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Ch.

07 Practice MC
1.

Which of the following is most likely to be an implicit cost for Company X?


A. forgone rent from the building owned and used by Company X
B. rental payments on IBM equipment
C. payments for raw materials purchased from Company Y
D. transportation costs paid to a nearby trucking firm

2.

Implicit and explicit costs are different in that:


A. explicit costs are opportunity costs; implicit costs are not.
B. implicit costs are opportunity costs; explicit costs are not.
C. the latter refer to non-expenditure costs and the former to monetary payments.
D. the former refer to non-expenditure costs and the latter to monetary payments.

3.

Accounting profits equal total revenue minus:


A. total explicit costs.
B. total implicit costs.
C. total economic costs.
D. economic profits.

4.

An explicit cost is:


A. omitted when accounting profits are calculated.
B. a money payment made for resources not owned by the firm itself.
C. an implicit cost to the resource owner who receives that payment.
D. always in excess of a resource's opportunity cost.

5.

Economic profits are calculated by subtracting:


A. explicit costs from total revenue.
B. implicit costs from total revenue.
C. implicit costs from normal profits.
D. explicit and implicit costs from total revenue.
The following is cost information for the Creamy Crisp Donut Company:
Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building = $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's forgone interest on personal funds used to finance the business = $6,000

6.

Refer to the above data. Creamy Crisp's total economic costs are:
A. $286,000.
B. $150,000.
C. $94,000.
D. $156,000.

7.

Refer to the above data. Creamy Crisp's accounting profit is:


A. $150,000.
B. $380,000.
C. $230,000.
D. $294,000.

8.

Refer to the above data. Creamy Crisp's economic profit is:


A. $150,000.
B. $80,000.
C. $230,000.
D. $94,000.

9.

The basic characteristic of the short run is that:


A. barriers to entry prevent new firms from entering the industry.
B. the firm does not have sufficient time to change the size of its plant.
C. the firm does not have sufficient time to cut its rate of output to zero.
D. a firm does not have sufficient time to change the amounts of any of the resources it employs.

10. Which of the following represents a long-run adjustment?


A. a farmer uses an extra dose of fertilizer on his corn crop
B. unable to meet foreign competition, a U.S. watch manufacturer sells one of its branch plants
C. a steel manufacturer cuts back on its purchases of coke and iron ore
D. a supermarket hires four additional clerks
11. Which of the following is a short-run adjustment?
A. A local bakery hires two additional bakers.
B. Six new firms enter the plastics industry.
C. The number of farms in the United States declines by 5 percent.
D. BMW constructs a new assembly plant in South Carolina.
12. To economists, the main difference between the short run and the long run is that:
A. the law of diminishing returns applies in the long run, but not in the short run.
B. in the long run all resources are variable, while in the short run at least one resource is fixed.
C. fixed costs are more important to decision making in the long run than they are in the short run.
D. in the short run all resources are fixed, while in the long run all resources are variable.
13. The basic difference between the short run and the long run is that:
A. all costs are fixed in the short run, but all costs are variable in the long run.
B. the law of diminishing returns applies in the long run, but not in the short run.
C. at least one resource is fixed in the short run, while all resources are variable in the long run.
D. economies of scale may be present in the short run, but not in the long run.
Answer the question on the basis of the following output data for a firm. Assume that the amounts of all

non-labor resources are fixed.


14. Refer to the above data. Diminishing marginal returns become evident with the addition of the:
A. sixth worker.
B. fourth worker.
C. third worker.
D. second worker.
15. Marginal product:
A. diminishes at all levels of production.
B. may initially increase, then diminish, but never become negative.
C. may initially increase, then diminish, and ultimately become negative.
D. is always less than average product.

16. Which of the following is not correct?


A. Where marginal product is greater than average product, average product is rising.
B. Where total product is at a maximum, average product is also at a maximum.
C. Where marginal product is zero, total product is at a maximum.
D. Marginal product becomes negative before average product becomes negative.
17. The total output of a firm will be at a maximum where:
A. MP is at a maximum.
B. AP is at a minimum.
C. MP is zero.
D. AP is at a maximum.

