13,000
B. $0
C. $17,000
D. $15,000
20-26
Chapter 20 - Cost
108. Which of the following is likely a variable cost?

A. Hourly wages
B. Fuel
C. Raw materials
D. Shipping
E. All of these choices are variable costs.
109. Which of the following is an example of a fixed cost?

A. Rent
C. Contract salaries
E. All of these choices are fixed costs.
110. Statement I: At an output of 0, variable cost is always 0.
Statement II: Total cost less fixed cost equals variable cost.
111. Statement I: The decision to shut down is a long run decision.
Statement II: The decision to shut down and the decision to go out of business are
interchangeable; therefore, there is no need to distinguish between them.
20-27
Chapter 20 - Cost
112. If your total revenue is $10 million, your variable costs are $8 million, and your fixed
costs are $20 million, in the short run you will
A. operate.
B. shut down.
C. go out of business.
113. If a firm is losing money, in the short run it

A. will definitely operate.
B. will definitely shut down.
C. may operate if covering variable costs.
D. will definitely go out of business.
E. may go out of business.
114. The decision to go out of business

A. may be made only in the short run.
B. may be made only in the long run.
C. may be made in either the short run or the long run.
115. Statement I: Average total cost less average fixed cost equals average variable cost.
Statement II: At an output of one, average total cost is equal to total cost.
20-28
Chapter 20 - Cost
116. Statement I: Average fixed cost at an output of 4 is double average fixed cost at an
output of 8.
Statement II: If average variable cost is rising, average total cost may be falling.
117. If ATC is rising, MC

A. must be below ATC.
B. may be below ATC.
C. must be above ATC.
118. If ATC is declining, MC

D. may be above ATC.
119. If MC is $100, ATC is $90 and AVC is $80, then

A. ATC is rising and AVC is rising.
B. ATC is falling and AVC is falling.
C. ATC is rising and AVC is falling.
D. ATC is falling and AVC is rising.
120. If ATC is $100, MC is $90 and AVC is $80, then

20-29
Chapter 20 - Cost
121. If ATC is $100, AVC is $90 and MC is $80, then

122. We can say that output has definitely been expanded too far when we reach the point of
A. increasing returns.
B. diminishing returns.
C. negative returns.
123. The pharmaceutical industry offers an excellent example of

A. economies of scale.
B. diseconomies of scale.
C. diminishing returns.
D. negative returns.
124. Statement I: There are tremendous economies of scale in entertainment and

communications.
Statement II: Adams Smith's pin factory illustrates the principle of diminishing returns.
125. If the U-shaped ATC curve is flattened out at its lowest point(s), we would have
B. increasing returns.
D. proportional returns to scale.
20-30
Chapter 20 - Cost
126. The ATC curve is __________ and the AVC curve is _________.
A. U-shaped; U-shaped
B. not U-shaped; not U-shaped
C. U-shaped; not U-shaped
D. not U-shaped; U-shaped
127. Varying plant sizes are shown graphically by

C. the long-run average costs curve.
D. diminishing returns.
E. negative returns.
128. As output expands,

A. increasing returns will follow diminishing returns.
B. diminishing returns will follow increasing returns.
C. increasing returns and diminishing returns will occur simultaneously.
129. Economies of scale are most closely associated with a firm's

A. ATC curve.
B. AVC curve.
C. MC curve.
D. Demand curve.
130. Parkinson's law states that

A. work expands so as to fill the time available for its completion.
B. anything that can go wrong will go wrong.
C. diseconomies of scale will eventually overcome economies of scale.
D. in the long run all firms must either expand or die.
20-31
Chapter 20 - Cost
131. Adam Smith used a pin factory to demonstrate

A. the advantages of economies of scale.
C. the long-run average cost curve.
D. the advantage of being established.
132. Statement I: Adam Smith argued that specialization enabled workers to get good at their
jobs and that mass production would enable specialized and expensive equipment to be used.
Statement II: Parkinson's Law states that work expands so as to fill the time available for its
completion.

A. applies only to agriculture.
B. is another way of stating Parkinson's Law.
C. focuses on marginal output.
D. explains why mass production leads to lower costs.
134. Each of the following industries takes great advantage of economies of scale except
A. communications.
B. entertainment.
C. software design.
D. pharmaceuticals
E. medicine and dentistry.
20-32
Chapter 20 - Cost
135. If the marginal cost of printing the textbook you are using for this course is just $3, then
what is the most reasonable conclusion you can reach?
A. The publisher is making a profit of at least 1000 percent.
B. The publisher needs to print and sell thousands of copies in order to take advantage of
economies of scale.
C. The publisher has very low fixed costs.
D. The publisher has very high variable costs.
136. When a firm has an extremely large output, it will likely experience
A. both economies of scale and diseconomies of scale.
B. neither economies of scale nor diseconomies of scale.
C. economies of scale, but not diseconomies of scale.
D. diseconomies of scale, but not economies of scale.
137. Statement I: The marginal cost curve crosses the lowest point of the ATC.
Statement II: The marginal cost curve cross the lowest point of the AVC.
138. When MC is falling, ATC and AVC

A. must be rising.
B. must be falling.
C. may be falling or rising.
D. will remain constant.
139. When AVC is rising, ATC

A. must be rising.
B. must be falling.
20-33
Chapter 20 - Cost
140. When AFC is falling, ATC

A. must be rising.
B. must be falling.
141. When output rises, AFC

A. must be rising.
B. must be falling.
142. As output rises, AVC

A. must be rising.
B. must be falling.
143. When MC is rising, AVC

A. must be rising.
B. must be falling.
144. When MC is rising, ATC

A. must be rising.
B. must be falling.
20-34
Chapter 20 - Cost
145. When AVC is falling, ATC

A. must be rising.
B. must be falling.
146. Each of the following is a fixed cost except

A. hourly wages.
B. rent.
C. interest payments.
D. insurance premiums.
147. Each of the following is a variable cost except

A. raw material costs.
B. hourly wages.
C. rent.
D. advertising costs.
148. The law of diminishing returns predicts that

A. total output will fall.
B. marginal output will fall.
C. total output will rise.
D. marginal output will rise.
149. Suppose you owned a 40-acre farm and worked it with two helpers. If you hired an
additional six helpers, you would most likely encounter
20-35
Chapter 20 - Cost
150. If price is between the break-even point and the shutdown point, in the short run the firm
will
A. operate.
B. shut down.
C. stay in business.
D. go out of business.
151. If price is between the break-even point and the shutdown point, in the long run the firm
will
A. operate.
B. shut down.
152. If you had fixed cost of $100,000 and variable costs of $10,000, in the short run you
would operate if total revenue were equal to, or greater than
A. $0.
B. $10,000.
C. $100,000.
D. $110,000.
153. If you had fixed costs of $100,000 and variable costs of $10,000, in the long run you
would stay in business if total revenue were equal to, or greater than
A. $0.
B. $10,000.
C. $100,000.
D. $110,000.
154. As long as there are __________ costs, we are in the short run.
A. variable
B. fixed
C. marginal
D. average
20-36
Chapter 20 - Cost
155. George and Dick's used car lot has a total revenue of $5 million, fixed costs of $8
million, and variable costs of $6 million. In the short run the firm will _______, and in the
long run it will _______.
C. operate; stay in business
D. operate; go out of business
156. Which economist said, "In the long run, we are simply in another short run"?
A. Adam Smith
B. Abba Lerner
C. Theordore K. Quinn
D. Karl Marx
157. As output rises, the difference between the AVC and the ATC curves
A. narrows.
B. stays the same.
C. widens.
158. The production function illustrates

