Economics, 3e (Hubbard/O'Brien) - TB 1
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Chapter 10 Technology, Production, and Costs
10.1 Technology: An Economic Definition
1) A firm has successfully adopted a positive technological change when
A) it can produce more output using the same inputs.
B) it produces less pollution in its production process.
C) can pay its workers less yet increase its output.
D) it sees an increase in worker productivity.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 326/326
Topic: Technological Change
Objective: LO1: Define technology and give examples of technological change.
AACSB: Reflective Thinking
Special Feature: None
2) Which of the following is not a source of technological advancement for a producer?
A) better trained workers
B) more efficient physical capital
C) higher skill level of managers
D) outsourcing some aspect of production
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 326/326
Topic: Technological Change
Objective: LO1: Define technology and give examples of technological change.
AACSB: Reflective Thinking
Special Feature: None
3) Which of the following is an example of market "production", as used by economist?
A) Garvey takes out a low-cost government loan to start his pet-sitting business.
B) Heidi makes a pizza for her family's dinner.
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C) Katrina works as a cashier at the local produce stand.
D) The theatre and film studies department in Fine Art's College stages a play at the local theatre.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 326/326
Topic: Technology
Objective: LO1: Define technology and give examples of technological change.
AACSB: Reflective Thinking
Special Feature: None
4) A firm's cost of production is determined by all of the following except
A) the technology used to produce its output.
B) the productivity of its workers.
C) the cost of raw material used in production.
D) the amount of corporate taxes it must pay on its profit.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 326/326
Topic: Technology
Objective: LO1: Define technology and give examples of technological change.
AACSB: Reflective Thinking
Special Feature: None
5) A firm increased its production and sales because the firm's manager rearranged the layout of his factory floor. This is an example of
A) investment in human capital.
B) economies of scale.
C) positive technological change.
D) inspired management.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 326/326
Topic: Technological Change
Objective: LO1: Define technology and give examples of technological change.
AACSB: Reflective Thinking
Special Feature: None
6) The difference between technology and technological change is that
A) technology refers to the processes used by a firm to transform inputs into output while technological change is a change in a firm's ability to produce a given level of output with a given quantity of inputs.
B) technology is carried out by firms producing physical goods but technological change is an intellectual exercise into seeking ways to improve production.
C) technology is product-centered, that is, developing new products with our limited resources while technological change is process-centered in that it focuses on developing new production techniques.
D) technology involves the use of capital equipment while technological change requires the use of brain power.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 326/326
Topic: Technology
Objective: LO1: Define technology and give examples of technological change.
AACSB: Reflective Thinking
Special Feature: None
7) Which of the following is an example of positive technological change?
A) A firm offers workers a higher wage to work on weekends and at night. As a result, the firm is able to increase its weekly production of surf boards.
B) A firm buys an additional machine that it uses to make surf boards. As a result, the firm is able to increase its weekly production of surf boards.
C) A firm conducts a new advertising campaign. As a result, the demand for the firm's surf boards increases.
D) A firm's workers participate in a training program designed to increase the number of surf boards they can produce per day.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 326/326
Topic: Technological Change
Objective: LO1: Define technology and give examples of technological change.
AACSB: Reflective Thinking
Special Feature: None
8) Suppose a chain of convenience stores reorganized its system of supplying its stores with food. This led to a sharp reduction in the number of trucks that the company had to use and increased the amount of fresh food on store shelves. Which of the following statements best describes the chain stores' actions?
A) The change implemented is not an example of technological change because it did not require the use of new machinery of equipment.
B) Technological change refers only to the introduction of new products or improvements to existing product. As such, the scenario described in the question is not technological change.
C) The firm is able to produce more output (increase its sales) using fewer inputs (less trucks). Therefore, the chain of convenience stores has implemented a positive technological change.
D) The scenario described is an example of management efficiency and not technological change. Essentially, the chain changes its way of operating its business.
Answer: C
Diff: 2 Page Ref: 326-327/326-327
Topic: Technological Change
Objective: LO1: Define technology and give examples of technological change.
AACSB: Analytic Skills
Special Feature: Making the Connection: Improving Inventory Control at Wal-Mart
9) Improvements in inventory control represent a positive technological change because they allow firms to produce the same output with fewer inputs. In recent years, many firms have adopted an inventory system in which firms accept shipments from suppliers as close as possible to the time they will be needed. Wal-Mart has been a pioneer in using inventory control systems to this in its stores. This type of inventory system is called a ________ inventory system.
A) first-in-first-out
B) cash-and-carry
C) just-in-time
D) buy-now-pay-later
Answer: C
Diff: 2 Page Ref: 326-327/326-327
Topic: Technological Change
Objective: LO1: Define technology and give examples of technological change.