Answer the question on the basis of the following information:


18. Refer to the above data. The marginal product of the fourth worker:
A. is 5.
B. is 7.
C. is 71/2.
D. cannot be calculated from the information given.
19. When total product is increasing at a decreasing rate, marginal product is:
A. positive and increasing.
B. positive and decreasing.
C. constant.
D. negative.
20. Fixed cost is:
A. the cost of producing one more unit of capital, for example, machinery.
B. any cost which does not change when the firm changes its output.
C. average cost multiplied by the firm's output.
D. usually zero in the short run.
21. Which of the following is most likely to be a fixed cost?
A. shipping charges
B. property insurance premiums
C. wages for unskilled labor
D. expenditures for raw materials
22. If you operated a small bakery, which of the following would be a variable cost in the short run?
A. baking ovens
B. interest on business loans
C. annual lease payment for use of the building
D. baking supplies (flour, salt, etc.)
23. Which of the following is correct as it relates to cost curves?
A. Average variable cost intersects marginal cost at the latter's minimum point.
B. Marginal cost intersects average total cost at the latter's minimum point.
C. Average fixed cost intersects marginal cost at the latter's minimum point.
D. Marginal cost intersects average fixed cost at the latter's minimum point.

24. Refer to the above diagram. At output level Q total cost is:
A. 0BEQ.
B. BCDE.
C. 0BEQ plus BCDE.
D. 0AFQ plus BCDE.
25. Other things equal, if the fixed costs of a firm were to increase by $100,000 per year, which of the
following would happen?
A. Marginal costs and average variable costs would both rise.
B. Average fixed costs and average variable costs would rise.
C. Average fixed costs and average total costs would rise.
D. Average fixed costs would rise, but marginal costs would fall.
Answer the question on the basis of the following information:

26. Refer to the above information. Average total cost is:


A.
B.
C.
D.
27. In the short run it is impossible for an expansion of output to increase:
A. average total cost.
B. average fixed cost.
C. marginal cost.
D. average variable cost.
28. The vertical distance between the total cost and the total variable cost curves differs by an amount
which:
A. initially increases, but then decreases, as output increases.
B. is constant as output changes.
C. decreases as output increases.
D. increases as output increases.
29. In the short run:
A. TVC will increase for a time at a diminishing rate, but then beyond some point will increase at an
increasing rate.
B. TVC will increase for a time at an increasing rate, but then beyond some point will increase at a
diminishing rate.
C. TVC will increase by the same absolute amount for each additional unit of output produced.
D. one cannot generalize concerning the behavior of TVC as output increases.

30. Because the marginal product of a variable resource at first increases and then decreases as the output of
the firm is increased:
A. total cost at first increases at a decreasing rate and then increases at an increasing rate.
B. total variable cost at first increases at an increasing rate and then increases at a decreasing rate.
C. average total cost at first increases and then diminishes.
D. average fixed cost will rise beyond the point of diminishing returns.
31. In comparing the changes in TC and TVC associated with an additional unit of output, we find that:
A. the change in TVC is equal to MC, while the change in TC is equal to TFC.
B. the change in TC exceeds the change in TVC.
C. the change in TVC exceeds the change in TC.
D. both are equal to MC.

Answer the question on the basis of the following cost data:


32. Refer to the above data. The total cost of four units of output is:
A. $260.
B. $77.50.
C. $310.
D. $215.
33. Refer to the above data. The marginal cost curve would intersect the average variable cost curve at
about:
A. 2 units of output.
B. 4 units of output.
C. 6 units of output.
D. 7 units of output.
The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs
(TVC) change with output as shown in the accompanying table. Use this information to answer the

following question(s).
34. Refer to the above information. The average fixed cost of 3 units of output is:
A. $13.33.
B. $12.50.
C. $40.
D. $18.50.

35. Refer to the above diagram. If labor is the only variable input, the average product of labor is at a:
A. minimum at point b.
B. maximum at point b.
C. maximum at point a.
D. maximum at point c.
Answer the question on the basis of the accompanying table that shows average total costs (ATC) for a

manufacturing firm whose total fixed costs are $10:


36. Refer to the above data. The marginal cost of the fourth unit of output is:
A. $2.
B. $12.
C. $37.
D. $16.

37. As the firm in the above diagram expands from plant size #3 to plant size #5, it experiences:
A. increasing returns.
B. economies of scale.
C. diseconomies of scale.
D. constant costs.
38. Which of the following is not a source of economies of scale?
A. learning-by-doing.
B. labor specialization.
C. use of larger machines.
D. inelastic resource supply curves.

39. If a firm doubles its output in the long run and its unit costs of production decline, we can conclude
that:
A. technological progress has occurred.
B. economies of scale are being realized.
C. the firm is encountering diminishing returns.
D. diseconomies of scale are being encountered.

