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Chapter 6—Production costs
MULTIPLE CHOICE
Costs and profit
2. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current
job, which pays $20 000 a year, and take over a store building that he owns and currently rents to
his brother for $6000 a year. His expenses at the sushi bar would be $50 000 for food and $2000
for gas and electricity. What are his explicit costs?
A. $26 000.
B. $66 000.
C. $78 000.
D. $52 000.
E. $72 000.
ANS: D PTS: 1 DIF: Moderate REF: Costs and profit
OBJ: TYPE: CA TOP: Costs and profit
6. If a firm has total revenue of $200 million, explicit costs of $190 million and implicit costs of $10
million, its economic profit is:
A. $200 million.
B. $70 million.
C. $10 million.
D. $0 million.
E. –$10 million.
ANS: D PTS: 1 DIF: Easy REF: Economic and
accounting profit
OBJ: TYPE: SA TOP: Economic and accounting profit
8. An economist left her $100 000-a-year teaching position to work full-time in her own consulting
business. In the first year, she had total revenue of $200 000 and business expenses of $100 000.
She made a/an:
A. economic profit.
B. economic loss.
C. implicit profit.
D. accounting loss but not an economic loss.
E. zero economic profit.
ANS: E PTS: 1 DIF: Moderate REF: Economic and
accounting profit
OBJ: TYPE: SA TOP: Economic and accounting profit
10. Suppose a firm has total revenue of $500 million, explicit costs of $200 million and implicit costs
of $100 million. This firm’s economic profit is:
A. $200 million.
B. $300 million.
C. $700 million.
D. –$200 million.
ANS: A PTS: 1 DIF: Moderate REF: Economic and
accounting profit
OBJ: TYPE: SA TOP: Economic and accounting profit
12. If a firm has total revenue of $300 million, explicit costs of $200 million and implicit costs of $30
million, its accounting profit is:
A. $200 million.
B. $100 million.
C. $70 million.
D. –$10 million.
E. –$20 million.
ANS: B PTS: 1 DIF: Easy REF: Economic and
accounting profit
OBJ: TYPE: SA TOP: Economic and accounting profit
14. During the course of a week, McDonalds has enough time to hire or lay-off workers, but it does
not have enough time to expand its kitchen or add an additional seating area. In this situation,
McDonald’s:
A. has no fixed costs.
B. is in the short run.
C. suffers an economic loss.
D. earns a large profit.
ANS: B PTS: 1 DIF: Moderate REF: Short-run production
costs
OBJ: TYPE: RE TOP: Short-run production costs
18. A firm can produce 450 litres of milk per day with four workers and 500 litres per day with five
workers. The marginal product of the fifth worker expressed in gallons per worker per day, is:
A. 35.
B. 50.
C. 70.
D. 350.
ANS: B PTS: 1 DIF: Easy REF: Short-run production
costs
19. A farm can produce 10 000 bushels of wheat per year with five workers and 12 000 bushels with
six workers. The marginal product of the sixth worker for this farm is:
A. 10 000 bushels.
B. 2000 bushels.
C. 500 bushels.
D. 23 000 bushels.
ANS: B PTS: 1 DIF: Moderate REF: Short-run production
costs
20. Marginal product measures the change in:
A. total cost brought about by changing production by one unit.
B. product price brought about by changing production by one unit.
C. a firm’s revenue brought about by changing production by one unit.
D. the firm’s output brought about by employing one additional unit of input.
E. the firm’s profit brought about by employing one more input.
ANS: D PTS: 1 DIF: Moderate REF: Short-run production
costs
OBJ: TYPE: RE TOP: Short-run production costs
23. The law of diminishing returns applies to which of the following segments of the marginal product
of labour curve?
A. The entire curve.
B. The downward-sloping segment only.
C. The upward-sloping segment only.
D. The point where labour input is zero.
ANS: B PTS: 1 DIF: Moderate REF: Short-run production
costs
OBJ: TYPE: SA TOP: Short-run production costs
24. The situation in which the marginal product of labour is greater than zero and declining as more
labour is hired is called the law of:
A. negative returns to scale.
B. diminishing returns.
C. inverse return to labour.
D. demand.
ANS: B PTS: 1 DIF: Easy REF: Short-run production
costs
OBJ: TYPE: SA TOP: Short-run production costs
25. The _____ is the situation in which the marginal product of labour is greater than zero and
declining as more labour is hired.