AACSB: Analytic Skills
Special Feature: Making the Connection: Improving Inventory Control at Wal-Mart
10) The process a firm uses to turn inputs into outputs of goods and services is called technology.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 326/326
Topic: Technology
Objective: LO1: Define technology and give examples of technological change.
AACSB: Reflective Thinking
Special Feature: None
11) If a firm experiences positive technological change, it is able to produce more output using the same inputs.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 326/326
Topic: Technological Change
Objective: LO1: Define technology and give examples of technological change.
AACSB: Reflective Thinking
Special Feature: None
12) Is it possible for technological change to be negative? If so, give an example.
Answer: Technological change could be negative, for instance, when a natural disaster hits, or when a firm hires less-experienced workers. In these cases, the firm would produce a lower level of output with the same inputs.
Comment: Recurring
Diff: 2 Page Ref: 326-327/326-327
Topic: Technological Change
Objective: LO1: Define technology and give examples of technological change.
AACSB: Reflective Thinking
Special Feature: None
13) Describe how Wal-Mart has used positive technological change to manage its inventory.
Answer: Wal-Mart uses a "just-in-time" inventory system to manage its inventory. Company founder Sam Walton built a series of distribution centers across the country to supply goods to the retail stores. As goods are sold in stores, sales information is sent electronically to the distribution centers to help managers determine what merchandise to ship to each store, with the shipments often being received overnight. This allows Wal-Mart to minimize its inventory holdings without running the risk of many stockouts occurring. Wal-Mart has involved many of its suppliers in this process, which allows these manufacturers to more efficiently determine production schedules and the quantities to be shipped to Wal-Mart.
Diff: 2 Page Ref: 326-327/326-327
Topic: Technology
Objective: LO1: Define technology and give examples of technological change.
AACSB: Reflective Thinking
Special Feature: Making the Connection: Improving Inventory Control at Wal-Mart
10.2 The Short Run and the Long Run in Economics
1) A characteristic of the long run is
A) there are fixed inputs.
B) all inputs can be varied.
C) plant capacity cannot be increased or decreased.
D) there are both fixed and variable inputs
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 327/327
Topic: The Short Run and the Long Run
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
2) Which of the following is a factor of production that generally is fixed in the short run?
A) raw materials
B) labor
C) a factory building
D) water
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 327/327
Topic: The Short Run and the Long Run
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
3) Which of the following is an example of a long run adjustment?
A) Your university offers Saturday morning classes next fall.
B) Ford Motor Company lays off 2,000 assembly line workers.
C) A soybean farmer turns on the irrigation system after a month long dry spell.
D) Wal-Mart builds another Supercenter.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 327/327
Topic: The Short Run and the Long Run
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
4) Which of the following is the best example of a short run adjustment?
A) A local bakery purchases another commercial oven as part of its capacity expansion.
B) Your local Wal-Mart hires two more associates.
C) Smith University completed negotiations to acquire a large piece of land to build its new library.
D) Toyota builds a new assembly plant in Texas.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 327/327
Topic: The Short Run and the Long Run
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
5) If a producer is not able to expand its plant capacity immediately, it is
A) bankrupt.
B) operating in the long run.
C) operating in the short run.
D) losing money.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 327/327
Topic: The Short Run and the Long Run
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
6) Which of the following is a fixed cost?
A) payment to hire a security worker to guard the gate to the factory around the clock
B) wages to hire assembly line workers
C) payments to an electric utility
D) costs of raw materials
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 327/327
Topic: Fixed Cost
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
7) Academic book publishers hire editors, designers, and production and marketing managers who help prepare books for publication. Because these employees work on several books simultaneously, the number of people the company hires will not go up and down with the quantity of books the company publishes during any particular year. The salaries and benefits of people in these job categories will be included in
A) fixed cost and marginal cost but not variable cost.
B) fixed cost but not variable cost and total cost.
C) marginal cost and total cost but not fixed cost.
D) fixed cost and total cost but not variable cost.
Answer: D
Diff: 2 Page Ref: 328/328
Topic: Fixed Cost
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: Making the Connection: Fixed Costs in the Publishing Industry
8) Economic costs of production differ from accounting costs in that
A) economic costs include expenditures for hired resources while accounting costs do not.
B) economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.
C) accounting costs include expenditures for hired resources while economic costs do not.
D) accounting costs are always larger than economic cost.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 328-329/328-329
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
9) Implicit costs can be defined as
A) accounting profit minus explicit cost.
B) the non-monetary opportunity cost of using the firm's own resources.
C) the deferred cost of production.
D) total cost minus fixed costs.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 328-329/328-329
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
10) Which of the following is an implicit cost of production?
A) interest paid on a loan to a bank
B) wages paid to labor plus the cost of carrying benefits for workers
C) the utility bill paid to water, electricity, and natural gas companies
D) rent that could have been earned on a building owned and used by the firm
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 328-329/328-329
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
11) Which of the following is an implicit cost of production?
