Chapter 13

True/False
Indicate whether the statement is true or false.

____ 1. The cost of capital includes both any interest payments in loans as well as any forgone interest on savings
used to finance the business.

____ 2. The fact that many decisions are fixed in the short run but variable in the long run has an impact on the firm’s
cost curves.

____ 3. If the total cost curve becomes flatter as output increases, then this reveals diminishing marginal product.

____ 4. Even if a firm was to produce nothing, it still incurs some variable costs in the short-run.

____ 5. Average variable cost is equal to the quantity of output divided by the total variable cost.

____ 6. The average total cost curve is unaffected by diminishing marginal product.

____ 7. If a firm incurs fixed costs the average variable cost curve will always lie below the average total cost curve.

____ 8. The use of specialisation to achieve economies of scale is one reason modern societies are as prosperous as
they are.

____ 9. Average total cost reveals how much total cost will change as the firm alters its level of production.

____ 10. Cost of capital can also be seen as implicit costs.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Economists normally assume that a firm would?

(i) sell a higher output if this would increase revenue
(ii) sell a lower output and collect less revenue, if this would increase profit
(iii) sell a higher output and incur more costs, if this would increase profit
A. (i) and (ii)
B. (i) and (iii)
C. (ii) and (iii)
D. none of the above
____ 2. Opportunity costs are comprised of:
A. explicit costs
B. implicit costs
C. forgone income
D. all of the above
____ 3. Mosti, a materials engineer, has discovered a groundbreaking new way to make recycled plastic stronger. He
is looking to exploit this discovery by starting up his own business at a cost of $500 000. Unfortunately Mosti
has only $200 000 in savings and must borrow the other $300 000. If the interest rate is 10%, then what,
according to an economist, is the opportunity cost of starting up the business?
A. $500,000 per annum
B. $50,000 per annum
C. $30,000 per annum
D. $20,000 per annum
____ 4. Mike just finished designing a new coffee cup for his manufacturing business and is considering if the new
cup will be profitable to manufacture. When calculating total costs involved in manufacturing this new coffee
cup, which of the following should not be considered?
A. employee wages
B. foregone rental income on the manufacturing equipment used
C. the cost of designing the new coffee cup
D. the cost of cardboard used to make the cups
____ 5. An important implicit cost of almost every business is the:
A. cost of accounting services
B. cost of compliance with government regulation
C. opportunity cost of financial capital that has been invested in the business
D. cost of debt
____ 6. Which of the following costs do not vary with the amount of output a firm produces?
A. marginal costs and average fixed costs
B. total fixed costs
C. average fixed costs
D. total fixed costs and average fixed costs
____ 7. A sawmill processes logs into timber. Identify the costs below that are an example of a fixed cost.
(i) rent paid on the factory
(ii) maintenance of the trucks used for transport of logs
(iii) wages of the workers
A. (i) only
B. (i) and (ii)
C. (ii) and (iii)
D. (i), (ii) and (iii)
____ 8. Average fixed cost will:
A. always decline when production increases
B. will be constant for all production levels
C. will increase as production increases
D. we cannot say without more information
____ 9. Diminishing marginal product suggests that:
A. marginal cost is downward-sloping
B. additional units of output are more expensive
C. the firm is at full capacity
D. all of the above are true
____ 10. At low output levels a firm’s average total cost tends to be high because:
A. marginal costs are increasing
B. variable costs are spread over only a few units of output
 C. average fixed cost is large
D. there is a shortage of experienced workers
____ 11. The marginal cost curve will intersect:
A. average variable cost at its minimum
B. average fixed cost at its minimum
C. average total cost at its minimum
D. both the average variable cost and the average total costs at their minimums

Graph 13-5

The set of curves above reflect information about the cost structure of a firm. Use this graph to answer the
following question(s).

____ 12. Refer to Graph 13-5. This particular firm is necessarily experiencing increasing marginal product when curve:
A. A is falling
B. B is falling
C. C is falling
D. D is falling

Graph 13-6
 This graph depicts average total cost functions for a firm that produces automobiles. Use the graph to answer
the following question(s).

____ 13. Refer to Graph 13-6. Which of the curves is most likely to characterise the short-run average total cost curve
of the biggest factory?
A. ATCA
B. ATCB
C. ATCC
D. ATCD
____ 14. If a firm wants to capitalise on economies of scale, it may be able to do so by:
A. giving its employees a limited task that they can master
B. employing a larger number of workers
C. producing a larger quantity of output
D. doing all of the above

Table 13-3
Consider the following firm which makes high-performance racing bicycles. All costs are given in dollars.
Output is shown on a monthly basis. The firm’s fixed costs include a rent of $800 and a lease cost of $400 per
month.
____ 15. Refer to Table 13-3. What is the marginal cost of producing the tenth bicycle in a given month?
A. $300
B. $304
C. $321
D. $340
Chapter 14

True/False
Indicate whether the statement is true or false.

____ 1. In a competitive market, firms that increase prices experience increases in sales.

____ 2. In a competitive market, individual buyers and sellers have little ability to influence price.

____ 3. In a competitive market, marginal revenue will only sometimes equal average revenue.

____ 4. One of the important characteristics of a perfectly competitive market is that there are many buyers and
sellers.

____ 5. To maximise profit, a firm should operate at the minimum of average total cost.

____ 6. In the long run, a competitive market with 1000 identical firms will experience an equilibrium price equal to
the minimum of each firm’s average total cost.