A. The Law of Demand.
B. The Law of Increasing Opportunity Cost.
C. The Law of Diminishing Marginal Utility.
D. The Law of Diminishing Marginal Returns.
E. The Law of Supply.
159. When the production function is at its peak, marginal output is ___________.
A. rising
B. falling
C. zero
D. positive
E. negative
20-37
Chapter 20 - Cost
Fill in the Blank Questions
160. If a firm with total revenue of $900,000 shuts down, we may conclude that its variable
costs are ______.
________________________________________
161. If a firm that is losing money and that has variable costs of $2,000,000 continues to
operate, we may conclude that its total revenue is _________.
________________________________________
162. If a firm that has total revenue of $5 million shuts down, we may conclude that its
variable costs are _________.
________________________________________
163. If a firm that has variable costs of $8 million shuts down, we may conclude that its total
revenue is _________.
________________________________________
164. If a firm with variable costs of $14 million lost money and continues to operate, we may
conclude that its total revenue is _________.
________________________________________
165. If a firm that is losing money shuts down and has variable costs of $10 million and
continues to operate, we may conclude that its total revenue is _________.
________________________________________
166. If a firm with total revenue of $2 million continues to operate in the short run, we may
conclude that its variable costs are _________.
________________________________________
20-38
Chapter 20 - Cost
167. A firm that has declining marginal output would be experiencing _________.
________________________________________
168. A firm that has increasing marginal output would be experiencing _________.
________________________________________
169. In the long run a firm will go out of business if __________ is greater than __________.
________________________________________
170. The average variable cost curve and the average total cost curves are intersected at their
__________ by the marginal cost curve.
________________________________________
171. Average total cost is found by dividing ________ by __________.

________________________________________
172. Specialization and quantity discounts are examples of ________________.

________________________________________
173. As output rises, average fixed cost _________.

________________________________________
174. Total cost may be divided into ________ and _______.

________________________________________
20-39
Chapter 20 - Cost
175. A firm will operate in the short run as long as it can cover its ______________.
________________________________________
176. If the marginal cost curve is below the average total cost curve, average total cost must
be ___.
________________________________________
177. Fixed costs stay the same no matter how much _______; variable costs vary with
_______.
________________________________________
178. The shutdown decision is made in the _______________.

________________________________________
179. As output rises, the difference between AVC and ATC gets _____.
________________________________________
180. In the short run a firm will operate if ______ is greater than _________.
________________________________________
181. Variable costs vary with _______________.

________________________________________
182. Hourly wages of employees not under guaranteed contracts would be an example of
__________ costs.
________________________________________
20-40
Chapter 20 - Cost
183. Total costs divided by output equals _____.

________________________________________
184. If the marginal cost curve is below the average variable cost curve, average variable cost
must be ____________.
________________________________________
185. A firm will operate if ______ is greater than _______; a firm will shut down if ______
are greater than ________.
________________________________________
186. A firm will stay in business if _____ are greater than _______; a firm will go out of
business if ______ are greater than _____.
________________________________________
187. We know that diminishing returns has set in when ______ declines.
________________________________________
188. We know that negative returns have set in when _____.

________________________________________
189. ATC – AVC = _______________.

________________________________________
190. Average fixed cost is found by dividing ________ by output; as output rises, average
fixed cost __________.
________________________________________
20-41
Chapter 20 - Cost
191. _____________ is the additional output produced by the last worker hired.
________________________________________
192. The marginal cost curve intersects the ATC at the _____________ of the ATC curve.
________________________________________
193. The MC curve intersects the AVC curve at the ____________ of the AVC curve.
________________________________________
194. As output rises, AFC gets _______________.

________________________________________
195. If it costs Microsoft $800 million to bring a new version of Windows to market, and if
the marginal cost of producing one unit were $1, the ATC of producing 10 million units
would be approximately _____.
________________________________________
196. At an output of zero, total cost = _______________.

________________________________________
197. At an output of one, variable cost = _______________.

________________________________________
198. ATC – AFC = _______

________________________________________
20-42
Chapter 20 - Cost
199. At small levels of output the gap between the ATC and the AVC curves is ______, and
at larger levels of output the gap between the ATC and the AVC curves is ______.
________________________________________
200. Salaries of employees under guaranteed contracts would be an example of a ________

cost.
________________________________________
201. Fuel and shipping costs are examples of __________ costs.

________________________________________
202. The word economists use when referring to "additional" or "incremental" units of output
or costs is _________.
________________________________________
203. Fixed costs are sometimes referred to as _________ costs.

________________________________________
204. The short run __________ in length from industry to industry.

________________________________________
205. The time at which all costs become variable costs is called the ___________.
________________________________________
206. As a farmer adds more and more fertilizer to a fixed amount of land he will eventually
experience _______________.
________________________________________
20-43
Chapter 20 - Cost
207. In 1776 in the Wealth of Nations, Adam Smith noted three advantages of economies of
scale: ___________________; _________________________; and
______________________.
________________________________________
208. The relationship between the maximum amounts of output a firm can produce and
various quantities of inputs is called a __________________.
________________________________________
Short Answer Questions
209. Fill in this table.
210. If a firm's sales are $6 million, its fixed costs are $7 million, and its variable costs are $4
million, what does it do in the (a) short run and (b) long run?
20-44
Chapter 20 - Cost
211. If a firm's sales are $50 million; its fixed costs are $10 million, and its variable costs are
$52 million, what does it do in the (a) short run and (b) long run?
212. Fill in this table. Assume that fixed cost is $100.
20-45
Chapter 20 - Cost
215. If a firm's sales are $16 million, its fixed costs $18 million, and its variable costs $15
million, what does it do in the (a) short run? (b) long run?
20-46
Chapter 20 - Cost
217. Fill in the Marginal Output column.
218. Diminishing returns set in with the _____ worker.
219. Negative returns set in with the _____ worker.
20-47
Chapter 20 - Cost
20-48
Chapter 20 - Cost
20-49
Chapter 20 - Cost
226. Fill in the table. Assume the fixed cost is $600.
227. Draw a graph of AVC, ATC, and MC.
228. State the minimum points (in dollars and cents) of (a) the AVC, (b) the ATC.
20-50
Chapter 20 - Cost
229. Fill in the table. Assume the fixed cost is $2,000.
20-51
Chapter 20 - Cost
234. State the minimum points (in dollars and cents) of (a) the AVC and (b) the ATC.
20-52
Chapter 20 - Cost
20-53
Chapter 20 - Cost
238. It cost FedEx $100 million to set up a website to provide customers with package
tracking information and 20 cents to enter the data for each package. What would be the AVC
and ATC of tracking (a) 1 million packages? (b) 100 million packages?
239. Macy's spent $1 million to set up a customer surveillance system and spends $80,000 a
year to maintain it. What would be the AVC and ATC of the system if it watched (a) 100,000
customers a year? (b) 1 million customers a year?
240. The Blue Ridge Furniture Factory has fixed costs of $10 million and variable costs of $5
million. If it turns out 1 million chairs a year, how much is the average total cost of producing
one chair?
20-54
Chapter 20 - Cost
241. You own a factory that produces above ground pool frames. Here are your numbers for
this year: fixed costs: $100,000; variable costs: $10 per pool frame (no matter what output is);
output: 5,000; total revenue: $100,000. You had decided to go out of business when a
nationwide pool retailer offered you a contract to produce a large number of pool frames.
How many frames would you need to sell them to stay in business?
242. Your business has these annual costs: rent, $30,000; raw materials, $50,000; insurance,
$5,000; sales commissions, $25,000. Your total revenue is $100,000. What will you do in (a)
the short run? (b) the long run?
Chapter 20 Cost Answer Key
Multiple Choice Questions
1. In the short run, the ATC curve is _____ above the AVC curve.
A. always
B. sometimes
C. never
AACSB: Reflective Thinking

Bloom's: Remember
Difficulty: Easy
Learning Objective: 20-04 Define and calculate average fixed; Variable; and total cost.
20-55
Chapter 20 - Cost
2. As output rises,
A. AFC rises.
B. AFC falls.
C. AFC remains the same.
D. there is no way of determining what happens to AFC.