A) the loss in the value of capital equipment due to wear and tear
B) the salary you pay yourself for running your business
C) the utility bill paid to water, electricity, and natural gas companies
D) the interest you pay your mother for the money she loaned you to start your business
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 328-329/328-329
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
12) The explicit cost of production is also called
A) variable cost.
B) accounting cost.
C) direct cost.
D) overhead cost.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 328-329/328-329
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
13) Which of the following are implicit costs for a typical firm?
A) opportunity costs of capital owned and used by the firm
B) the cost of labor hired by the firm
C) utilities cost
D) a business licensing fee
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 328-329/328-329
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
14) Jayanthi moves her yoga studio from her home to a space she rents in Oakland, California. Holding everything else constant, as a result of this move,
A) her explicit cost falls and her implicit cost rises.
B) her implicit cost falls and her explicit cost rises.
C) her economic cost rises.
D) her opportunity cost rises.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 328-329/328-329
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
15) Which of the following would be categorized as an opportunity cost?
a. not being able to spend your $10,000 savings if you sink the money in your business
b. the cost of purchasing supplies for your house-cleaning business
c. the cost of purchasing auto insurance for your dry-cleaning delivery business
A) a only
B) a and c only
C) b and c only
D) all of the above
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 328-329/328-329
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
16) Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her explicit costs?
A) $45,000
B) $45,500
C) $47,000
D) $87,000
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 328-329/328-329
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Analytic Skills
Special Feature: None
17) Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her implicit costs?
A) $80,000
B) $70,000
C) $42,000
D) $41,500
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 328-329/328-329
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Analytic Skills
Special Feature: None
18) The production function shows
A) the total cost of producing a given quantity of output.
B) the maximum output that can be produced from each possible quantity of inputs.
C) the technology used to produce output.
D) the incremental output gained by improving the production process.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 329/329
Topic: The Production Function
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
19) The average total cost of production
A) is the extra cost required to produce one more unit.
B) equals the explicit cost of production.
C) equals total cost of production divided by the level of output.
D) equals total cost of production multiplied times the level of output.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 327/327
Topic: Total Cost
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
20) Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's variable cost per day when she produces 50 gyros using two workers?
A) $100
B) $124.40
C) $220
D) $240
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 327/327
Topic: Variable Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Analytic Skills
Special Feature: None
21) Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's total cost per day when she produces 50 gyros using two workers?
A) $100
B) $124.40
C) $220
D) $340
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 327/327
Topic: Total Cost
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Analytic Skills
Special Feature: None
22) Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's average fixed cost per day when she produces 50 gyros using two workers?
A) $2.00
B) $2.40
C) $4.40
D) $6.80
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 327/327
Topic: Fixed Cost
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Analytic Skills
Special Feature: None
23) Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. What is Vipsana's total cost per day when she does not produce any gyros and does not hire any workers?
A) $0
B) $2
C) $60
D) $120
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 327/327
Topic: Total Cost
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Analytic Skills
Special Feature: None
24) The short run is the time period during which a firm has at least one input constraint.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 327/327
Topic: The Short Run and the Long Run
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
25) A characteristic of the long run that is not available in the short run is that a firm is free to vary its output.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 327/327
Topic: The Short Run and the Long Run
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
26) Consider a manufacturing operation that uses specialized machinery and labor to produce its output. In this case, the input that is not fixed in the short run is labor.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 327/327
Topic: The Short Run and the Long Run
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
27) Accounting costs exclude implicit costs.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 328-329/328-329
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
28) If the firm is producing no output in the short run, then its total costs are zero.
Answer: FALSE
Comment: Recurring
Diff: 2 Page Ref: 327/327
Topic: Total Cost
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
29) In economics, what is the difference between the short run and the long run?
Answer: In economics, the short run refers to the period of time during which at least one of a firm's inputs is fixed. The long run refers to the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.
Comment: Recurring
Diff: 1 Page Ref: 327/327
Topic: The Short Run and the Long Run
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
30) What is the difference between explicit costs and implicit costs? List three examples each of explicit costs and implicit costs that may be experienced by a small business.
Answer: Explicit costs are costs that involve spending money. Implicit costs are nonmonetary opportunity costs. Explicit costs experienced by a small business may include wages, utility costs, and rent. Implicit costs experienced by a small business may include foregone salary, foregone interest, and economic depreciation.
Comment: Recurring
Diff: 1 Page Ref: 328/328
Topic: Explicit and Implicit Costs
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
31) Explain whether each of the following is a fixed cost or a variable cost for Damian Dandridge's tattoo parlor.
a. The payment he makes to buy tattoo ink.
b. The wages he pays his employees.
c. The $500-per-month payment he makes to advertise his shop on highway billboards.
d. The lease payment he makes to the landlord who owns the building where his shop is located.
e. The payment he makes on his liability insurance policy.
