Besanko & Braeutigam Microeconomics, 4th editionTest Bank

File: ch08, Chapter 8: Cost Curves

Multiple Choice

" long#run total cost curve a$ al%a&s has a constant slope! '$ is al%a&s up%ard sloping! c$ never has a constant slope! d$ is al%a&s do%n%ard sloping!

"ns: B (! The cost o) producing a good in a single#product )irm is e$ additional cost )$ stand#alone cost g$ varia'le cost h$ average cost

"ns: B *! "n indivisi'le input is i$ an input that cannot 'e seen '& the naked e&e! +$ an important input that the )irm cannot identi)&! k$ an input that can onl& 'e o'tained in a certain minimum si,e! l$ an input the )irm cannot stop using!

"ns: C 4! " )irm-s long#run average cost curve is comprised o) m$ the minimum points o) each o) the )irm-s short#run average cost curves! n$ the lo%er envelope o) the )irm-s short#run average cost curves! o$ the minimum points o) each o) the )irm-s short#run marginal cost curves! p$ the series o) points %here the short#run marginal cost curves intersect the short# run average cost curves!

"ns: B .! /hen average cost is 0u#shaped1 2neither al%a&s rising or al%a&s )alling$, the marginal cost curve %ill 3$ cross through 2'isect$ the average cost curve at its ma4imum! r$ not intersect %ith the average cost curve at all! s$ 'e a )i4ed distance a'ove the average cost curve!

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t$ "ns: 9 :!

cross through 2'isect$ the average cost curve at its minimum!

The long#run total cost curve sho%s u$ the various com'inations o) capital and la'or that %ill produce di))erent levels o) output at the same cost! v$ the various com'inations o) capital and la'or that %ill produce the same level o) output! %$ the minimum total cost to produce an& level o) output, holding input prices )i4ed, and choosing all inputs to minimi,e cost! 4$ )or a )i4ed level o) capital, the minimum cost to produce a given level o) output! " long#run total cost curve &$ must 'e e3ual to ,ero %hen the level o) output is ,ero! ,$ ma& 'e greater than or e3ual to ,ero %hen the level o) output is ,ero! aa$ must 'e decreasing %hen the level o) output is ,ero! ''$ %ill 'e e3ual to )i4ed cost, %hich is greater than ,ero, %hen the level o) output is ,ero! 7uppose )or a particular production )unction, the cost#minimi,ing level o) la'or is L = (Q and the cost#minimi,ing level o) capital is K = .Q ! 8) w = . and r = ( , the long#run total cost curve is TC = ;Q cc$ TC = ; dd$ TC = (0Q ee$ TC = (0 ))$

;!

8!

"ns: C <! 7uppose )or a particular production )unction, the cost#minimi,ing levels o) la'or and capital are Q r Q w L= K= 0 w 0 r 8) r = . and w = (0 , %hat is the e3uation )or long#run total cost= (Q gg$ . ( Q hh$ 0 (Q ii$ 4Q ++$

"ns: C

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/hich o) the )ollo%ing is not an accurate speci)ication o) a )irm-s long#run total cost curve= FC stands )or )i4ed cost, >C stands )or varia'le cost, and "C stands )or average cost, 'elo%! TC = FC + VC , %here FC ? 0 kk$ ll$ TC=FC + VC, %here FC @ 0 mm$ TC = wL + rK , %here L and K are chosen to minimi,e cost, and w and r are input prices! nn) TC = AC x Q

"ns: " ! 7uppose that a )irm-s production )unction can 'e speci)ied as Q = 0 KL ! /hich o) the )ollo%ing accuratel& descri'es this )irm-s long run total cost )unction= Q oo$ 0K Q pp$ 0L 33$ ( rwQ 0 rr$

0Q

rw

(!

"ssume that capital is measured along the vertical a4is, and la'or is measured along the hori,ontal a4is! The )irm has an initial isocost line called TC ! Ao% suppose that the price o) la'or dou'les, and the price o) capital )alls '& one#hal)! /hich statement accuratel& descri'es the movement o) the isocost line )rom TC to TC( = ss$ The slope o) the isocost line 'ecomes )latter! tt$ The slope o) the isocost line 'ecomes steeper! uu$ The slope o) the isocost line is unchanged! vv$ /e cannot determine %hether the slope 'ecomes )latter or steeper!