A. law of demand
B. law of diminishing supply
C. law of diminishing returns
D. law of returns to scale
ANS: C PTS: 1 DIF: Easy REF: Short-run production
costs
OBJ: TYPE: RE TOP: Short-run production costs
27. The main reason why the slope of the production function decreases is because of:
A. increasing returns to the variable factor.
B. constant returns to an increasing factor.
C. diminishing returns to the variable factor.
D. diseconomies of scale.
E. the fact that all factors are variable.
ANS: C PTS: 1 DIF: Moderate REF: Short-run production
costs
29. A fixed input is any resource for which the quantity can:
A. change any time.
B. change during a specific time.
C. not change at all.
D. not change during a specific time.
ANS: D PTS: 1 DIF: Easy REF: Short-run production
costs
OBJ: TYPE: RE TOP: Short-run production costs
32. In Exhibit 6–1, the marginal product of labour is equal to zero at point:
A. A.
B. B.
C. C.
D. D.
E. The marginal product of labour never equals zero.
ANS: C PTS: 1 DIF: Difficult REF: Short-run production
costs
Workers Pizzas
0 0
1 4
2 10
3 15
4 18
5 19
33. Exhibit 6–2 shows the change in the production of pizzas as more workers are hired. The marginal
product of the second employee equals:
A. 4.
B. 10.
C. 14.
D. 6.
E. 15.
ANS: D PTS: 1 DIF: Moderate REF: Short-run production
costs
OBJ: TYPE: SA TOP: Short-run production costs
34. Exhibit 6–2 shows the change in the production of pizzas as more workers are hired. The marginal
product of the labour input begins to fall with the employment of the _____ worker.
A. first
B. second
C. third
D. fourth
E. fifth
ANS: C PTS: 1 DIF: Difficult REF: Short-run production
costs
OBJ: TYPE: CA TOP: Short-run production costs
35. Exhibit 6–2 shows the change in the production of pizzas as more workers are hired. The marginal
product of the fifth worker is.
A. 0
B. 1
C. 4
D. 6
E. 10
ANS: B PTS: 1 DIF: Easy REF: Short-run production
costs
OBJ: TYPE: CA TOP: Short-run production costs
36. As shown in Exhibit 6–3, the law of diminishing returns applies where there are:
A. more than 5 workers per day.
B. more than 4 workers per day.
C. more than 3 workers per day.
D. between zero and 5 workers per day.
ANS: A PTS: 1 DIF: Easy REF: Short-run production
costs
OBJ: TYPE: SA TOP: Short-run production costs
37. As shown in Exhibit 6–3, the marginal product of labour when 5 additional workers are employed
per day is (points from B to C):
A. 50.
B. 100.
C. 150.
D. 175.
ANS: B PTS: 1 DIF: Easy REF: Short-run production
costs
OBJ: TYPE: SA TOP: Short-run production costs
38. As shown in Exhibit 6–3, what was the marginal product of labour when only one worker was
hired?
A. 50.
B. 100.
C. 150.
D. 175.
ANS: A PTS: 1 DIF: Easy REF: Short-run production
costs
OBJ: TYPE: SA TOP: Short-run production costs
39. As shown in Exhibit 6–3, what was the marginal product of labour when the second worker was
hired?
A. 50.
B. 100.
C. 150.
D. 175.
ANS: A PTS: 1 DIF: Easy REF: Short-run production
costs
OBJ: TYPE: SA TOP: Short-run production costs
Total
Labourers product
0 0
1 8
2 20
3 25
4 28
5 29
40. In Exhibit 6–4, the marginal returns are largest when the _____ worker is hired.
A. first
B. second
C. third
D. fourth
E. fifth
ANS: B PTS: 1 DIF: Moderate REF: Short-run production
costs
OBJ: TYPE: SA TOP: Short-run production costs
41. In Exhibit 6–4, the marginal product of the third worker is:
A. 0.
B. 5.
C. 10.
D. 12.
E. 20.
ANS: B PTS: 1 DIF: Moderate REF: Short-run production
costs
OBJ: TYPE: SA TOP: Short-run production costs
42. Which of the following is considered to be a fixed cost of operating a hairdressing salon?
A. Wages.
B. Insurance.
C. Cost of receipt books.
D. Cost of shampoos.
ANS: B PTS: 1 DIF: Moderate REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
43. Suppose the cost to produce an additional unit of output is $20. What is the change in total variable
cost?