Bloom's: Remember
Difficulty: Easy
3. When average total cost is declining, then

A. marginal cost must be less than average total cost.
B. marginal cost must be greater than average total cost.
C. average total cost must be greater than average fixed cost.
D. average variable cost must be declining.

Bloom's: Remember
Difficulty: Medium

A. The marginal cost curve intersects both the average variable cost curve and the average
B. The marginal cost curve intersects neither the average variable cost curve nor the average
C. The marginal cost curve intersects the average variable cost curve at its minimum point,
but it does not intersect the average total cost curve at its minimum point.
D. The marginal cost curve intersects the average total cost curve at its minimum point, but it
does not intersect the average variable cost curve at its minimum point.

Bloom's: Remember
Difficulty: Hard
Learning Objective: 20-05 Graph and analyze the AFC; AVC; ATC; and MC curves.
20-56
Chapter 20 - Cost
5. The law of diminishing returns states that as output rises, eventually _____ output will
decline.
A. total
B. average
C. fixed
D. marginal

Bloom's: Remember
Difficulty: Medium
Learning Objective: 20-06 Analyze the production function and its relationship to the law of diminishing returns.
6. The law of diminishing marginal returns implies

A. the more hours you spend studying economics the less you will know.
B. your understanding of economics will be increased by decreasing your marginal study
time.
C. after a certain point, the more hours you spend studying economics per day, the less you
will learn with each added hour.
D. the more hours you spend studying economics per day, the more you will learn with each
added hour.

Bloom's: Remember
Difficulty: Medium

A. is completely invalid.
B. states that if units of a resource are added to a fixed proportion of other resources,
eventually marginal output will decline.
C. states that if any two resources are combined, production will fall.
D. states that profit margins decline as output rises.

Bloom's: Remember
Difficulty: Medium
20-57
Chapter 20 - Cost
8. If marginal output is rising it is possible to have

B. negative returns.
C. both diminishing returns and negative returns.
D. neither diminishing returns nor negative returns.

Bloom's: Understand
Difficulty: Medium
9. If fixed cost is $5,000, and, at an output of 3 variable cost is $4,000, how much is average
total cost at an output of 3?
A. $1,333.33
B. $3,000
C. $4,500
D. $9,000
E. There is not enough information to determine ATC at an output of 3.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
10. If fixed cost is $8,000, variable cost is $5,000 at an output of 2 and $9,000 at an output of
3, how much is marginal cost at an output of 3?
A. $3,000
B. $4,000
C. $5,000
D. $8,000
E. There is not enough information to determine marginal cost at an output of 3.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-58
Chapter 20 - Cost
11. _______ is (are) the relationship between the maximum amounts of output a firm can
produce and various quantities of inputs.
A. A production function
B. The law of diminishing returns
C. Economies of scale
D. Diseconomies of scale

Bloom's: Remember
Difficulty: Medium
12. The MC curve intersects the AVC and ATC curves at their minimum points
A. none of the time.
B. some of the time.
C. most of the time.
D. all of the time.

Bloom's: Remember
Difficulty: Easy

A. AFC declines with output.
B. ATC declines with output.
C. AFC – AVC = ATC.
D. Output divided by fixed cost = AFC.

Bloom's: Remember
Difficulty: Medium
20-59
Chapter 20 - Cost
14. The phrase "spreading the overhead" refers to

A. the decrease in total cost that occurs as a firm reduces the size of its work force.
B. the decrease in average fixed cost that occurs as a firm increases its output.
C. the decrease in average variable cost that occurs as a firm increases its output.
D. the decrease in total fixed cost that occurs as a firm increases its output.

Bloom's: Understand
Difficulty: Medium
15. A firm has a fixed cost of $2,000, and at an output of one, variable cost is $1,500. How
much is marginal cost at an output of 1?
A. $1,000
B. $1,500
C. $2,000
D. $3,500
E. There is insufficient information to find marginal cost at an output of 1.
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
Learning Objective: 20-02 Discuss and measure marginal cost.

A. The AFC curve is U-shaped.
B. The AVC curve is U-shaped.
C. The ATC curve is U-shaped.

Bloom's: Remember
Difficulty: Easy
20-60
Chapter 20 - Cost
17. In the short run, output

A. can be varied by changing the size of factories.
B. can be varied by changing the amount of equipment in factories.
C. can be varied by using the factories and equipment in the industry with more or less of
other inputs.
D. cannot be varied because inputs are fixed.

Bloom's: Remember
Difficulty: Medium
Learning Objective: 20-08 Explain and differentiate between the shut-down and go-out-of-business decisions.

A. Fixed cost rises as output rises.
B. Variable cost falls as output rises.
C. In the short-run, at an output of zero, total cost = zero.
D. None of these statements are true.

Bloom's: Remember
Difficulty: Hard
Learning Objective: 20-01 Define and analyze fixed costs; variable costs; and total cost.

A. Fixed costs and variable costs vary with output.
B. Neither fixed costs nor variable costs vary with output.
C. Only fixed cost varies with output.
D. Only variable cost varies with output.

Bloom's: Remember
Difficulty: Medium
20-61
Chapter 20 - Cost
20. In the long run

A. all costs become fixed.
B. all costs become variable.
C. all costs are a combination of fixed and variable.

Bloom's: Remember
Difficulty: Medium
Learning Objective: 20-03 Distinguish between the short run and the long run.

A. The MC always intersects the ATC at its minimum point.
B. The MC always intersects the AVC at its minimum point.
C. The MC always intersects the AFC at its minimum point.

Bloom's: Remember
Difficulty: Easy
22. The average fixed cost curve

A. is a vertical line.
B. is a horizontal line.
C. slopes downward to the right as output rises.
D. is U-shaped (it declines as output rises, reaches a minimum, and then rises).

Bloom's: Remember
Difficulty: Medium
20-62
Chapter 20 - Cost
23. As output rises, average fixed cost

A. rises.
B. falls.
C. remains the same.

Bloom's: Remember
Difficulty: Easy
24. When the average total cost is at its minimum, it is

A. greater than MC.
B. equal to MC.
C. smaller than MC.

Bloom's: Remember
Difficulty: Easy
25. When MC is rising but still below AVC, then

A. AVC is declining.
B. AVC is constant.
C. AVC is rising.
D. There is not enough information to determine what AVC is doing.

Bloom's: Remember
Difficulty: Hard
20-63
Chapter 20 - Cost
26. As a firm's output expands, the

A. ATC will reach a minimum before the AVC.
B. AVC will reach a minimum before the ATC.
C. ATC and AVC will reach minimums at the same output.

Bloom's: Remember
Difficulty: Medium

A. Going out of business is a short run option.
B. Operating or shutting down are long run options.
C. Going out of business or not going out of business are long run options.

Bloom's: Remember
Difficulty: Easy
28. If a firm cannot cover its variable costs, it will

A. operate in the short run and stay in business in the long run.
B. operate in the short run and go out of business in the long run.
C. shut down in the short run and stay in business in the long run.
D. shut down in the short run and go out of business in the long run.