"ns: B *! The long#run total cost curve tends to %%$ rotate up%ard %hen input prices )all! 44$ rotate up%ard %hen input prices rise! &&$ shi)t verticall& up%ard '& a )i4ed amount! ,,$ shi)t verticall& do%n%ard '& a )i4ed amount!

"ns: B

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4!

"ssume that capital is measured along the vertical a4is, and la'or is measured along the hori,ontal a4is! The )irm has an initial isocost line called TC ! Ao% suppose that the price o) la'or tre'les and the price o) capital also tre'les! /hich statement accuratel& descri'es the movement o) the isocost line )rom TC to TC( = aaa$ The slope o) the isocost line 'ecomes )latter! '''$ The slope o) the isocost line 'ecomes steeper! ccc$ The slope o) the isocost line is unchanged! ddd$ /e cannot determine %hether the slope 'ecomes )latter or steeper! /hen the price o) all inputs increase '& the same percentage, eee$ the )irm-s total cost curve %ill rotate up%ard '& a higher percentage i) the )irm-s production technolog& e4hi'its decreasing returns to scale! )))$ the )irm-s total cost curve %ill rotate up%ard '& the same percentage! ggg$ the )irm-s total cost curve %ill rotate up%ard '& a higher percentage i) the )irm-s production technolog& e4hi'its increasing returns to scale! hhh$ the )irm-s total cost curve %ill remain unchanged since the cost#minimi,ing com'ination o) inputs is unchanged!

.!

"ns: B :! The output elasticit& o) total cost is de)ined as iii$ the percentage change in output per one percent change in total cost! +++$ the percentage change in total cost per one percent change in output! kkk$ output divided '& total cost! lll$ total cost divided '& output! "n increase in the price o) one input mmm$ %ill al%a&s rotate the long#run total cost curve up%ard! nnn$ ma& rotate the long#run total cost curve up%ard or ma& leave the long#run total cost unchanged! ooo$ could actuall& rotate the long#run total cost do%n%ard! ppp$ %ill have no e))ect on the long#run total cost curve as long as long as the )irm is using positive amounts o) 'oth inputs!

;!

"ns: B 8! Cost driver is 333$ a mathematical relationship that sho%s ho% total costs var& %ith the )actors that in)luence total costs rrr$ a )actor that in)luences or 0drives1 total or average costs sss$ a )actor that in)luences 3ualit& o) output and prices o) inputs ttt$ a cost level!

"ns: B

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/hen the prices o) all inputs increase '& a proportionate amount, uuu$ the )irm-s total cost curve %ill remain unchanged since the cost#minimi,ing com'ination o) inputs is unchanged! vvv$ the )irm-s total cost curve ma& rotate up%ard or ma& leave the long#run total cost curve unchanged! %%%$ %ill al%a&s rotate the long#run total cost curve up%ard! 444$ could actuall& rotate the long#run total cost do%n%ard i) the )irm chooses to produce a lo%er level o) output!

"ns: C (0! 8denti)& the truth)ulness o) the )ollo%ing statements! 8! Marginal cost can 'e measured as the slope o) the total cost curve! 88! "verage total cost can 'e measured as the slope o) the ra& )rom the origin to the total cost curve! &&&$ Both 8 and 88 are true! ,,,$ Both 8 and 88 are )alse! aaaa$ 8 is trueB 88 is )alse! ''''$ 8 is )alseB 88 is true!

"ns: " ( ! The relationship 'et%een the long#run total cost curve and the marginal and average cost curves is 'est descri'ed '& %hich o) the )ollo%ing statements= cccc$ The slope o) the total cost curve )rom the origin to a point on the total cost curve is ho% &ou derive the marginal cost curve %hile the average cost is given '& TCCD! dddd$ Marginal cost is MCCD %hile average cost is TCCD! eeee$ Marginal cost is derived '& dividing total cost '& a constant as is average cost! ))))$ The slope o) the total cost curve at each point is ho% &ou derive the marginal cost curve %hile the slope )rom the origin to a point on the total cost curve is ho% &ou derive the average cost curve!