Answer: c., d., and e. are fixed costs because they do not change as the quantity of tattoos produced increases. a. and b. are variable costs because they increase as the quantity of tattoos produced increases. It is important to note that the time period under consideration is important. In the long run, all of these costs are variable.
Comment: Recurring
Diff: 1 Page Ref: 328/328
Topic: Fixed Cost
Objective: LO2: Distinguish between the economic short run and the economic long run.
AACSB: Reflective Thinking
Special Feature: None
10.3 The Marginal Product of Labor and the Average Product of Labor
1) The marginal product of labor is defined as
A) the additional sales revenue that results when one more worker is hired.
B) the additional output that results when one more worker is hired, holding all other resources constant.
C) the additional number of workers required to produce one more unit of output.
D) the cost of hiring one more worker.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 331/331
Topic: Marginal Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: None
2) If four workers can produce 18 chairs a day and five can produce 20 chairs a day, the marginal product of the fifth worker is
A) 2 chairs.
B) 3 chairs.
C) 4 chairs.
D) 38 chairs.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 331/331
Topic: Marginal Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
3) Red Stone Creamery currently hires 5 workers. When it added a 6th worker, its output actually fell. Which of the following statements is true?
A) The marginal product of the sixth worker must be negative.
B) The average product of the sixth worker is negative.
C) The sixth worker is not as skilled as the fifth worker.
D) The total product becomes negative.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 331/331
Topic: Marginal Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: None
4) The law of diminishing marginal returns states
A) that at some point, adding more of a fixed input to a given amount of variable inputs will cause the marginal product of the variable input to decline.
B) that at some point, adding more of a variable input to a given amount of a fixed input will cause the marginal product of the variable input to decline.
C) that in the presence of a fixed factor, at some point average product of labor starts to fall as more and more variable inputs are added.
D) average total costs of production initially fall and after some point starts to rise at a decreasing rate as output increases.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 331/331
Topic: Diminishing Returns
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: None
5) The law of diminishing marginal returns
A) explains why the average total cost and marginal cost curves are U-shaped in the short run.
B) explains why the average total cost, average fixed cost and the marginal cost curves are Ushaped in the short run.
C) causes average total costs to rise at a decreasing rate as output increases.
D) causes the difference between average total cost and average variable cost to get smaller as output increases.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 331/331
Topic: Diminishing Returns
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: None
6) As a firm hires more labor in the short run, the
A) level of total product stays constant.
B) output per worker rises.
C) extra output of another worker may rise at first, but eventually must fall.
D) costs of production are increasing at a fixed rate per unit of output.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 331/331
Topic: Diminishing Returns
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: None
7) If diminishing marginal returns have already set in for Golden Lark Woodworks, and the marginal product of the 6th carpenter is 8 chairs, then the marginal product of the 7th carpenter is
A) negative.
B) less than 8 chairs.
C) more than 8 chairs.
D) zero.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 331-332/331-332
Topic: Marginal Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: None
8) Refer to Figure 10-1. The marginal product of the 3rd worker is
A) 57.
B) 19.
C) 15.
D) 11.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 331-332/331-332
Topic: Marginal Product of Labor
Skill: Graphing
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
9) Refer to Figure 10-1. The marginal product of the 7th worker is
A) 66.
B) 9.43.
C) 2.
D) -2.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 331-332/331-332
Topic: Marginal Product of Labor
Skill: Graphing
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
10) Refer to Figure 10-1. The average product of the 4th worker
A) is 68.
B) is 17.
C) is 11.
D) cannot be determined.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 333-334/333-334
Topic: Average Product of Labor
Skill: Graphing
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
11) Refer to Figure 10-1. Diminishing marginal productivity sets in after
A) the 2nd worker is hired.
B) the 3rd worker is hired.
C) the 4th worker is hired.
D) the 5th worker is hired.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 331-332/331-332
Topic: Diminishing Returns
Skill: Graphing
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
12) Refer to Figure 10-1. In a diagram that shows the marginal product of labor on the vertical axis and labor on the horizontal axis, the marginal product curve
A) never intersects the horizontal axis.
B) intersects the horizontal axis at a point corresponding to the 5th worker.
C) intersects the horizontal axis at a point corresponding to the 6th worker.
D) intersects the horizontal axis at a point corresponding to the 8th worker.
Answer: B
Comment: Recurring
Diff: 3 Page Ref: 331-332/331-332
Topic: Marginal Product of Labor
Skill: Graphing
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
13) If 11 workers can produce a total of 54 units of a product and a 12th worker has a marginal product of 6 units, then the average product of 12 workers is
A) 60 units.
B) 54 units.
C) 48 units.
D) 5 units.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 333-334/333-334
Topic: Average Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
14) If another worker adds 9 units of output to a group of workers who had an average product of 7 units, then the average product of labor
A) will remain the same.