Bloom's: Analyze
Difficulty: Medium
20-64
Chapter 20 - Cost
29. Average variable cost is equal to

A. average cost plus average fixed cost.
B. marginal cost plus average fixed cost.
C. marginal cost.
D. average total cost minus average fixed cost.

Bloom's: Remember
Difficulty: Easy
30. If average variable cost of production falls as output grows

A. marginal cost must also be declining.
B. fixed cost must also be declining.
C. total cost must also be declining.
D. marginal cost must be below average variable cost.

Bloom's: Remember
Difficulty: Hard
31. Both Jill and John own toothpick factories. Jill's factory has low fixed costs and high
variable costs. John's factory has high fixed costs and low variable costs. Currently each
factory is producing 1,000 boxes of toothpicks at the same total cost. Complete the following
statement with the correct answer. If each produces
A. more, their costs will be equal.
B. less, their costs will be equal.
C. less, the costs of Jill's factory will exceed those of John's factory.
D. more, the costs of Jill's factory will exceed those of John's factory.

Bloom's: Understand
Difficulty: Hard
20-65
Chapter 20 - Cost
32. Marginal cost may be defined as

A. the change in average total cost that results from producing one more unit of output.
B. the change in average variable cost that results from producing one more unit of output.
C. the change in total cost that results from producing one more unit of output.
D. the rate of change in total fixed cost that results from producing one more unit of output.

Bloom's: Remember
Difficulty: Easy
33. Fixed costs are best defined as

A. costs that will not vary with the firm's output level over some period of time.
B. costs that are paid on a yearly basis rather than a weekly or monthly basis.
C. costs of inputs that cannot be moved, such as real estate.
D. costs that will last as long as the firm exists.

Bloom's: Remember
Difficulty: Medium
34. A variable input is an input that can change

A. in the short run but not in the long run.
B. in the long run but not in the short run.
C. in both the long run and the short run.
D. without changing the level of output.

Bloom's: Remember
Difficulty: Medium
20-66
Chapter 20 - Cost
35. Which is most clearly a fixed cost?

A. Insurance premiums
B. Wages of production workers
C. Advertising
D. Shipping costs
E. Cost of raw materials

Bloom's: Apply
Difficulty: Medium
36. Which is most clearly a variable cost?

A. Rent
C. Salaries of employees under long-term contract
E. Wages of production workers

Bloom's: Apply
Difficulty: Medium
37. Fixed cost is sometimes referred to as

A. sunk cost.
B. variable cost.
C. total cost.
D. economic cost.
E. accounting cost.

Bloom's: Remember
Difficulty: Medium
20-67
Chapter 20 - Cost

A. Shutting down is a long run option.
B. Going out of business is a short run option.
C. Continuing to operate is a short run option.

Bloom's: Remember
Difficulty: Medium
39. Jimmy, Walter, Mike, and Bill run a school for political candidates. The school has fixed
costs of $10 million, variable costs of $4 million, and total revenue of $15 million. In the
short run the school will _____ and in the long run the school will ___.
A. operate; stay in business
B. operate; go out of business
C. shut down; stay in business
D. shut down; go out of business
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
40. The basic characteristic of the short run is that

A. a firm does not have sufficient time to change the amounts of any of the resources it
employs.
B. the firm does not have sufficient time to cut its rate of output to zero.
C. the firm does not have sufficient time to change the size of its plant.
D. the time frame is sufficient to allow new firms to enter the industry.

Bloom's: Understand
Difficulty: Medium
20-68
Chapter 20 - Cost
41. George and Dan's political consulting firm is losing money, but it is more than covering
its fixed costs. What is the most accurate statement we can make about it?
A. It will stay in business in the long run.
B. It will go out of business in the long run.
C. It will shut down in the short run.
D. None of these statements are correct.

Bloom's: Analyze
Difficulty: Medium
42. Average total cost is found by dividing

A. variable cost by output.
B. output by variable cost.
C. total cost by output.
D. output by total cost.

Bloom's: Remember
Difficulty: Easy
43. At an output of zero, total cost is

A. zero.
B. equal to fixed cost.
C. equal to variable cost.
D. cannot be found.

Bloom's: Remember
Difficulty: Easy
20-69
Chapter 20 - Cost
44. Which of the following cost curves will NOT shift downward if the price of a variable
input decreases?
A. Total cost
B. Average cost
C. Marginal cost
D. Average fixed cost

Bloom's: Understand
Difficulty: Medium
45. In the long run, all costs are _____________.

A. fixed
B. variable
C. equal to zero

Bloom's: Remember
Difficulty: Easy
46. In the long run,

A. a firm can shut down, but it cannot exit the industry.
B. there are no fixed factors of production.
C. a firm can vary all inputs, but it cannot change the mix of inputs it uses.

Bloom's: Remember
Difficulty: Medium
20-70
Chapter 20 - Cost
47. Fixed costs are best defined as costs ____________ with the firm's output level over some
period.
A. that will not vary
B. which vary directly
C. which vary inversely

Bloom's: Remember
Difficulty: East
48. Firms taking advantage of ___________ accounts for the downward slope in the long-run
average cost curve.
A. diseconomies of scale
B. the production function
C. economies of scale
D. marginal cost

Bloom's: Remember
Difficulty: Medium
Learning Objective: 20-07 List the factors contributing to economies and diseconomies of scale.

A. A firm will shut down when variable cost is greater than total revenue.
B. In the long run all costs become variable costs.
C. When the firm shuts down, output is zero.

Bloom's: Remember
Difficulty: Medium
20-71
Chapter 20 - Cost

A. Total cost rises with output because variable cost rises.
B. A firm will operate when prospective sales are greater than variable cost.
C. When output falls, variable costs fall.

Bloom's: Understand
Difficulty: Medium

A. 0.
B. $100.
C. $200.
D. $300.
E. $400.
F. cannot be found.
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
20-72
Chapter 20 - Cost

A. $50.
B. $100.
C. $200.
D. $400.
E. cannot be found.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy

A. $150.
B. $200.
C. $250.
D. $300.
E. $500.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
54. At an output of 1, MC is
A. 0.
B. $100.
C. $200.
D. $300.
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
20-73
Chapter 20 - Cost

A. $133.
B. $167.
C. $200.
D. $500.
E. $800.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy

A. $200.
B. $225.
C. $250.
D. $400.
E. $500.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-74
Chapter 20 - Cost

A. $200.
B. $250.
C. $500.
D. $1,000.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy

A. 0.
B. $400.
C. $1,000.
D. $1,400.
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard

A. $250.
B. $300.
C. $333.
D. $400.
E. $667.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-75
Chapter 20 - Cost
60. At an output of 1, marginal cost is

A. 0.
B. $200.
C. $300.
D. $400.
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard

A. $250.
B. $400.
C. $600.
D. $800.
E. $1,000.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy

A. $350.
B. $700.
C. $850.
D. $1,000.
E. $1,700.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-76
Chapter 20 - Cost
63. Statement I: In the short run, output can be varied by changing the size of factories.
Statement II: The MC curve intersects the AVC and ATC curves at their minimum points
most of the time.

Bloom's: Understand
Difficulty: Medium

A. J.
B. K.
C. L.
D. M.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-77
Chapter 20 - Cost
65. The AFC curve is

A. J.
B. K.
C. L.
D. M.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
66. The MC curve is

A. J.
B. K.
C. L.
D. M.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
67. The ATC curve is

A. J.
B. K.
C. L.
D. M.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-78
Chapter 20 - Cost

A. W.
B. X.
C. Y.
D. Z.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
69. The MC curve is curve

A. W.
B. X.
C. Y.
D. Z.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-79
Chapter 20 - Cost
70. The AFC curve is curve

A. W.
B. X.
C. Y.
D. Z.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
71. The ATC curve is curve

A. W.
B. X.
C. Y.
D. Z.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
72. Statement I: In the short run a firm has two options: stay in business or go out of business.
Statement II: In the short run there are no fixed costs.