A. $10.
B. $20.
C. $30.
D. $40.
ANS: B PTS: 1 DIF: Easy REF: Short-run cost formulas
OBJ: TYPE: CA TOP: Short-run cost formulas
44. Marginal cost is defined as the increase in total cost resulting from an increase in:
A. 1 unit of output.
B. output of 100 units.
C. a firm’s plant size.
D. 1 unit of labour.
ANS: A PTS: 1 DIF: Easy REF: Short-run cost formulas
OBJ: TYPE: RE TOP: Short-run cost formulas
45. The minimum point on the marginal cost curve corresponds to the:
A. maximum point on the total cost curve.
B. minimum point on the total cost curve.
C. minimum point on the average variable cost curve.
D. midpoint of the total cost curve.
ANS: C PTS: 1 DIF: Moderate REF: Short-run cost formulas
OBJ: TYPE: RE TOP: Short-run cost formulas
47. When the cost curves have U-shapes, at the point where marginal cost equals average total cost:
A. average variable cost is constant.
B. fixed cost is declining.
C. average total cost is at its maximum and the marginal cost is falling.
D. average total cost is at its minimum and the marginal cost is rising.
ANS: D PTS: 1 DIF: Difficult REF: Short-run cost formulas
OBJ: TYPE: CA TOP: Short-run cost formulas
49. Which of the following is true if the total variable cost curve is rising?
A. Average fixed cost is increasing.
B. Marginal cost is decreasing.
C. Marginal cost is increasing.
D. Average fixed cost is constant.
ANS: C PTS: 1 DIF: Difficult REF: Short-run cost formulas
OBJ: TYPE: CA TOP: Short-run cost formulas
53. If ATC = $10, AVC = $6, AFC = $3 and MC = $5, then if output increased by one unit:
A. MC will increase.
B. MC will decrease.
C. ATC will increase.
D. MC may be increasing or decreasing.
E. AFC will increase.
ANS: D PTS: 1 DIF: Difficult REF: Short-run cost formulas
62. In Exhibit 6–5, by filling in the blanks it can be determined that the fixed costs for the 2nd unit are
A. $0.
B. $200.
C. $900.
D. $1000.
E. $3000.
ANS: B PTS: 1 DIF: Moderate REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
63. In Exhibit 6–5, by filling in the blanks it can be determined that the marginal cost of the first unit
of output is:
A. $200.
B. $700.
C. $900.
D. $1000.
E. $3000.
ANS: B PTS: 1 DIF: Moderate REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
64. In Exhibit 6–5, by filling in the blanks it can be determined that the total cost of the second unit of
output is:
A. $0.
B. $700.
C. $1000.
D. $1200.
E. $1800.
ANS: E PTS: 1 DIF: Moderate REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
65. In Exhibit 6–5, by filling in the blanks it can be determined that the marginal cost of the third unit
of output is:
A. $0.
B. $200.
C. $700.
D. $1200.
E. $2000.
ANS: D PTS: 1 DIF: Moderate REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
66. In Exhibit 6–5, by filling in the blanks it can be determined the variable costs for the first unit is:
A. $0.
B. $200.
C. $700.
D. $1000.
E. $3000.
ANS: C PTS: 1 DIF: Moderate REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