40. Refer to the above diagram. For output level Q, per unit costs of C are:
A. unattainable and imply the inefficient use of resources.
B. unattainable, given resource prices and the current state of technology.
C. attainable, but imply the inefficient use of resources.
D. attainable and imply that resources are being combined efficiently.
41. Refer to the above diagram. For output level Q, per unit costs of B are:
A. unattainable and imply the inefficient use of resources.
B. unattainable, given resource prices and the current state of technology.
C. attainable, but imply the inefficient use of resources.
D. attainable and imply least-cost production of this level of output.
42. If an industry's long-run average total cost curve has an extended range of constant returns to scale, this
implies that:
A. technology precludes both economies and diseconomies of scale.
B. the industry will be a natural monopoly.
C. both relatively small and relatively large firms can be viable in the industry.
D. the industry will be comprised of a very large number of small firms.

43. In the above diagram it is assumed that:


A. some costs are fixed and other costs are variable.
B. all costs are variable.
C. the law of diminishing returns determines the shape of the cost curve.
D. marginal product first falls, but ultimately rises as output is increased.

44. Refer to the above diagram. Constant returns to scale:


A. occur over the 0Q1 range of output.
B. occur over the Q1Q3 range of output.
C. begin at output Q3.
D. are in evidence at all output levels.
45. If a firm increases all of its inputs by 10 percent and its output increases by 10 percent, then:
A. it is encountering diseconomies of scale.
B. it is encountering economies of scale.
C. it is encountering constant returns to scale.
D. the marginal products of all inputs are falling.
46. Which of the following types of firms are least likely to have their MC, AVC, and ATC curves affected
by fluctuations in gasoline prices?
A. firms like UPS that use a fleet of gasoline-powered vehicles.
B. taxi cab and limousine companies.
C. companies that operate bus tours to popular vacation destinations.
D. firms like iTunes that distribute their products over the Internet.
47. In which of the following industries are economies of scale exhausted at relatively low levels of output?
A.
B.
C.
D.

aircraft production
automobile manufacturing
concrete mixing
newspaper printing

48. Daily newspapers have been rising in price in recent years because:
A. wages in the newspaper industry have risen dramatically.
B. the overhead costs have recently been spread over a shrinking number of buyers.
C. capital has replaced virtually all labor used to produce a newspaper.
D. long-standing government subsidizes have been removed in most major cities.
49. (Consider This) In order to apply the concept of diminishing returns to study time:
A. the amount of study time available must be held constant.
B. study time must be considered a long-run production process.
C. all inputs to the learning process must be allowed to vary.
D. all inputs to the learning process except for study time must be assumed to be fixed.
50. (Last Word) A cost that cannot be partly or fully recovered through any subsequent action is known as
a:
A. variable cost.
B. fixed cost.
C. marginal cost.
D. sunk cost.

Ch. 07 Practice MC Key


1. A
2. D
3. A
4. B
5. D
6. A
7. C
8. D
9. B
10. B
11. A
12. B
13. C
14. C
15. C
16. B
17. C
18. A
19. B
20. B
21. B
22. D
23. B
24. C
25. C
26. D
27. B
28. B
29. A
30. A
31. D
32. C
33. B
34. A
35. B
36. C

37. C
38. D
39. B
40. C
41. D
42. C
43. B
44. B
45. C
46. D
47. C
48. B
49. D
50. D

Ch. 07 Practice MC Summary


Category
AACSB: Analytic
AACSB: Reflective Thinking
Blooms: Level 1 Remember
Blooms: Level 2 Understand
Blooms: Level 3 Apply
Difficulty: 1 Easy
Difficulty: 2 Medium
Learning Objective: 0701 Explain why economic costs include both explicit (revealed and expressed) costs and implicit (present but not obvious) costs.
Learning Objective: 07-02 Relate the law of diminishing returns to a firms short-run production costs.
Learning Objective: 0703 Describe the distinctions between fixed and variable costs and among total; average; and marginal costs.
Learning Objective: 07-04 Use economies of scale to link a firms size and its average costs in the long run.
McConnell - Chapter 07
Status: New
Topic: Economic costs
Topic: Long-run production costs
Topic: Profits
Topic: Short run and long run
Topic: Short-run production costs
Topic: Short-run production relationships
Type: Graph
Type: Table

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