"ns: 9 ((! 7uppose that a )irm-s long#run total cost curve can 'e e4pressed as TC = 0Q ( + (0Q ! This )irm-s long#run average total cost curve can 'e e4pressed as gggg$ AC = (0Q + (0 ! hhhh$ AC = 0Q + (0 ! AC = 0 + (0Q ! iiii$ AC = 0Q ( ! ++++$

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For a )irm, let total cost 'e TC(Q) = 160+10Q2 and marginal cost 'e MC(Q) = 20Q. /hat is the minimum e))icient scale )or this )irm= kkkk$ 0 llll$ ( mmmm$ 4 nnnn$ indeterminate 7uppose that a )irm-s total costs o) production are 0 at an output o) ,ero, 0 at an output o) , (0 at an output o) ( units, *0 at an output o) three units, *. at an output o) )our units and *; at an output o) )ive units! "t %hich num'er o) units are marginal and average costs e3ual= oooo$ The )irst unit! pppp$ The )i)th unit! 3333$ The third unit! rrrr$ "t the )irst, second and third units! For a )irm, let total cost 'e TC(Q) = 10Q2 and marginal cost 'e MC(Q) = 20Q. /hich o) the )ollo%ing is an e4pression )or the output elasticit& o) total cost= ssss) TC,Q = 10Q. tttt$ TC,Q = 2Q! uuuu$ TC,Q = 2! vvvv$ TC,Q = 20Q! 7uppose that a )irm-s total costs o) production are 0 at an output o) ,ero, 0 at an output o) , (0 at an output o) ( units, *0 at an output o) three units, *. at an output o) )our units and *; at an output o) )ive units! "t %hich num'er o) units is average cost minimi,ed= %%%%$ The )irst unit! 4444$ The )i)th unit! &&&&$ The third unit! ,,,,$ "t the )irst, second and third units!

(4!

(.!

(:!

"ns: B (;! 7uppose that a )irm-s long#run total cost curve can 'e e4pressed as TC 2Q$ = 00Q ! This )irm-s long#run marginal cost curve can 'e e4pressed as aaaaa$ MC = 00 ! '''''$ MC = 00Q ! ccccc$ MC = 00Q ( ! ddddd$ MC = 0 !

"ns: "

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8denti)& the truth)ulness o) the )ollo%ing statements! 8! /hen marginal cost is rising, average total cost is rising! 88! /hen marginal cost is 'elo% average total cost, average total cost is )alling! eeeee$ Both 8 and 88 are true! )))))$ Both 8 and 88 are )alse! ggggg$ 8 is trueB 88 is )alse! hhhhh$ 8 is )alseB 88 is true!

"ns: 9 (<! 8) average cost is constant )or all levels o) output, iiiii$ the marginal cost curve %ill intersect the average cost at a single point, the minimum o) average cost! +++++$ marginal cost %ill 'e e3ual to average cost )or all levels o) output! kkkkk$ marginal cost %ill 'e a'ove average cost %hen average cost is increasing and marginal cost %ill 'e 'elo% average cost %hen average cost is decreasing! lllll$ marginal cost %ill have a region o) diminishing marginal cost!

"ns: B *0! Marginal cost mmmmm$ is e3ual to average cost at the minimum point o) the marginal cost curve! nnnnn$ is e3ual to average cost at the ma4imum point o) the average cost curve! ooooo$ is decreasing %henever average cost is decreasing! ppppp$ is e3ual to average cost at the minimum point o) the average cost curve! /hen the production )unction is given '& D ? E, %hich o) the )ollo%ing statements is true= 33333$ TC ? %D(, E ? D( and "C ? % rrrrr$ TC ? % # D, E ? D and "C ? % sssss$ TC ? %D, E ? D and "C ? % ttttt$ TC ? %D, E ? D and "C ? E

* !

*(!

7uppose a )irm-s total cost curve is given '& the e3uation TC = Q ( + (Q + 00 ! The )irm-s marginal cost is MC = (Q + ( ! "t %hat level o) Q does the )irm-s average cost curve reach a minimum= uuuuu$ 00 vvvvv$ ( %%%%%$ 0 44444$ (0

"ns: C

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**!