Bloom's: Remember
Difficulty: Medium
20-80
Chapter 20 - Cost
73. Statement I: Shutting down and going out of business mean exactly the same thing.
Statement II: A firm will shut down if variable cost is greater than total revenue.

Bloom's: Remember
Difficulty: Medium
74. If marginal cost is less than average total cost,

A. average total cost is falling.
B. average total cost is constant.
C. average total cost is rising.
D. there is no way to determine if average total cost is falling, constant, or rising.

Bloom's: Remember
Difficulty: Hard
75. If marginal cost is less than average variable cost,

A. average variable cost is falling.
B. average variable cost is constant.
C. average variable cost is rising.
D. there is no way to determine if average variable cost is falling, constant, or rising.

Bloom's: Remember
Difficulty: Hard
20-81
Chapter 20 - Cost
76. Statement I: Average total cost can be found by dividing output by total cost.
Statement II: At one unit of output marginal cost is always zero.

Bloom's: Remember
Difficulty: Medium
77. Statement I: Average variable cost can be found by dividing output by variable cost.
Statement II: At an output of zero, total cost is always equal to fixed cost.

Bloom's: Remember
Difficulty: Medium
78. If variable cost is $15 million, fixed cost is $14 million, and total revenues are $13
million, in the short run the firm will _____ and in the long run the firm will ____.
C. operate; go out of business
D. operate; stay in business
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-82
Chapter 20 - Cost
79. As diseconomies of scale begin to outweigh the economies of scale,

A. the long-run average cost curve begins to slope upward.
B. the long-run average cost curve begins to slope downward.
C. the long-run average cost curve becomes horizontal and continues this way into infinity.
D. the long-run average cost curve is unaffected.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
80. If a firm has a fixed cost of $200,000, and a variable cost of $130,000 at an output of one,
how much is marginal cost at an output of one?
A. $70,000
B. $130,000
C. $200,000
D. $270,000
E. There is insufficient information to answer the question.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
81. When marginal cost is less than average variable cost, average variable cost is falling.
Statement II: As output rises, average fixed cost declines.
D. Both statements are false

Bloom's: Remember
Difficulty: Medium
20-83
Chapter 20 - Cost
82. Statement I: In the short run, when output is zero, total cost is zero.
Statement II: Average fixed cost plus average variable cost equals average total cost.

Bloom's: Remember
Difficulty: Medium
83. As output increases,

A. ATC reaches a minimum before AVC.
B. AVC reaches a minimum before ATC.
C. ATC and AVC reach a minimum at the same output.
D. there is no way to determine whether ATC or AVC will reach a minimum first.

Bloom's: Remember
Difficulty: Medium
84. When output is 1,

A. marginal cost equals variable cost.
B. total cost equals average total cost.
C. total cost equals fixed cost plus variable cost.

Bloom's: Understand
Difficulty: Medium
20-84
Chapter 20 - Cost
85. In the short-run, when output is zero,

A. fixed cost is zero.
B. variable cost is zero.
C. total cost is zero.

Bloom's: Remember
Difficulty: Medium
86. When the ATC curve is falling, MC is ____________ ATC.

A. less than
B. greater than
C. equal to

Bloom's: Remember
Difficulty: Medium
87. Average total cost is always ____________ average variable cost, but as output rises, the
difference between them ___________.
A. greater than; widens
B. less than; widens
C. greater than; narrows
D. less than; narrows

Bloom's: Remember
Difficulty: Medium
20-85
Chapter 20 - Cost
88. Which is the most accurate statement?

A. There is basically no real difference between shutting down and going out of business.
B. One big difference between shutting down and going out of business is that after you've
shut down you're still paying bills, but when you've gone out of business, there are no more
bills to pay.
C. When you shut down you must still pay your variable costs, but when you go out of
business you have no costs at all.
D. Shutting down is a long run option, while going out of business is a short run option.

Bloom's: Understand
Difficulty: Medium
89. Statement I: Variable costs vary with output.
Statement II: Fixed costs don't vary with output.


Bloom's: Remember
Difficulty: Easy
90. The reason that total cost rises with output is that ______ cost is rising.
A. variable
B. fixed
C. marginal
D. All of these choices are correct.

Bloom's: Remember
Difficulty: Easy
20-86
Chapter 20 - Cost
91. As output rises

A. fixed cost and average fixed cost both rise.
B. fixed cost and average fixed cost both fall.
C. fixed cost and average fixed cost are constant.
D. fixed cost falls and average fixed cost is constant.
E. fixed cost is constant and average fixed cost falls.

Bloom's: Remember
Difficulty: Medium
92. In the short run, when output is zero

A. total cost is zero.
B. total cost is equal to variable cost.
C. total cost is equal to fixed cost.
D. it is impossible to determine total cost.

Bloom's: Remember
Difficulty: Medium
20-87
Chapter 20 - Cost
93. Diseconomies of scale first become greater than economies of scale at

A. Q1.
B. Q2.
C. Q3.
D. Q4.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
94. Output Q3 can be produced at the lowest cost by the size of firm represented by
A. ATC1.
B. ATC2.
C. ATC3.
D. ATC4.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
95. Economies and diseconomies of scale explain

A. the distinction between fixed and variable costs.
B. why the firm's short-run marginal cost curve cuts the short-run average variable cost curve
at its minimum point.
C. why the firm's long-run average cost curve is U-shaped.
D. the profit-maximizing level of production.

Bloom's: Remember
Difficulty: Medium
20-88
Chapter 20 - Cost
96. Diseconomies of scale are associated with

A. an upward-sloping long-run average cost curve.
B. a horizontal long-run average cost curve.
C. a downward-sloping long-run average cost curve.

Bloom's: Remember
Difficulty: Medium
97. Economies of scale include each of the following except

A. quantity discounts.
B. increasing specialization.
C. lower selling costs.
D. the corporate bureaucracy working at cross purposes.

Bloom's: Remember
Difficulty: Easy
98. Adam Smith's pin factory illustrated the

A. advantages of economies of scale.
B. disadvantages of economies of scale.
C. importance of receiving quantity discounts.
D. dangers of corporate bureaucracies.

Bloom's: Remember
Difficulty: Medium
20-89
Chapter 20 - Cost
99. If you wanted to produce an output of 1,000 in the long run, you would choose a plant
A. ATC1.
B. ATC2.
C. ATC3.
D. ATC4.
E. ATC5.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-90
Chapter 20 - Cost
A. ATC1.
B. ATC2.
C. ATC3.
D. ATC4.
E. ATC5.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
A. ATC1.
B. ATC2.
C. ATC3.
D. ATC4.
E. ATC5.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
102. Who said "Work expands so as to fill the time available for its completion," and "Work
expands to occupy people available for its completion"?
A. Adam Smith
B. C. Northcote Parkinson
C. Karl Marx
D. John Maynard Keynes
E. Alfred Marshall

Bloom's: Remember
Difficulty: Medium
20-91
Chapter 20 - Cost
103. If you wanted to produce at an output of 80, in the long run you would choose a plant
whose size is represented by
A. ATC1.
B. ATC2.
C. ATC3.
D. ATC4.
E. ATC5.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-92
Chapter 20 - Cost
104. If output is rising then each of the following must be constant or rising except
A. total cost.
B. variable cost.
C. marginal cost.
D. fixed cost.