B) will increase.
C) will decrease.
D) and what will happen to it cannot be determined.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 333-334/333-334
Topic: Average Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
15) In the short run, marginal product of labor increases at first and then falls because
A) as more labor is hired, they are not as skilled as the first ones hired.
B) there are fewer opportunities for division of labor and specialization when fewer workers are hired.
C) managerial inefficiency sets in when a firm gets too large.
D) the new workers do not have as much experience as those who have been with the firm for a long time and therefore are not as productive.
Answer: B
Diff: 2 Page Ref: 333/333
Topic: Marginal Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: Making the Connection: Adam Smith's Famous Account of the Division of Labor in a Pin Factory
16) Refer to Table 10-1. What is the marginal product of the 4th worker?
A) 137 pounds
B) 50 pounds
C) 12.5 pounds
D) 5 pounds
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 331-332/331-332
Topic: Marginal Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
17) Refer to Table 10-1. What is the average product of labor when the farm hires 5 workers?
A) 4 pounds
B) 10.8 bushels
C) 38.2 pounds
D) 54 pounds
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 333-334/333-334
Topic: Average Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
18) Refer to Table 10-1. Diminishing marginal returns sets in when the ________ worker is hired.
A) 2nd B) 3rd
C) 4th
D) None of the above; the production function displays increasing marginal returns.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 331-332/331-332
Topic: Diminishing Returns
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
19) Who was the economist who first analyzed the advantages of specialization and the division of labor?
A) David Ricardo
B) Arthur C. Pigou
C) Ronald Coase
D) Adam Smith
Answer: D
Diff: 1 Page Ref: 333/333
Topic: Division of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
Special Feature: Making the Connection: Adam Smith's Famous Account of the Division of Labor in a Pin Factory
20) One reason why, in the short run, the marginal product of labor might increase initially as more workers are hired is that
A) the first workers hired get to use the best equipment.
B) specialization allows a worker to focus on one task, thereby increasing her proficiency at that task.
C) the best workers are hired first and later hires are not as skillful.
D) beyond some point, a firm has hired too many workers.
Answer: B
Diff: 2 Page Ref: 333/333
Topic: Marginal Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: Making the Connection: Adam Smith's Famous Account of the Division of Labor in a Pin Factory
21) Refer to Figure 10-2. The curve labeled "E" is
A) the total product curve.
B) the average product curve.
C) the marginal product curve.
D) the output supply curve.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 333-334/333-334
Topic: Marginal Product of Labor
Skill: Graphing
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
22) Refer to Figure 10-2. The curve labeled "F" is
A) the total product curve.
B) the average product curve.
C) the marginal product curve.
D) the output supply curve.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 333-334/333-334
Topic: Average Product of Labor
Skill: Graphing
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
23) Refer to Figure 10-2. Diminishing returns to labor set in
A) after L1.
B) after L2.
C) after L3.
D) immediately.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 333-334/333-334
Topic: Diminishing Returns
Skill: Graphing
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
24) Refer to Figure 10-2. Short run output is maximized at
A) L1.
B) L2.
C) L3.
D) insufficient information to determine
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 333-334/333-334
Topic: Marginal Product of Labor
Skill: Graphing
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
25) Refer to Figure 10-2. The average product of labor declines after L2 because
A) the marginal product of labor is below the average product of labor.
B) the marginal product of labor is falling.
C) the marginal product of labor is negative.
D) the marginal product of labor is positive.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 333-334/333-334
Topic: Average Product of Labor
Skill: Graphing
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
26) If we have information about workers' marginal products, then total and average product can be found by
A) dividing marginal costs by the number of workers.
B) multiplying the average marginal product times the number of workers.
C) summing the marginal values to find the total and multiplying it times the number of workers to get the average.
D) summing the marginal values to find the total and dividing it by the number of workers to get the average.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 333-334/333-334
Topic: Marginal Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: None
27) If, after hiring the 6th worker, a firm's output falls, then the marginal product of the 6th worker is negative.
Answer: TRUE
Comment: Recurring
Diff: 2 Page Ref: 331/331
Topic: Marginal Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: None
28) A downward sloping marginal product of labor curve demonstrates the law of diminishing marginal returns.
Answer: TRUE
Comment: Recurring
Diff: 2 Page Ref: 331/331
Topic: Marginal Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: None
29) If average product is decreasing, then marginal product must be negative.
Answer: FALSE
Comment: Recurring
Diff: 2 Page Ref: 333-334/333-334
Topic: Marginal Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: None
30) State the law of diminishing marginal returns.
Answer: As more units of a variable input are used in conjunction with a fixed input, the extra output of the variable input will eventually begin to decrease and continue to decrease as more units are used.