67. As shown in Exhibit 6–6, the total cost of producing 4 units is:
A. $0.
B. $227.
C. $250.
D. $100.
ANS: B PTS: 1 DIF: Easy REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
68. As shown in Exhibit 6–6, the total cost of producing 5 units is:
A. $0.
B. $227.
C. $250.
D. $100.
ANS: C PTS: 1 DIF: Easy REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
69. As shown in Exhibit 6–6, the average fixed cost of producing the fifth unit is:
A. $0.
B. $20.
C. $25.
D. $100.
ANS: B PTS: 1 DIF: Easy REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
70. As shown in Exhibit 6–6, the marginal cost of producing the fourth unit is:
A. $0.
B. $19.
C. $27.
D. $100.
ANS: B PTS: 1 DIF: Easy REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
71. As shown in Exhibit 6–6, the average total cost of producing 5 units is:
A. $0.
B. $27.
C. $50.
D. $100.
ANS: C PTS: 1 DIF: Moderate REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
Exhibit 6–7 Short-run cost curves schedule for a pizzeria’s hourly production
73. By filling in the blanks in Exhibit 6–8, the AFC of 4 pizzas is shown to be equal to:
A. $9.50.
B. $10.00.
C. $19.50.
D. $40.00.
E. $78.00.
ANS: B PTS: 1 DIF: Moderate REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
74. By filling in the blanks in Exhibit 6–8, the ATC of 4 pizzas is shown to be equal to:
A. $9.50.
B. $10.00.
C. $19.50.
D. $40.00.
E. $78.00.
ANS: C PTS: 1 DIF: Easy REF: Short-run cost formulas
OBJ: TYPE: SA TOP: Short-run cost formulas
75. By filling in the blanks in Exhibit 6–8, the AVC of 4 pizzas is shown to be equal to:
A. $9.50.
B. $10.00.
C. $19.50.
D. $40.00.
E. $78.00.
ANS: A PTS: 1 DIF: Difficult REF: Short-run cost formulas
OBJ: TYPE: CA TOP: Short-run cost formulas
76. By filling in the blanks in Exhibit 6–8, the AFC of 3 pizzas is shown to be equal to:
A. $9.00.
B. $10.00.
C. $13.33.
D. $22.33.
E. $40.00.
ANS: C PTS: 1 DIF: Difficult REF: Short-run cost formulas
OBJ: TYPE: CA TOP: Short-run cost formulas
77. By filling in the blanks in Exhibit 6–8, the ATC of 3 pizzas is shown to be equal to:
A. $9.00.
B. $10.00.
C. $13.33.
D. $22.33.
E. $40.00.
ANS: D PTS: 1 DIF: Difficult REF: Short-run cost formulas
OBJ: TYPE: CA TOP: Short-run cost formulas
78. By filling in the blanks in Exhibit 6–8, the AVC of 3 pizzas is shown to be equal to:
A. $9.00.
B. $10.00.
C. $13.33.
D. $22.33.
E. $40.00.
ANS: A PTS: 1 DIF: Difficult REF: Short-run cost formulas
OBJ: TYPE: CA TOP: Short-run cost formulas
80. Which of the following is true at the point where diminishing returns set in?
A. Both marginal product and marginal cost are at a maximum.
B. Both marginal product and marginal cost are at a minimum.
C. Marginal product is at a maximum and marginal cost at a minimum.
D. Marginal product is at a minimum and marginal cost at a maximum.
ANS: C PTS: 1 DIF: Difficult REF: Marginal cost
relationships OBJ: TYPE: CA TOP: Marginal cost relationships
95. For a typical firm, the long-run average total cost curve:
A. is a tangent to the minimum point of each possible short-run average total cost curve.
B. is a tangent to each possible short-run average total cost curve at one point.
C. intersects each possible short-run average total cost curve at two points.
D. passes through the minimum points of all possible short-run average total cost curves.
ANS: B PTS: 1 DIF: Moderate REF: Long-run average cost
curves
OBJ: TYPE: RE TOP: Long-run average cost curves
96. When the curve that envelops the series of possible short-run average total cost curves is horizontal,
this means that there are:
A. economies of scale.
B. diseconomies of scale.
C. constant returns to scale.
D. diminishing returns.
E. some fixed factors of production.
ANS: C PTS: 1 DIF: Moderate REF: Long-run average cost
curves
OBJ: TYPE: SA TOP: Long-run average cost curves
97. If the minimum points of all the possible short-run average total cost curves become successively
lower as quantity of output increases, then:
A. the firm should try to produce less output.
B. total fixed costs are constant along the LRAC curve.
C. there are economies of scale.
D. the firm is probably having significant management problems.
E. when output is doubled, total costs are doubled.
ANS: C PTS: 1 DIF: Difficult REF: Long-run average cost
curves
OBJ: TYPE: CA TOP: Long-run average cost curves
99. In Exhibit 6–9, constant returns to scale only exist for output levels between:
A. 0 and 1000.
B. 1000 and 2000.
C. 2000 and 3000.
D. 3000 and 4000.
E. 4000 and infinity.
ANS: C PTS: 1 DIF: Moderate REF: Different scales of
production
OBJ: TYPE: SA TOP: Different scales of production
100. In Exhibit 6–9, a firm finds that it is experiencing numerous managerial and information problems.
The position of its short-run and long-run average total cost curves suggest that it is operating at a
production level:
A. between 0 and 1000.
B. between 1000 and 2000.
C. between 2000 and 3000.
D. between 3000 and 4000.
E. where it should shut down immediately.
ANS: D PTS: 1 DIF: Difficult REF: Different scales of
production
OBJ: TYPE: CA TOP: Different scales of production
101. In Exhibit 6–9, the U-shaped LRAC curve indicates which of the following as quantity increases
from 0 to 4000?