Bloom's: Remember
Difficulty: Easy
105. If a firm is operating beyond the minimum point of its ATC curve, then marginal cost is

Bloom's: Remember
Difficulty: Easy
106. If a firm is operating at an output that is a little less than the minimum point of its ATC
curve, the marginal cost is

Bloom's: Understand
Difficulty: Medium
20-93
Chapter 20 - Cost
107. The Fairlane Farm has total costs of $15,000 and total variable costs of $2,000. The
Fairlane Farm's total fixed costs are _________.
A. $13,000
B. $0
C. $17,000
D. $15,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
108. Which of the following is likely a variable cost?

A. Hourly wages
B. Fuel
C. Raw materials
D. Shipping
E. All of these choices are variable costs.

Bloom's: Understand
Difficulty: Easy
109. Which of the following is an example of a fixed cost?

A. Rent
C. Contract salaries
E. All of these choices are fixed costs.

Bloom's: Understand
Difficulty: Easy
20-94
Chapter 20 - Cost
110. Statement I: At an output of 0, variable cost is always 0.
Statement II: Total cost less fixed cost equals variable cost.

Bloom's: Remember
Difficulty: Easy
111. Statement I: The decision to shut down is a long run decision.
Statement II: The decision to shut down and the decision to go out of business are
interchangeable; therefore, there is no need to distinguish between them.

Bloom's: Remember
Difficulty: Medium
112. If your total revenue is $10 million, your variable costs are $8 million, and your fixed
costs are $20 million, in the short run you will
A. operate.
B. shut down.
C. go out of business.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-95
Chapter 20 - Cost
113. If a firm is losing money, in the short run it

A. will definitely operate.
B. will definitely shut down.
C. may operate if covering variable costs.
D. will definitely go out of business.
E. may go out of business.

Bloom's: Remember
Difficulty: Medium
114. The decision to go out of business

A. may be made only in the short run.
B. may be made only in the long run.
C. may be made in either the short run or the long run.

Bloom's: Remember
Difficulty: Easy
115. Statement I: Average total cost less average fixed cost equals average variable cost.
Statement II: At an output of one, average total cost is equal to total cost.

Bloom's: Remember
Difficulty: Easy
20-96
Chapter 20 - Cost
116. Statement I: Average fixed cost at an output of 4 is double average fixed cost at an
output of 8.
Statement II: If average variable cost is rising, average total cost may be falling.

Bloom's: Remember
Difficulty: Medium
117. If ATC is rising, MC


Bloom's: Remember
Difficulty: Medium
118. If ATC is declining, MC

D. may be above ATC.

Bloom's: Remember
Difficulty: Medium
20-97
Chapter 20 - Cost
119. If MC is $100, ATC is $90 and AVC is $80, then

AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
120. If ATC is $100, MC is $90 and AVC is $80, then

AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
121. If ATC is $100, AVC is $90 and MC is $80, then

AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
20-98
Chapter 20 - Cost
122. We can say that output has definitely been expanded too far when we reach the point of

Bloom's: Understand
Difficulty: Easy
123. The pharmaceutical industry offers an excellent example of

C. diminishing returns.
D. negative returns.

Bloom's: Remember
Difficulty: Medium
124. Statement I: There are tremendous economies of scale in entertainment and

communications.
Statement II: Adams Smith's pin factory illustrates the principle of diminishing returns.

Bloom's: Understand
Difficulty: Medium
20-99
Chapter 20 - Cost
125. If the U-shaped ATC curve is flattened out at its lowest point(s), we would have
B. increasing returns.
D. proportional returns to scale.

Bloom's: Remember
Difficulty: Medium
126. The ATC curve is __________ and the AVC curve is _________.
A. U-shaped; U-shaped
B. not U-shaped; not U-shaped
C. U-shaped; not U-shaped
D. not U-shaped; U-shaped

Bloom's: Remember
Difficulty: Easy
127. Varying plant sizes are shown graphically by

C. the long-run average costs curve.
D. diminishing returns.
E. negative returns.

Bloom's: Remember
Difficulty: Medium
20-100
Chapter 20 - Cost
128. As output expands,

A. increasing returns will follow diminishing returns.
B. diminishing returns will follow increasing returns.
C. increasing returns and diminishing returns will occur simultaneously.

Bloom's: Remember
Difficulty: Easy
129. Economies of scale are most closely associated with a firm's

A. ATC curve.
B. AVC curve.
C. MC curve.
D. Demand curve.

Bloom's: Remember
Difficulty: Easy
130. Parkinson's law states that

A. work expands so as to fill the time available for its completion.
B. anything that can go wrong will go wrong.
C. diseconomies of scale will eventually overcome economies of scale.
D. in the long run all firms must either expand or die.

Bloom's: Remember
Difficulty: Medium
20-101
Chapter 20 - Cost
131. Adam Smith used a pin factory to demonstrate

A. the advantages of economies of scale.
C. the long-run average cost curve.
D. the advantage of being established.

Bloom's: Remember
Difficulty: Medium
132. Statement I: Adam Smith argued that specialization enabled workers to get good at their
jobs and that mass production would enable specialized and expensive equipment to be used.
Statement II: Parkinson's Law states that work expands so as to fill the time available for its
completion.

Bloom's: Understand
Difficulty: Medium

A. applies only to agriculture.
B. is another way of stating Parkinson's Law.
C. focuses on marginal output.
D. explains why mass production leads to lower costs.

Bloom's: Remember
Difficulty: Easy
20-102
Chapter 20 - Cost
134. Each of the following industries takes great advantage of economies of scale except
A. communications.
B. entertainment.
C. software design.
D. pharmaceuticals
E. medicine and dentistry.

Bloom's: Analyze
Difficulty: Medium
135. If the marginal cost of printing the textbook you are using for this course is just $3, then
what is the most reasonable conclusion you can reach?
A. The publisher is making a profit of at least 1000 percent.
B. The publisher needs to print and sell thousands of copies in order to take advantage of
economies of scale.
C. The publisher has very low fixed costs.
D. The publisher has very high variable costs.
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
136. When a firm has an extremely large output, it will likely experience
A. both economies of scale and diseconomies of scale.
B. neither economies of scale nor diseconomies of scale.
C. economies of scale, but not diseconomies of scale.
D. diseconomies of scale, but not economies of scale.

Bloom's: Remember
Difficulty: Easy
20-103
Chapter 20 - Cost
137. Statement I: The marginal cost curve crosses the lowest point of the ATC.
Statement II: The marginal cost curve cross the lowest point of the AVC.