Comment: Recurring
Diff: 2 Page Ref: 331/331
Topic: Diminishing Returns
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Reflective Thinking
Special Feature: None
31) Damian owns a tattoo parlor and has hired three tattoo artists to work for him. The marginal product of labor is 8 for the first artist, 12 for the second artist, and 7 for the third artist. What is Damian's average product of labor for these three tattoo artists?
Answer: The average product of labor is the average of the marginal products of labor.
Therefore, Damian's average product of labor for these three artists is (8 + 12 + 7) / 3 = 9.
Comment: Recurring
Diff: 2 Page Ref: 333-334/333-334
Topic: Average Product of Labor
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
32) Fill in the missing values in the following table. Draw one graph showing how total output increases with the quantity of workers hired, and another graph showing the marginal product of labor and the average product of labor.
Comment: Recurring
Diff: 2 Page Ref: 333-334/333-334
Topic: Average Product of Labor
Skill: Graphing
Objective: LO3: Understand the relationship between the marginal product of labor and the average product of labor.
AACSB: Analytic Skills
Special Feature: None
10.4 The Relationship between Short-Run Production and Short-Run Cost
1) Marginal cost is equal to the
A) change in total cost divided by the change in output.
B) change in average total costs divided by the change in output.
C) change in total product divided by the change in output.
D) change in average product divided by the change in output.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 335-336/335-336
Topic: Marginal Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: None
2) Marginal cost is the
A) change in average cost when an additional unit of output is produced.
B) the additional output when total cost is increased by one dollar.
C) additional cost of producing an additional unit of output.
D) change in the price of inputs if a firm buys more inputs to produce an additional unit of output.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 335-336/335-336
Topic: Marginal Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: None
3) In the short run, if marginal product is at its maximum, then
A) average cost is at its minimum.
B) average variable cost is at its minimum.
C) marginal cost is at its minimum.
D) total cost is at its maximum.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 335-336/335-336
Topic: Marginal Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: None
4) When a firm produces 50,000 units of output, its total cost equals $6.5 million. When it increases its production to 70,000 units of output, its total cost increases to $9.4 million. Within this range, the marginal cost of an additional unit of output is
A) $41.43.
B) $134.29.
C) $135.
D) $145.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 335-336/335-336
Topic: Marginal Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Analytic Skills
Special Feature: None
5) If the 15th unit of output has a marginal cost of $29.50 and the average cost of producing 14 units of output is $30.23, what will happen to the average cost of production if the 15th unit is produced?
A) Average cost increases as more is produced.
B) Average cost will fall.
C) Average cost could increase or decrease depending on what happens to variable cost.
D) Average cost could increase or decrease depending on what happens to fixed cost.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 335-336/335-336
Topic: Average Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Analytic Skills
Special Feature: None
6) If the marginal cost curve is below the average variable cost curve, then
A) average variable cost is increasing.
B) average variable cost is decreasing.
C) marginal cost must be decreasing.
D) average variable cost could either be increasing or decreasing.
Answer: B
Diff: 1 Page Ref: 337/337
Topic: Marginal Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Relationship between Marginal Cost and Average Cost
7) If the average variable cost curve is above the marginal cost curve, then
A) marginal costs must be decreasing.
B) average variable costs must be increasing.
C) marginal costs must be increasing.
D) marginal costs can be either increasing or decreasing.
Answer: D
Diff: 1 Page Ref: 337/337
Topic: Marginal Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Relationship between Marginal Cost and Average Cost
8) Which of the following costs will not change as output changes?
A) marginal cost
B) total variable cost
C) average variable cost
D) average fixed cost
E) total fixed cost
Answer: E
Comment: Recurring
Diff: 2 Page Ref: 335-336/335-336
Topic: Fixed Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: None
9) Average fixed costs of production
A) remain constant.
B) will rise at a fixed rate as more is produced.
C) graph as a U-shaped curve.
D) fall as long as output is increased.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 335-336/335-336
Topic: Fixed Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: None
10) If fixed costs do not change, then marginal cost
A) also remains constant.
B) equals the change in variable cost divided by the change in output.
C) equals the change in average variable cost divided by the change in output.
D) equals the change in average fixed cost divided by the change in output.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 335-336/335-336
Topic: Marginal Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: None
11) In the short run, if marginal product is below average product, then average variable cost is increasing.
Answer: TRUE
Comment: Recurring
Diff: 2 Page Ref: 335-336/335-336
Topic: Average Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: None
12) If marginal cost is above the average variable cost, then average variable cost is decreasing.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 335-336/335-336
Topic: Marginal Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: None
13) If the marginal product of labor is decreasing, then marginal cost of production must be rising.
Answer: TRUE
Comment: Recurring
Diff: 2 Page Ref: 335-336/335-336
Topic: Marginal Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: None
14) Describe the relationship between marginal cost and average total cost.
Answer: If marginal cost for a given output is below average total cost, average total cost will decrease as output increases but if marginal cost is above average total cost, average total cost will increase as output increases. If marginal cost equals average total cost, average total cost is at its minimum value.