A. Diseconomies of scale; constant returns to scale; economies of scale.
B. Constant returns to scale; economies of scale; diseconomies of scale.
C. Economies of scale; constant returns to scale; diseconomies of scale.
D. Diseconomies of scale; economies of scale; constant returns to scale.
E. Economies of scale; diseconomies of scale; constant returns to scale.
ANS: C PTS: 1 DIF: Moderate REF: Different scales of
production
OBJ: TYPE: SA TOP: Different scales of production
102. In Exhibit 6–10, short-run average total cost, short-run marginal cost and long-run average cost are
all equal at which level of output per week?
A. 500 units.
B. 1000 units.
C. 1500 units.
D. 2000 units.
ANS: B PTS: 1 DIF: Moderate REF: Different scales of
production
OBJ: TYPE: SA TOP: Different scales of production
103. If the firm represented in Exhibit 6–10 is operating with a plant whose size corresponds to
short-run average total cost curve A, the level of output that would minimise its short-run average
total cost is:
A. 500 units per week.
B. 1000 units per week.
C. 1500 units per week.
D. 2000 units per week.
ANS: A PTS: 1 DIF: Difficult REF: Different scales of
production
OBJ: TYPE: SA TOP: Different scales of production
104. Long-run economies of scale exist when the long-run average cost curve:
A. rises.
B. remains constant.
C. falls.
D. does not exist.
ANS: C PTS: 1 DIF: Moderate REF: Different scales of
production
OBJ: TYPE: RE TOP: Different scales of production
105. Economies of scale are created by greater efficiency of capital and by:
A. longer chains of command in management.
B. better wages for labour.
C. smaller plant sizes.
D. increased specialisation of labour.
ANS: D PTS: 1 DIF: Moderate REF: Different scales of
production
OBJ: TYPE: RE TOP: Different scales of production
106. The decreasing portion of a firm’s long-run average cost curve is attributable to:
A. diminishing returns to scale.
B. increasing marginal cost.
C. economies of scale.
D. diseconomies of scale.
E. constant returns to scale.
ANS: C PTS: 1 DIF: Difficult REF: Different scales of
production
OBJ: TYPE: CA TOP: Different scales of production
110. Which firm in Exhibit 6–11 displays a long-run average cost curve with diseconomies of scale
beginning at 2000 units of output per week?
A. Firm A.
B. Firm B.
C. Firm C.
D. Firms A and C.
ANS: A PTS: 1 DIF: Moderate REF: Different scales of
production
OBJ: TYPE: SA TOP: Different scales of production
111. Which firm in Exhibit 6–11 displays a long-run average cost curve with economies of scale
throughout the range of output shown?
A. Firm A.
B. Firm B.
C. Firm C.
D. Firms A and B.
ANS: C PTS: 1 DIF: Moderate REF: Different scales of
production
OBJ: TYPE: SA TOP: Different scales of production
TRUE/FALSE
Costs and profit
1. Suppose a firm earns an accounting profit. This means the firm also earns a positive economic
profit.
3. If the total variable cost of producing 5 units of output is $10 and the total variable cost of
producing 6 units is $15, the marginal cost of producing the sixth unit is $5.
4. Total cost is equal to total fixed costs plus total variable cost.
5. Costs that do not vary as output varies and that must be paid even if output is zero are called total
fixed costs.
7. The law of diminishing marginal returns causes a firm’s short-run marginal cost curve to be
U-shaped.
8. The shape of the MC curve is inversely related to the shape of the marginal product curve.
10. The long-run average cost curve traces the lowest points of the AVC and ATC for all firms.
11. Economies of scale exist over all ranges of output for which short-run average total cost exceeds
long-run average cost.
12. If a firm increases output and its average total cost declines, then the firm is experiencing
economies of scale.
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