Bloom's: Remember
Difficulty: Easy
138. When MC is falling, ATC and AVC

A. must be rising.
B. must be falling.

Bloom's: Remember
Difficulty: Medium
139. When AVC is rising, ATC

A. must be rising.
B. must be falling.

Bloom's: Remember
Difficulty: Hard
20-104
Chapter 20 - Cost
140. When AFC is falling, ATC

A. must be rising.
B. must be falling.

Bloom's: Remember
Difficulty: Easy
141. When output rises, AFC

A. must be rising.
B. must be falling.

Bloom's: Remember
Difficulty: Easy
142. As output rises, AVC

A. must be rising.
B. must be falling.

Bloom's: Remember
Difficulty: Medium
20-105
Chapter 20 - Cost
143. When MC is rising, AVC

A. must be rising.
B. must be falling.

Bloom's: Remember
Difficulty: Medium
144. When MC is rising, ATC

A. must be rising.
B. must be falling.

Bloom's: Remember
Difficulty: Medium
145. When AVC is falling, ATC

A. must be rising.
B. must be falling.

Bloom's: Remember
Difficulty: Hard
20-106
Chapter 20 - Cost
146. Each of the following is a fixed cost except

A. hourly wages.
B. rent.
C. interest payments.
D. insurance premiums.

Bloom's: Apply
Difficulty: Easy
147. Each of the following is a variable cost except

A. raw material costs.
B. hourly wages.
C. rent.
D. advertising costs.

Bloom's: Apply
Difficulty: Easy
148. The law of diminishing returns predicts that

A. total output will fall.
B. marginal output will fall.
C. total output will rise.
D. marginal output will rise.

Bloom's: Remember
Difficulty: Easy
20-107
Chapter 20 - Cost
149. Suppose you owned a 40-acre farm and worked it with two helpers. If you hired an
additional six helpers, you would most likely encounter
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
150. If price is between the break-even point and the shutdown point, in the short run the firm
will
A. operate.
B. shut down.

Bloom's: Understand
Difficulty: Easy
151. If price is between the break-even point and the shutdown point, in the long run the firm
will
A. operate.
B. shut down.

Bloom's: Remember
Difficulty: Easy
20-108
Chapter 20 - Cost
152. If you had fixed cost of $100,000 and variable costs of $10,000, in the short run you
would operate if total revenue were equal to, or greater than
A. $0.
B. $10,000.
C. $100,000.
D. $110,000.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
153. If you had fixed costs of $100,000 and variable costs of $10,000, in the long run you
would stay in business if total revenue were equal to, or greater than
A. $0.
B. $10,000.
C. $100,000.
D. $110,000.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
154. As long as there are __________ costs, we are in the short run.
A. variable
B. fixed
C. marginal
D. average

Bloom's: Remember
Difficulty: Easy
20-109
Chapter 20 - Cost
155. George and Dick's used car lot has a total revenue of $5 million, fixed costs of $8
million, and variable costs of $6 million. In the short run the firm will _______, and in the
long run it will _______.
C. operate; stay in business
D. operate; go out of business
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
156. Which economist said, "In the long run, we are simply in another short run"?
A. Adam Smith
B. Abba Lerner
C. Theordore K. Quinn
D. Karl Marx

Bloom's: Remember
Difficulty: Easy
157. As output rises, the difference between the AVC and the ATC curves
A. narrows.
B. stays the same.
C. widens.

Bloom's: Remember
Difficulty: Hard
20-110
Chapter 20 - Cost
158. The production function illustrates

A. The Law of Demand.
B. The Law of Increasing Opportunity Cost.
C. The Law of Diminishing Marginal Utility.
D. The Law of Diminishing Marginal Returns.
E. The Law of Supply.

Bloom's: Remember
Difficulty: Medium
159. When the production function is at its peak, marginal output is ___________.
A. rising
B. falling
C. zero
D. positive
E. negative

Bloom's: Remember
Difficulty: Hard
Fill in the Blank Questions
160. If a firm with total revenue of $900,000 shuts down, we may conclude that its variable
costs are ______.
more than $900,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-111
Chapter 20 - Cost
161. If a firm that is losing money and that has variable costs of $2,000,000 continues to
operate, we may conclude that its total revenue is _________.
more than $2,000,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
162. If a firm that has total revenue of $5 million shuts down, we may conclude that its
variable costs are _________.
more than $5,000,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
163. If a firm that has variable costs of $8 million shuts down, we may conclude that its total
revenue is _________.
less than $8 million
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
164. If a firm with variable costs of $14 million lost money and continues to operate, we may
conclude that its total revenue is _________.
more than $14 million
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-112
Chapter 20 - Cost
165. If a firm that is losing money shuts down and has variable costs of $10 million and
continues to operate, we may conclude that its total revenue is _________.
more than $10 million
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
166. If a firm with total revenue of $2 million continues to operate in the short run, we may
conclude that its variable costs are _________.
less than $2 million
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
167. A firm that has declining marginal output would be experiencing _________.
diminishing returns

Bloom's: Remember
Difficulty: Easy
168. A firm that has increasing marginal output would be experiencing _________.
increasing returns

Bloom's: Remember
Difficulty: Easy
20-113
Chapter 20 - Cost
169. In the long run a firm will go out of business if __________ is greater than __________.
total cost; total revenue

Bloom's: Remember
Difficulty: Easy
170. The average variable cost curve and the average total cost curves are intersected at their
__________ by the marginal cost curve.
minimum points

Bloom's: Remember
Difficulty: Easy
171. Average total cost is found by dividing ________ by __________.

total cost; output

Bloom's: Remember
Difficulty: Medium
172. Specialization and quantity discounts are examples of ________________.

economies of scale

Bloom's: Remember
Difficulty: Easy
20-114
Chapter 20 - Cost
173. As output rises, average fixed cost _________.

declines

Bloom's: Remember
Difficulty: Easy
174. Total cost may be divided into ________ and _______.

variable cost; fixed cost

Bloom's: Remember
Difficulty: Medium
175. A firm will operate in the short run as long as it can cover its ______________.
variable costs

Bloom's: Remember
Difficulty: Easy
176. If the marginal cost curve is below the average total cost curve, average total cost must
be ___.
declining

Bloom's: Remember
Difficulty: Hard
20-115
Chapter 20 - Cost
177. Fixed costs stay the same no matter how much _______; variable costs vary with
_______.
output varies; output

Bloom's: Remember
Difficulty: Medium
178. The shutdown decision is made in the _______________.

short run

Bloom's: Remember
Difficulty: Easy
179. As output rises, the difference between AVC and ATC gets _____.
smaller

Bloom's: Remember
Difficulty: Medium
180. In the short run a firm will operate if ______ is greater than _________.
total revenue; variable cost

Bloom's: Remember
Difficulty: Hard
20-116
Chapter 20 - Cost
181. Variable costs vary with _______________.

output

Bloom's: Remember
Difficulty: Easy
182. Hourly wages of employees not under guaranteed contracts would be an example of
__________ costs.
variable

Bloom's: Remember
Difficulty: Medium
183. Total costs divided by output equals _____.

ATC (average total cost)

Bloom's: Remember
Difficulty: Medium
184. If the marginal cost curve is below the average variable cost curve, average variable cost
must be ____________.
declining

Bloom's: Remember
Difficulty: Medium
20-117
Chapter 20 - Cost
185. A firm will operate if ______ is greater than _______; a firm will shut down if ______
are greater than ________.
total revenue; variable costs; variable costs; total revenue

Bloom's: Understand
Difficulty: Hard
186. A firm will stay in business if _____ are greater than _______; a firm will go out of
business if ______ are greater than _____.
total revenue; total costs; total costs; total revenue

Bloom's: Understand
Difficulty: Hard
187. We know that diminishing returns has set in when ______ declines.
marginal output

Bloom's: Remember
Difficulty: Medium
188. We know that negative returns have set in when _____.

total output declines (marginal output turns negative)

Bloom's: Remember
Difficulty: Medium
20-118
Chapter 20 - Cost
189. ATC – AVC = _______________.