7uppose a )irm produces .0,000 units o) output, and determines that its marginal cost is F0!;( and its average total cost is F0!;(! At this !antit" o# o!t$!t, %hat is the slope o) this )irm-s long run average total cost curve= &&&&&$ Gp%ard#sloping! ,,,,,$ 9o%n%ard#sloping! aaaaaa$Hori,ontal! ''''''$ >ertical!

"ns: C *4! Marginal cost is cccccc$the cost per unit o) output! dddddd$ the increase in total cost )rom producing an additional unit o) output! eeeeee$the same thing as total varia'le cost! ))))))$ is onl& relevant in the long#run! " )irm notices that %hen it increases output 'e&ond an initial level Q , average total cost decreases! For this )irm, the region o) output 'e&ond Q is characteri,ed '& gggggg$ economies o) scale! hhhhhh$ diseconomies o) scale! iiiiii$ constant economies o) scale! ++++++$ the minimum e))icient scale!

*.!

"ns: " *:! /hich o) the )ollo%ing )actors %a" e4plain diseconomies o) scale= kkkkkk$ 8ncreasing returns to scale o) inputs! llllll$ 7peciali,ation o) la'or! mmmmmm$ 8ndivisi'le inputs! nnnnnn$ Managerial diseconomies!

"ns: 9 *;! The output elasticit& o) total cost is e3ual to oooooo$ the slope o) the isocost line! pppppp$ the ratio o) marginal cost to average cost! 333333$ the ratio o) average cost to marginal cost! rrrrrr$ the ratio o) average cost to total cost!

"ns: B

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*8!

/hen the output elasticit& o) total cost is less than one, ssssss$ Marginal cost is less than average cost and average cost decreases as D increases! tttttt$ Marginal cost is less than average cost and average cost increases as D increases! uuuuuu$ Marginal cost is greater than average cost and average cost decreases as D increases! vvvvvv$ Marginal cost is greater than average cost and average cost increases as D increases!

"ns: " *<! Minimum e))icient scale is %%%%%%$ the lo%est level o) e))icienc& the )irm can achieve! 444444$ the highest level o) output the )irm can achieve! &&&&&&$ the lo%est level o) long#run average cost! ,,,,,,$the smallest 3uantit& at %hich the long#run average cost achieves a minimum!

"ns: 9 40! Iconomies o) scale e4ist %hen )irms have aaaaaaa$ increasing returns to scale! '''''''$ constant returns to scale! ccccccc$ decreasing returns to scale! ddddddd$ constant marginal cost! 7uppose a )irm-s production )unction can 'e speci)ied as Q = 10KL! This )irm-s cost )unction e4hi'its eeeeeee$ economies o) scale )))))))$ diseconomies o) scale ggggggg$ neither diseconomies nor economies o) scale! hhhhhhh$ economies o) scale )or output levels less than some level, Q1= 1&', and diseconomies o) scale therea)ter! 7uppose a )irm-s total cost curve can 'e %ritten TC(Q) = Q ( .)Q2 + Q*, %ith marginal cost MC(Q) = 1 + Q + *Q2. This cost )unction e4hi'its: iiiiiii$ economies o) scale +++++++$ diseconomies o) scale kkkkkkk$ neither diseconomies nor economies o) scale! lllllll$ economies o) scale )or output levels less than some level, Q1 = 1&', and diseconomies o) scale therea)ter!

4 !

4(!

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4*!

7uppose the output elasticit& o) total cost is !.! This implies the average cost curve e4hi'its mmmmmmm$ increasing returns to scale! nnnnnnn$ economies o) scale! ooooooo$ neither economies nor diseconomies o) scale! ppppppp$ diseconomies o) scale!

"ns: 9 44! 8) the output elasticit& o) total cost is less than one, then the long#run average cost curve e4periences 3333333$ economies o) scale! rrrrrrr$ diseconomies o) scale! sssssss$ decreasing returns to scale! ttttttt$ the minimum e))icient scale!

"ns: " 4.! 9iseconomies o) scale e4ist %hen uuuuuuu$ the )irm-s total cost )alls as the level o) output increases! vvvvvvv$ the )irm-s total cost increases as the level o) output increases! %%%%%%%$ the )irm-s average cost decreases as the level o) output decreases! 4444444$ the )irm-s average cost decreases as the level o) output increases!