Diff: 2 Page Ref: 337/337
Topic: Marginal Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Relationship between Marginal Cost and Average Cost
15) Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain.
Answer: Yes. As long as the marginal cost is below the average total cost, average total cost will be decreasing.
Diff: 2 Page Ref: 337/337
Topic: Marginal Cost
Objective: LO4: Explain and illustrate the relationship between marginal cost and average total cost.
AACSB: Reflective Thinking
Special Feature: Solved Problem: The Relationship between Marginal Cost and Average Cost
10.5 Graphing Cost Curves
1) Which of the following equations is correct?
A) AVC - ATC = AFC
B) AVC + ATC = AFC
C) AFC + AVC = ATC
D) ATC + AVC = AFC
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Reflective Thinking
Special Feature: None
2) When the average total cost is $16 and the total cost is $800, then the number of units the firm is producing is
A) impossible to determined with the information given.
B) 12,800.
C) 784.
D) 50. Answer: D
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: None
3) Adam spent $10,000 on new equipment for his small business, "Adam's Fitness Studio". Membership at his fitness center is very low and at this rate, Adam needs an additional $12,000 per year to keep his studio open. Which of the following is true?
A) The fixed cost of running the studio is $22,000.
B) The variable cost of running the studio is $22,000.
C) The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000 he'll need to continue operations is a variable cost.
D) The $10,000 Adam spent on equipment is the total cost of starting the business and the $12,000 he'll need to continue operations is a marginal cost.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Reflective Thinking
Special Feature: None
4) The formula for total fixed cost is
A) TFC = TC + TVC
B) TFC = TVC - TC.
C) TFC = TC/TVC
D) TFC = TC - TVC.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Reflective Thinking
Special Feature: None
5) Refer to Figure 10-3. What happens to the average fixed cost of production when the firm increases output from 150 to 200?
A) It remains constant.
B) It rises.
C) It falls.
D) It could rise or fall depending on what happens to total cost.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Skill: Graphing
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: None
6) If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35, what is the firm's average fixed cost at that level of output?
A) $65
B) $50
C) $15
D) It is impossible to determine without additional information.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: None
7) If a firm produces 20 units of output and incurs a total cost of $1,000 and a variable cost is $700, calculate the firm's average fixed cost of production if it expands output to 25 units.
A) $300
B) $15
C) $12
D) It is impossible to determine without additional information.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: None
8) Average variable cost can be calculated using any of the formulas below except
A) TVC/Q.
B) (TC - FC)/Q.
C) Δ(TC - FC)/ΔQ.
D) (TC/Q) - AFC
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Reflective Thinking
Special Feature: None
9) If average total cost is $50 and average fixed cost is $15 when output is 20 units, then the firm's total variable cost at that level of output is
A) $1,000.
B) $700.
C) $300.
D) impossible to determine without additional information.
Answer: B
Comment: Recurring
Diff: 3 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: None
10) Suppose you have just opened a store to sell espresso machines. Both you and a competing store buy this machine from a manufacturer for $130 each. Your competitor who has a store of the same size as yours is currently selling about 10 machines a month at a price of $200 per machine. You expect to sell about 6 machines a month at a price of $220 per machine. If you lower your price, you expect to make a loss. Which of the following could explain why your competitor is able to profitably sell the machine at a lower price although the cost of purchasing the machine is the same for the both of you?
A) The competing store probably has a lower marginal cost of production.
B) The competing store probably has a lower average variable cost of production.
C) The competing store's goal is to maximize revenue and not profit.
D) The competing store probably has a lower average cost because average fixed cost falls as output increases.
Answer: D
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: Economics in YOUR LIFE!: Using Cost Concepts in Your Own Business
11) Refer to Table 10-2. What is the variable cost of production when the firm produces 115 lanterns?
A) $1,556
B) $1,157
C) $956
D) $10.05
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: None
12) Refer to Table 10-2. What is the average total cost of production when the firm produces 120 lanterns?
A) $1,680
B) $72
C) $14
D) $12.3
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: None
13) Refer to Table 10-2. What is the average variable cost per unit of production when the firm produces 90 lanterns?
A) $490
B) $33.67
C) $7.67
D) $5.44
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: None
14) Refer to Table 10-2. What is the marginal cost per unit of production when the firm produces 100 lanterns?
A) $420
B) $32
C) $11.1
D) $8.1
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: None
15) Refer to Figure 10-4. Identify the curves in the diagram.
A) E = average fixed cost curve; F = variable cost curve; G = total cost curve, H = marginal cost curve
B) E = marginal cost curve; F = total cost curve; G = variable cost curve, H = average fixed cost curve
C) E = average fixed cost curve; F = average total cost curve; G = average variable cost curve, H = marginal cost curve
D) E = marginal cost curve; F = average total cost curve; G = average variable cost curve; H = average fixed cost curve.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 338/338
Topic: Cost Curves
Skill: Graphing
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Reflective Thinking
Special Feature: None
16) Refer to Figure 10-4. The vertical difference between curves F and G measures
A) average fixed costs.
