Section 1: Multiple Choice Questions

Chapter 6

1. The opportunity cost of a firm's inputs:

A) depends on who supplies them to the firm
B) includes implicit costs but does not include explicit costs
C) includes explicit costs but does not include implicit cost
D) should not concern anyone but economists
E) is the value of the inputs in their most highly valued alternative use

2. If average variable cost is increasing with increases in output, total fixed cost will:
A) increase with increases in output
B) decrease with increases in output
C) remain unchanged with increases in output
D) increase initially and then decrease with increases in output
E) decrease initially and then increase with increases in output

3. Long-run average cost equals long-run marginal cost whenever:

A) the production function exhibits constant returns to scale
B) fixed costs are zero
C) no factor always has increasing marginal returns
D) the cost of capital is near zero
E) long-run marginal cost is at its minimum

4. Gerry works 40 hours a week, managing Gerry's Market, without drawing a salary. He could
earn $600 a week doing the same work for Jean. Gerry's Market owes its bank $100,000, and
Gerry has invested $100,000 of his own money. If Gerry's accounting profits are $1,000 per
week while the interest on his bank debt is $200 per week, his economic profits are:
A) $0 per week
B) $200 per week
C) $400 per week
D) $800 per week
E) $1,000 per week

5. A firm’s marginal cost of production equals its average cost of production. Which of the
following statements is therefore true?
A) marginal cost is at a minimum
B) total cost is fixed
C) average cost is at a maximum
D) average cost is at a minimum
E) None of the above
6. The long run is a time period during which:
A) all inputs are semi-variable
B) all inputs except capital and entrepreneurship are variable
C) average variable costs are strictly less than average total cost
D) all inputs are quasi-variable
E) all inputs are variable

7. Leisure Enterprise’'s total cost of producing speedboats is given by

TC = 10Q3 - 4Q2 + 25Q + 500. On the basis of this information, the marginal cost of producing
the 25th speedboat is:
A) $1,700
B) $6,050
C) $18,575
D) $18,775
E) $19,075

8. Trudeau's Body Shop incurs total costs given by TC = 2,400 + 100Q. If the price it charges for
a paint job is $120, what is its break-even level of output?
A) 20 paint jobs
B) 40 paint jobs
C) 60 paint jobs
D) 90 paint jobs
E) 120 paint jobs

9. Framjam Sports Equipment produces basketballs at its factory in Kentucky and soccer balls at
its factory in Illinois. At its current annual rate of production, the cost of producing basketballs is
$80,000 and the cost of producing soccer balls is $45,000. If the firm consolidates production at
a single location, the annual cost of production will be $100,000. What is the degree of
economies of scope in this case?
A) 5
B) 4
C) 0.75
D) 0.25
E) None of the above

10. Economies of scale are said to exist whenever:

A) the learning curve is upward-sloping
B) increases in output bring about higher output
C) increases in output bring about higher input prices
D) the elasticity of total cost with respect to output is greater than 1
E) the long-run average cost curve is downward-sloping
11. Loco Pony Adventures rents clowns and ponies for children’s birthday parties. If the annual
total cost of furnishing entertainment is given by TC = 0.5Q2 + 25Q + 1,000, the average
variable cost of catering to 30 birthday parties is:
A) $25.00
B) $25.50
C) $26.50
D) $30.00
E) $40.00

12. Economies of scope exist when it is cheaper to produce:

A) with a large fixed plant and equipment
B) at increasing rates of output
C) given quantities of two different products together than to produce the same quantities
separately
D) given quantities of two different products separately than to produce the same quantities
together
E) using more than one technique

Section 2: Suggested Short Answer Questions

Chapter 6

From the textbook: Problems 2, 3, 5, 6 and 9.

From the assignments: A#2 Fall 2012 questions 1 and 2.

Other problems:

1. Pear Corporation is considering two types of plants to manufacture its product. For each type
of plant, average variable cost is constant so long as output is less than capacity (which is the
maximum output of the plant). The cost structure for each type of plant is as follows:

Plant A Plant B
Average Variable Costs
Labour $15.22 $27.75
Materials 12.05 12.34
Other 9.87 10.01
Total $37.14 $50.10
Total Fixed Cost $380,000 $170,000
Annual Capacity 200,000 100,000

a) Derive the average cost of producing 50,000, 100,000 and 200,000 units per year at Plant
A.
 b) Derive the average cost of producing 50,000, 100,000 and 200,000 units per year at Plant
B (for output exceeding the capacity of a single plant, assume that more than one plant of
this type is built).
c) If these are the only plants to produce this product, plot the points on the long run average
cost curve for the production of this product for output of 50,000, 100,000 and 200,000
per year (be sure to label the x and y axes and make a neat diagram).

2. The Comfee Chair Corporation, a retail seller of recliners, wants to determine how many
recliners it must sell in order to earn a profit of $20,000 per month. The price of each recliner is
$650, and the average variable cost is $200.

a) What is the required sales volume if the Comfee Chair Corporation’s monthly fixed costs
are $4,750 per month?
b) If the firm sold each recliner at a price of $695, rather than $650, what would the required
sales volume be?
c) If the price is $695 and if average variable cost is $145, rather than $200, what would the
required sales volume be?