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Chapter 7 The Cost of Production 7.

7. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the fixed
cost?
1. Which of the following statements is true regarding the differences between economic and accounting costs?
a. 200
a. Accounting costs include all implicit and explicit costs.
b. 5Q
b. Economic costs include implied costs only.
c. 5
c. Accountants consider only implicit costs when calculating costs.
d. 5 + (200/Q)
d. Accounting costs include only explicit costs.
8. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the marginal
2. In order for a taxicab to be operated in New York City, it must have a medallion on its hood. Medallions are
cost?
expensive, but can be resold, and are therefore an example of
a. 200
a. a fixed cost.
b. 5Q
b. a variable cost.
c. 5
c. an implicit cost.
d. 5 + (200/Q)
d. an opportunity cost.
9. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average
e. a sunk cost.
total cost?
3. Prospective sunk costs
a. 500
a. are relevant to economic decision-making.
b. 5Q
b. are considered as investment decisions.
c. 5
c. rise as output rises.
d. 5 + (200/Q)
d. do not occur when output equals zero.
10. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average
4. Incremental cost is the same concept as ______________ cost.
fixed cost?
a. average
a. 500
b. marginal
b. 5Q
c. fixed
c. 5
d. variable
d. none of the above
5. Which of the following costs always declines as output increases?
11. An isocost line reveals the
a. average cost
a. costs of inputs needed to produce along an isoquant.
b. marginal cost
b. costs of inputs needed to produce along an expansion path.
c. fixed cost
c. input combinations that can be purchased with a given outlay of funds.
d. average fixed cost
d. output combinations that can be produced with a given outlay of funds.
e. average variable cost
12. Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the
6. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the variable
vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the
cost?
slope of the isocost curve will be
a. 200
a. 500.
b. 5Q
b. 25/500.
c. 5
c. -4/5.
d. 5 + (200/Q)
d. 25/20 or 1/4.
e. none of the above
13. Which of the following is NOT an expression for the cost minimizing combination of inputs? 19. Cost-output elasticity can be written and calculated as

a. MRTS = MPL /MPK. a. MC/AC.


b. MPL/w = MPK/r. b. AC/MC
c. MRTS = w/r. c. (AC)(MC)
d. MPL/MPK = w/r. d. (AC)2(MC)
14. When an isocost line is just tangent to an isoquant, we know that e. (AC)(MC)2.
20. When there are economies of scale,
a. output is being produced at minimum cost.
b. output is not being produced at minimum cost. a. MC > AC, so cost-output elasticity is greater than AC.
c. the two products are being produced at the least input cost to the firm. b. MC < AC, so cost-output elasticity is less than AC.
d. the two products are being produced at the highest input cost to the firm. c. MC < AC, so cost-output elasticity is greater than 1.
15. Suppose that the price of labor ( PL ) is $10 and the price of capital ( PK ) is $20. What is the equation of the d. MC < AC, so cost-output elasticity is less than 1.
isocost line corresponding to a total cost of $100? 21. Generally, economies of scope are present when

a. PL + 20PK a. economies of scale are present in the production of two or more goods.
b. 100 = 10L + 20K b. economies of scale are constant in the joint production of two products.
c. 100 = 30(L+K) c. joint output is less from a single firm than could be achieved from two different firms each
d. 100  30 PL  PK producing a single product (assuming equivalent production inputs in both situations).
e. none of the above d. joint output is greater from a single firm producing two goods than could be achieved by two
16. A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The different firms each producing a single product (assuming equivalent production inputs in
marginal product of labor is 3, and the marginal product of capital is 5. The firm both situations).
22. Economies of scope refer to
a. is producing its current output level at the minimum cost.
b. could reduce the cost of producing its current output level by employing more capital and less a. changes in technology.
labor. b. the very long run.
c. could reduce the cost of producing its current output level by employing more labor and less c. multiproduct firms.
capital. d. single product firms that utilize multiple plants.
d. could increase its output at no extra cost by employing more capital and less labor. 23. Two firms, each producing different goods, can achieve a greater output than one firm producing both goods with
17. Assume that a firm's production process is subject to increasing returns to scale over a broad range of outputs. the same inputs. We can conclude that the production process involves
Long run average costs over this output will tend to
a. diseconomies of scope.
a. increase. b. economies of scale.
b. decline. c. decreasing returns to scale.
c. remain constant. d. increasing returns to scale.
d. fall to a minimum and then rise. e.
18. The cost-output elasticity is used to measure:

a. economies of scope.
b. economies of scale.
c. the curvature in the fixed cost curve.
d. steepness of the production function.