"ns: C 4:! /hich o) the )ollo%ing )actors wo!,d not e4plain economies o) scale= &&&&&&&$ 8ncreasing returns to scale o) inputs! ,,,,,,,$ 7peciali,ation o) la'or! aaaaaaaa$ 8ndivisi'le inputs! ''''''''$ Managerial diseconomies

"ns: 9 4;! 7uppose a )irm-s production technolog& e4hi'its constant returns to scale! The )irm-s long#run a-.ra/. cost curve %ill cccccccc$ 'e G#shaped dddddddd$ e4hi'it economies o) scale! eeeeeeee$ e4hi'it diseconomies o) scale! ))))))))$ 'e a hori,ontal straight line!

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48!

The short#run total cost curve is the sum o) t%o components gggggggg$ 7hort#run and long#run hhhhhhhh$ Total varia'le cost curve and total )i4ed cost curve iiiiiiii$ "verage cost curve and marginal cost curve ++++++++$ Iconomies o) scale and economies o) scope The short#run total cost curve kkkkkkkk$ sho%s the minimi,ed total cost o) producing a given 3uantit& o) output! llllllll$ sho%s the outputs that correspond to minimi,ed total cost %hen at least one input is )i4ed! mmmmmmmm$ sho%s the minimi,ed total cost o) producing a given 3uantit& o) output %hen at least one input is )i4ed! nnnnnnnn$ sho%s the minimi,ed total cost o) producing a given 3uantit& o) output %hen all inputs are )i4ed!

4<!

.0!

7uppose Q = KL in the short#run! The )irm-s short#run )i4ed cost curve is oooooooo$ pppppppp$ 33333333$ rrrrrrrr$

0FC = 0FC =

Q( K wQ ( K

+rK

0FC = wQ
0FC = r K

. !

7uppose Q = KL in the short#run! The )irm-s short#run total cost curve is ssssssss$ tttttttt$ 0TC = uuuuuuuu$ vvvvvvvv$ 0TC = Q( K

wK + rK Q 0TC = Q ( + K 0TC = wQ ( + rK K

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7uppose a )irm-s short run total cost curve can 'e e4pressed as 0 TC 2Q$ = .0Q + 0 ! This )irm-s short#run average total cost curve can 'e e4pressed as .0 + 0 ! %%%%%%%%$ Q .0Q ! 44444444$ &&&&&&&&$ .0! ,,,,,,,,$ 0!

.*!

7uppose Q = KL in the short#run! The )irm-s short#run varia'le cost curve is aaaaaaaaa$ '''''''''$ ccccccccc$ ddddddddd$

0FC = 0FC =

Q( K wQ ( K

+rK

0FC = wQ
0FC = r K

"ns: C .4! 7uppose a )irm-s short run total cost curve can 'e e4pressed as 0 TC 2Q$ = .0Q + 0 ! This )irm-s short#run marginal cost can 'e e4pressed as .0 + 0 ! eeeeeeeee$ Q .0Q ! )))))))))$ ggggggggg$ .0! hhhhhhhhh$ 0! 7uppose 0TC(Q) = 2Q + 20! 7hort run marginal cost is iiiiiiiii$ indeterminate, since %e don-t kno% the level o) Q ! +++++++++$ (( kkkkkkkkk$ (0 lllllllll$ (

..!

"ns: 9 .:! Iconomies o) JJJJJJ occur %hen a single )irm can produce t%o products together )or a lo%er total cost than t%o )irms could produce those same products separatel&, one at each )irm! mmmmmmmmm$ scale!

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nnnnnnnnn$ ooooooooo$ ppppppppp$ .;!

scope! e))icienc&! output!

Iconomies o) scope 333333333$ are related to the average cost o) producing a good %hen &ou dou'le the scale o) output! rrrrrrrrr$ are higher the more speciali,ed a )irm is in production! sssssssss$ means the rotation o) the long#run total cost curve in a do%n%ard direction! ttttttttt$ are a production characteristic in %hich the total cost o) producing given 3uantities o) t%o goods in the same )irm is less than the total cost o) producing those 3uantities in t%o single#product )irm!