____ 7. Marginal adjustments to production end when firms in competitive markets experience a price equal to
marginal revenue.

____ 8. Restaurants often remain open for lunch even if they attract few customers because, the variable costs are
small relative to the revenue, even if the fixed costs are large.

____ 9. If a firm in a competitive market sells 25 per cent less, then its total revenue will fall by 25 per cent.

____ 10. In a competitive market, the actions of any single buyer or seller will have a negligible impact on the market
price.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

Table 14-1

This table shows the revenue and costs of a parrot farmer.

Quantity Total Revenue ($) Total Cost ($)

0 0 3
1 10 5
2 20 9
3 30 15
4 40 23
5 50 33
6 60 45
7 70 59
8 80 75
9 90 94
10 100 115

____ 1. Refer to Table 14-1. If the farmer harvested three parrots then:
A. fixed cost is zero
 B. marginal cost is $8
C. marginal revenue is less than average variable cost
D. marginal revenue is less than marginal cost
____ 2. The implication of a firm being a price taker is that, if it increases its price then:
A. buyers will purchase from other sellers instead
B. buyers will pay the higher price in the short run
C. other sellers in the market will increase prices as well
D. the firm will need to advertise to sell its goods
____ 3. A firm in a competitive market produces and sells 500 door knobs at a price of $10 each. It then chooses to
increase its output to 1000 door knobs. After the increase in output, its average revenue will:
A. decrease
B. increase
C. equal $10
D. fall below marginal revenue
____ 4. When price is below average variable cost, a firm in a competitive market will:
A. shut down and incur fixed costs
B. shut down and incur both variable and fixed costs
C. continue to operate as long as average revenue exceeds marginal cost
D. continue to operate as long as average revenue exceeds average fixed cost

Graph 14-3

This graph depicts the cost structure of a profit-maximising firm in a competitive market. Use the graph to
answer the following question(s).

____ 5. Refer to table 14-3. Suppose the current market price is $2. Which of the following is likely to occur?
A. firms will shut-down in the short-run
B. firms will exit in the long-run
C. firms will enter in the long-run
D. the number of firms in the industry will be stable in both the long- and short-run
____ 6. The Wheeler Wheat Farm has a long-term lease on 5000 acres of land in New South Wales. The annual lease
payment is $250,000. Prior to planting in the spring of 2001, the Wheeler Farm accountant predicted that the
Farm would have $135 000 left after paying all of its costs except the annual lease payment. In this case, the
Wheeler Wheat Farm should:
A. continue to operate even though it predicts an accounting loss of $115 000
B. shut down and experience an accounting loss of $135 000
C. exit the market and experience an accounting loss of $250 000
D. continue to operate because total revenue exceeds total cost
____ 7. A profit-maximising firm’s short-run shut down criterion is:
A. average revenue > marginal cost
B. price < average variable cost
C. price < average total cost
D. average revenue > average fixed cost
____ 8. Choose the correct statement. In the long-run, each firm in a competitive market with identical firms will:
i) operate at the firm’s efficient scale
ii) produce at a point where Marginal Cost and Average Total Cost are equal
iii) will earn zero economic profit
A. (i) only
B. (i) and (ii) only
C. (ii) and (iii) only
D. (i), (ii), and (iii)
____ 9. In a market with 1000 identical firms, the market supply is equal to the:
A. average number of units supplied by each firm in the market
B. sum of the quantities supplied by each of the 1000 individual firms
C. marginal cost curve for a representative firm in the market
D. product of the quantities supplied by all firms in the market

Graph 14-8

____ 10. Refer to Graph 14-8. If the figure in panel (a) reflects the long-run equilibrium of a profit-maximising firm in
a competitive market, the figure in panel (b) most likely reflects:
A. perfectly inelastic long-run market supply
B. the product of individual firm supply curves for all firms in the market
C. the idea that free entry and exit of firms in the market lead to only one market price in the
long run
D. zero profits cannot be sustained in the long run
____ 11. According to the information provided, as a result of the increase in the demand for abalone, we would
predict that in the short run:
A. production of abalone would be at efficient scale
B. the cost for existing wild abalone fishers must rise
C. the price for abalone would rise
D. all of the above would occur
____ 12. The exit of firms from a competitive market will:
A. decrease market supply and increase market prices
B. increase market supply and increase market prices
C. increase market supply and decrease market prices
D. decrease market supply and decrease market prices
 Graph 14-9

____ 13. Refer to Graph 14-9. When the market is in long-run equilibrium at point A in panel (b), the firm represented
in panel (a) will:
A. exit the market
B. be at zero-profit equilibrium
C. earn negative accounting profit
D. do all of the above
____ 14. The market for arts and crafts used in home decoration is a very competitive market. In this market, costs vary
since some people work faster than others and have more artistic talent in producing arts and crafts. In this
competitive market, we would expect to observe:
A. a short-run supply curve more elastic than the market’s long-run supply curve
B. an upward-sloping long-run supply curve
C. firms that are generally unresponsive to change in demand
D. little exit and entry
____ 15. The production decisions of perfectly competitive firms follow the principle of economics that states that
rational people:
A. consider sunk costs
B. think at the margin
C. equate prices to the average costs of production
D. will eventually leave markets that experience zero profit