B) marginal costs.
C) fixed costs.
D) sunk costs.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Skill: Graphing
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Reflective Thinking
Special Feature: None
17) Refer to Figure 10-4. Curve G approaches curve F because
A) marginal cost is above average variable costs.
B) average fixed cost falls as output rises.
C) fixed cost falls as capacity rises.
D) total cost falls as more and more is produced.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Skill: Graphing
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Reflective Thinking
Special Feature: None
18) Average total cost is equal to average variable cost minus average fixed cost.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Reflective Thinking
Special Feature: None
19) As output increases, average fixed cost gets smaller and smaller.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Reflective Thinking
Special Feature: None
20) As the level of output increases, what happens to the value of average fixed cost, and what happens to the difference between the value of average total cost and average variable cost?
Answer: As the level of output increases, the value of average fixed cost decreases. The same fixed cost is divided by a larger and larger output. The difference between average total cost and average variable cost is average fixed cost, so as is stated above, the value decreases.
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Reflective Thinking
Special Feature: None
21) Suppose the total cost of producing 40,000 flash drives is $120,000, and the fixed cost is $30,000.
a. What is the variable cost?
b. When output is 40,000, what are the average variable cost and the average fixed cost?
c. Assuming the cost curves have the usual shape, is the dollar difference between the average total cost and the average variable cost greater when the output is 40,000 flash drives or when the output is 60,000 flash drives? Explain.
Answer: a. Variable cost = total cost - fixed cost. So, $90,000 = $120,000 - $30,000.
b. AVC = VC/Q = $90,000/40,000 = $2.25. AFC = FC/Q = $30,000/40,000 = $0.75
c. The gap must get smaller as output rises because ATC = AVC + AFC, and AFC falls as output rises. So, the dollar difference between ATC and AVC is greater when the output of flash drives is 40,000.
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: None
22) Explain how the listed events (a-d) would affect the following at Hilton Hotels.
i. Marginal cost
ii. Average variable cost
iii. Average fixed cost
iv. Average total cost
a. Hilton decides on an across-the-board 5 percent increase in executive salaries.
b. Hilton decides to eliminate all print advertising.
c. Hilton signs a new contract with the Culinary Workers Union that requires the company to increase wages for all its kitchen workers.
d. The federal government starts to levy a $5 room tax on all hotel rooms.
Answer: a. Average fixed cost and average total cost will decrease; marginal cost and average variable cost will be unaffected.
c. Average fixed cost and average total cost will increase; marginal cost and average variable cost will be unaffected.
c. Marginal cost, average variable cost and average total cost will increase; average fixed cost will be unaffected.
d. Marginal cost, average variable cost and average total cost will increase; average fixed cost will be unaffected.
Comment: Recurring
Diff: 2 Page Ref: 338/338
Topic: Cost Curves
Objective: LO5: Graph average total cost, average variable cost, average fixed cost, and marginal cost.
AACSB: Analytic Skills
Special Feature: None
10.6 Costs in the Long Run
1) Long-run cost curves are U-shaped because
A) of the law of demand.
B) of the law of diminishing returns.
C) of economies and diseconomies of scale.
D) of the law of supply.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 338-339/338-339
Topic: Long Run Average Cost
Objective: LO6: Understand how firms use the long-run average cost curve in their planning.
AACSB: Reflective Thinking
Special Feature: None
2) If, when a firm doubles all its inputs, its average cost of production decreases, then production displays
A) diminishing returns.
B) economies of scale.
C) diseconomies of scale.
D) declining fixed costs.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 339/339
Topic: Economies of Scale
Objective: LO6: Understand how firms use the long-run average cost curve in their planning.
AACSB: Reflective Thinking
Special Feature: None
3) If production displays economies of scale, the long-run average cost curve is
A) above the short-run average total cost curve.
B) downward-sloping.
C) upward sloping.
D) below the long-run marginal cost curve.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 339/339
Topic: Economies of Scale
Objective: LO6: Understand how firms use the long-run average cost curve in their planning.
AACSB: Reflective Thinking
Special Feature: None
4) Economies of scale exist as a firm increases its size in the long run because of all of the following except
A) the firm can afford more sophisticated technology in production.
B) labor and management can specialize even further in their tasks.
C) as a larger input buyer, the firm can purchase inputs at a lower per unit cost.
D) as a firm expands its production, its profit margin per-unit of output increases.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 339/339
Topic: Economies of Scale
Objective: LO6: Understand how firms use the long-run average cost curve in their planning.
AACSB: Reflective Thinking
Special Feature: None