"ns: 9 .8! The e4perience curve 2also called the learning curve$ sho%s the relationship 'et%een uuuuuuuuu$ average total cost and output! vvvvvvvvv$ average varia'le cost and returns to scale! %%%%%%%%%$ output and marginal cost! 444444444$ average varia'le cost and cumulative production volume! The percentage change in average varia'le cost )or ever& cumulative volume is re)erred to as &&&&&&&&&$ e4perience elasticit& ,,,,,,,,,$ e4perience curve aaaaaaaaaa$ e4perience output ''''''''''$ e4perience slope percent increase in

.<!

"ns: " :0! Iconomies o) e4perience are e4hi'ited %hen cccccccccc$ it takes a pro)essor a smaller 3uantit& o) time to prepare a lesson )or a ne% class than )or the )irst class he taught! dddddddddd$ an older pro)essor is more intelligent than a &ounger pro)essor! eeeeeeeeee$ a pro)essor goes into 'usiness as a consultant! ))))))))))$ a pro)essor reaches age :. and 'egins to get a senior citi,en discount!

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: !

Eet the average varia'le cost o) production 'e F(0 %hen 0 units are produced in the )irst &ear! 8n the second &ear, a)ter the second 0 units have 'een produced, the average varia'le cost o) production is F (! The slope o) the e4perience curve )or this )irm is: gggggggggg$ 8.K hhhhhhhhhh$ :0K iiiiiiiiii$ ;.K ++++++++++$ (K

"ns: B :(! 8denti)& the truth)ulness o) the )ollo%ing statements! 8! Iconomies o) I4perience impl& that Iconomies o) 7cale must e4ist! 88! Iconomies o) 7cale impl& that Iconomies o) I4perience must e4ist! kkkkkkkkkk$ Both 8 and 88 are true! llllllllll$ Both 8 and 88 are )alse! mmmmmmmmmm$ 8 is trueB 88 is )alse! nnnnnnnnnn$ 8 is )alseB 88 is true!

"ns: B :*! " production process that involves t%o inputs, capital and la'or, the constant elasticit& long#run total cost )unction de)ined in linear relationship using logarithms is oooooooooo$ log TC ? log a L 1 log Q L 2 log w L d log r pppppppppp$ log T ? log t L 2 log Q L a log w L ' log r 3333333333$ T ? log t L 2 log Q L a log w L ' log r rrrrrrrrrr$ T ? t L 2Q L aw L 'r

"ns: " :4! Eet a )irm-s long run total cost 'e descri'ed '& the constant elasticit& total cost )unction! The coe))icient o) the log o) output in this )unction is interpreted as the ssssssssss$ average cost! tttttttttt$ marginal cost! uuuuuuuuuu$ output elasticit& o) total cost! vvvvvvvvvv$ cost driver!

"ns: C :.! Eet a )irm-s long run total cost 'e descri'ed '& the constant elasticit& total cost )unction! The coe))icients o) the log o) the %age and the log o) capital in this )unction should %%%%%%%%%%$ add up to one! 4444444444$ 'e negative! &&&&&&&&&&$ 'e o) opposite sign! ,,,,,,,,,,$ o) indeterminate sign!

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"ns: " ::! The )ollo%ing is not a propert& o) the translog cost )unction: aaaaaaaaaaa$ The constant elasticit& cost )unction is a special case o) it! '''''''''''$ The average cost ma& 'e G#shaped! ccccccccccc$ 8t is a good appro4imation )or almost an& production )unction! ddddddddddd$ 8t onl& applies to long run total costs!

"ns: 9 :;! The e3uation o) translog cost )unction is eeeeeeeeeee$ !

)))))))))))$

ggggggggggg$

hhhhhhhhhhh$ T ? t L 2Q L aw L 'r "ns: " :8! " constant elasticit& cost )unction iiiiiiiiiii$ takes a )orm such as TC = a Q1 w2 rd and is use)ul in empirical %ork 'ecause it can 'e converted into a linear )orm using logarithms! +++++++++++$ takes a )orm such as TC = wL + rK , %here L and K are chosen to minimi,e cost, and w and r are input prices! kkkkkkkkkkk$ takes a )orm such as TC = a Q2 + KL. lllllllllll$ is given '& TC = AC x Q.

"ns: "

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