AFC

Bloom's: Remember
Difficulty: Easy
190. Average fixed cost is found by dividing ________ by output; as output rises, average
fixed cost __________.
fixed cost; declines

Bloom's: Remember
Difficulty: Medium
191. _____________ is the additional output produced by the last worker hired.
Marginal output

Bloom's: Remember
Difficulty: Medium
192. The marginal cost curve intersects the ATC at the _____________ of the ATC curve.
minimum point

Bloom's: Remember
Difficulty: Easy
20-119
Chapter 20 - Cost
193. The MC curve intersects the AVC curve at the ____________ of the AVC curve.
minimum point

Bloom's: Remember
Difficulty: Easy
194. As output rises, AFC gets _______________.

smaller

Bloom's: Remember
Difficulty: Easy
195. If it costs Microsoft $800 million to bring a new version of Windows to market, and if
the marginal cost of producing one unit were $1, the ATC of producing 10 million units
would be approximately _____.
$80 or $81
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
196. At an output of zero, total cost = _______________.

fixed cost

Bloom's: Remember
Difficulty: Hard
20-120
Chapter 20 - Cost
197. At an output of one, variable cost = _______________.

marginal cost

Bloom's: Remember
Difficulty: Medium
198. ATC – AFC = _______

AVC

Bloom's: Remember
Difficulty: Easy
199. At small levels of output the gap between the ATC and the AVC curves is ______, and
at larger levels of output the gap between the ATC and the AVC curves is ______.
wide (large); narrow (small)

Bloom's: Remember
Difficulty: Medium
200. Salaries of employees under guaranteed contracts would be an example of a ________

cost.
fixed

Bloom's: Analyze
Difficulty: Medium
20-121
Chapter 20 - Cost
201. Fuel and shipping costs are examples of __________ costs.

variable

Bloom's: Analyze
Difficulty: Easy
202. The word economists use when referring to "additional" or "incremental" units of output
or costs is _________.
marginal

Bloom's: Remember
Difficulty: Easy
203. Fixed costs are sometimes referred to as _________ costs.

sunk

Bloom's: Remember
Difficulty: Easy
204. The short run __________ in length from industry to industry.

varies or is different

Bloom's: Remember
Difficulty: Easy
20-122
Chapter 20 - Cost
205. The time at which all costs become variable costs is called the ___________.
long run

Bloom's: Remember
Difficulty: Easy
206. As a farmer adds more and more fertilizer to a fixed amount of land he will eventually
experience _______________.
diminishing marginal returns
AACSB: Analytic
Bloom's: Analyze
Difficulty: Easy
207. In 1776 in the Wealth of Nations, Adam Smith noted three advantages of economies of
scale: ___________________; _________________________; and
______________________.
workers become good at their jobs; workers don't waste time going from one task to
another; the factory can employ specialized or expensive equipment.

Bloom's: Remember
Difficulty: Medium
208. The relationship between the maximum amounts of output a firm can produce and
various quantities of inputs is called a __________________.
production function

Bloom's: Remember
Difficulty: Medium
20-123
Chapter 20 - Cost
Short Answer Questions
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
million, what does it do in the (a) short run and (b) long run?
(a) operate; (b) go out of business.
AACSB: Analytic
Bloom's: Analyze
Difficulty: Easy
20-124
Chapter 20 - Cost
211. If a firm's sales are $50 million; its fixed costs are $10 million, and its variable costs are
$52 million, what does it do in the (a) short run and (b) long run?
(a) shut-down; (b) go out of business
AACSB: Analytic
Bloom's: Analyze
Difficulty: Easy
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-125
Chapter 20 - Cost
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-126
Chapter 20 - Cost
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
215. If a firm's sales are $16 million, its fixed costs $18 million, and its variable costs $15
(a) Operate; (b) Go out of business
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
20-127
Chapter 20 - Cost
(a) Operate; (b) Stay in business
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-128
Chapter 20 - Cost
4th
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
8th
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-129
Chapter 20 - Cost
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
4th
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
9th
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-130
Chapter 20 - Cost
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
5th
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-131
Chapter 20 - Cost
9th
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-132
Chapter 20 - Cost
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
(a) $432 (must be a little below $433.33); (b) $598.90 (must be a little below $600)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-133
Chapter 20 - Cost
229. Fill in the table. Assume the fixed cost is $2,000.
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-134
Chapter 20 - Cost
(a) $1,665 (must be a little below $1,666.67); (b) $2,248 (must be a little below $2,250)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-135
Chapter 20 - Cost
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
(a) $165.50 (must be a little below $166.67); (b) $248 (must be a little below $250)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-136
Chapter 20 - Cost
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-137
Chapter 20 - Cost
(a) $349 (must be a little below $350); (b) $624.90 (must be a very below $625)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
238. It cost FedEx $100 million to set up a website to provide customers with package
tracking information and 20 cents to enter the data for each package. What would be the AVC
and ATC of tracking (a) 1 million packages? (b) 100 million packages?
(a) AVC $.20; ATC $100.20; (b) AVC $.20; ATC $1.20
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
239. Macy's spent $1 million to set up a customer surveillance system and spends $80,000 a
year to maintain it. What would be the AVC and ATC of the system if it watched (a) 100,000
customers a year? (b) 1 million customers a year?
(a) AVC $.80; ATC $10.80 (b) AVC $.08; ATC $1.08
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
20-138
Chapter 20 - Cost
240. The Blue Ridge Furniture Factory has fixed costs of $10 million and variable costs of $5
million. If it turns out 1 million chairs a year, how much is the average total cost of producing
one chair?
$15
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
241. You own a factory that produces above ground pool frames. Here are your numbers for
this year: fixed costs: $100,000; variable costs: $10 per pool frame (no matter what output is);
output: 5,000; total revenue: $100,000. You had decided to go out of business when a
nationwide pool retailer offered you a contract to produce a large number of pool frames.
How many frames would you need to sell them to stay in business?
5,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
242. Your business has these annual costs: rent, $30,000; raw materials, $50,000; insurance,
$5,000; sales commissions, $25,000. Your total revenue is $100,000. What will you do in (a)
the short run? (b) the long run?
(a) operate; (b) go out of business
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
20-139
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Multiple Choice Questions

3. When average total cost is declining, then

4. Which statement is true?

6. The law of diminishing marginal returns implies

7. The law of diminishing returns

8. If marginal output is rising it is possible to have

13. Which statement is true?

14. The phrase "spreading the overhead" refers to

16. Which statement is false?

17. In the short run, output

18. Which statement is true?

19. Which statement is true?

20. In the long run

21. Which statement is false?

22. The average fixed cost curve

23. As output rises, average fixed cost

24. When the average total cost is at its minimum, it is

25. When MC is rising but still below AVC, then

26. As a firm's output expands, the

27. Which statement is true?

28. If a firm cannot cover its variable costs, it will

29. Average variable cost is equal to

30. If average variable cost of production falls as output grows

32. Marginal cost may be defined as

33. Fixed costs are best defined as

34. A variable input is an input that can change

35. Which is most clearly a fixed cost?

36. Which is most clearly a variable cost?

37. Fixed cost is sometimes referred to as

38. Which statement is true?

40. The basic characteristic of the short run is that

42. Average total cost is found by dividing

43. At an output of zero, total cost is

45. In the long run, all costs are _____________.

46. In the long run,

49. Which statement is false?

50. Which statement is false?

Use the above table and assume a fixed cost of $200.

51. At an output of 0, total cost is

52. At an output of 4, AFC is

53. At an output of 2, ATC is

55. At an output of 3, AVC is

56. At an output of 4, ATC is

Use the above table and assume a fixed cost of $1000.

57. At an output of 4, AFC is

58. At an output of 0, total cost is

59. At an output of 3, AVC is

60. At an output of 1, marginal cost is

61. At an output of 4, ATC is

62. At an output of 2, ATC is

64. The AVC curve is curve

65. The AFC curve is

66. The MC curve is

67. The ATC curve is

171. Average total cost is found by dividing by __.

174. Total cost may be divided into __ and _.