Businesses and the Costs of Production (Normal profit isan implicit cost oTrue oo False 2. Economic profits are usually larger than accounting profits. oTme False 3. Ifa firm produces zero output in the short run, then its profits will also be zero. CTiue 0 False 4. In the long run, a firm can increase its output quantity, but it will be limited by the size of its existing production plant. oTrue & False 5. When diminishing marginal retums starts occurring, the addition of successive units of a variable resource to a fixed resource will cause the firm's production to diminish. ATre 0 False 6. Over the range of positive, but diminishing, marginal returns for an input, the total product curve increases at a decreasing rate. wruc 0 False @rtthe average product of labor equals 4 at all levels of output, the marginal product of labor is also equal to 4 at all levels of ey a t low oTme 0 False PF_= MK oF TPay. L von S\6 ac at 8. When the total product is at its maximum level, the marginal product is zero! doagns, 4 wliue 0 False Ovety QWhea total product is increasing at a decreasing rate, marginal product is positive, but falling. oTme 0 False @® The short-run marginal-cost curve is upward-sloping because of the law of diminishing marginal retums, oTrue 0 False11. Marginal product is highest where marginal cost is lowest. xTrue 0 False 12. When a firm increases its output, its average fixed costs will stay constant. olme afFalse 13. When average costs are increasing, marginal costs are greater than average costs. Atrue 0 False (re firm increases all its inputs by 10 percent and its output increases by 15 percent, the im is experiencing diseconomies of scale. oTiue » False 15. A major factor explaining economies of scale is increased specialization of labor. Ade 0 False 16. Diseconomies of scale are caused by the law of diminishing marginal returns. ole False @ Ifa firm doubles its resource inputs and as a result output triples, then the long-run average cost curve must be upward-sloping oTrue % False Gif the minimum efficient scale in an industry were smaller than the size of the market of that industry, then we would have a natural-monopoly situation. yeTiue 0 False 19. The total cost at a zero level of output is always equal to the variable cost, oTme ¥¢False (yr firm has constant returns to scale, the long-run cost curve will be downward-sloping. oTrue False If the MP of a worker is 12 units per hour and the wage rate is $10 per hour, the unit labor cost is equal to $1.20 per unit of output. oTrue 0 False 22. Diseconomies of scale imply that the average total cost eurve is downward-sloping in the Jong run. olme -& False1. Economie cost can best be defined as (a) any contractual obligation that results in a flow of money expenditures from an enterprise to resource suppliers. (b)any contractual obligation to labor or material suppliers. a payment that must be made to obtain and retain the services of a resource. (d)all costs exclusive of payments to fixed factors of production. 2. Which of the followi 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 (¢) payments for raw materials purchased from Company Y (d) transportation costs paid to a nearby trucking firm 3. Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million ina specific year. If the firm sold 100,000 units of its output at $50 per unit, its accounting (a) profits were $100,000 and its economie profits were $0. (b)losses were $300,000 and its economic losses were $0. rofits were $500,000 and its economic profits were $1 million. eens were $0 and its economic losses were $500,000. 4, The basic characteristic of the short run is that (a) barriers to entry prevent new firms from entering the industry. @pre 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. 5. 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 mun all resources are variable. 6. The law of diminishing returns indicates that @ as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point. (bybecause of economies and diseconomies of scale, a competitive firm's long-run average total cost curve will be U-shaped. (©) the demand for goods produced by purely competitive industries is downsloping.(d)beyond some point, the extra utility derived from additional units of a product will yield 7. Which of the following statements concerning the relationships between total product (TP), average product (AP), and marginal product (MP) is not correct? @AP continues to rise so long as TP is rising. (b) AP reaches a maximum before TP reaches a maximum. (c) TP reaches a maximum when the MP of the variable input becomes zero. (4)MP cuts AP at the maximum AP. 8. The total output of a firm will be at a maximum where (a) MP is ata maximum. (b) AP is at a minimum. MP is zero. (@) AP is at a maximum. 9. Fixed cost is (a) the cost of producing one more unit of capital, for example, machinery. Gas cost that does not change when the firm changes its output. (¢) average cost multiplied by the firm's output. (d)usually zero in the short run. 10. Which of the following is most likely to be a fixed cost? (a) shipping charges property insurance premiums (© wages for unskilled labor (d) expenditures for raw materials 11. 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. 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.ATC, ‘AVE Dollars > o hi AFC 0 Q Quantity 12. Refer to the diagram. At output level Q, total variable cost is (a) 0BEQ. (b) BCDE. @ocve. (d04FO. 13. Refer to the diagram. At output level Q, total fixed cost is (a) 0BEQ. /BCDE. (c) OBEQ -0AFQ. (M0CDQ. 14. Refer to the diagram. At output level Q, total cost is (a) 0BEQ. (b)BCDE. © BEQ + BCDE. (d)0AFQ + BCDE. 15. Refer to the diagram. At output level Q, average fixed cost (a) is equal to EF. (b) is equal to QE. (c) is measured by both QF and ED. (d) cannot be determined from the information given. 16. Refer to the diagram. At output level O, pein product is falling. (bymarginal product is rising. (c) marginal product is negative. (d)one cannot determine whether marginal product is falling or rising.17. Refer to the diagram. The vertical distance between ATC and AVC reflects (a) the law of diminishing returns. the average fixed cost at each level of output. (c) marginal cost at each level of output. (d)the presence of economies of scale. 18. Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firm's total fixed costs are @35.000. (b)S500. (c)$0.50. (850. 19. In the short run, which of the following statements is correct? (a) The marginal cost curve intersects the average variable and average fixed cost curves at their minimum points. (b) Average variable cost declines continuously as total output is expanded. (c) Total cost will exceed variable cost. (@)If the inputs of all resources are increased by equal amounts, total output will expand by diminishing amounts. 21. Suppose that, when producing 10 units of output, a firm's AVC is $22, its AFC is $5, and its MC is $30. This firm's (a) ATC is $35. (b)ATC is $57. total cost is $270. @total cost is $30. 22. Economies and diseconomies of scale explain (a) the profit-maximizing level of production. (b) why the firm's long-run average total cost curve is U-shaped. (c) why the firm's short-run marginal cost curve cuts the short-run average variable cost curve at its minimum point. (d)the distinction between fixed and variable costs. 23. When diseconomies of scale occur, (a) the long-run average total cost curve falls. (b) marginal cost intersects average total cost. the long-run average total cost curve rises. - (Daverage fixed costs will rise.24. Which of the following is not a source of economies of scale? @eaming-by-doing (b) labor specialization (c) use of larger machines (inelastic resource supply curves 25. Economies of seale are indicated by (a) the rising segment of the average variable cost curve. (b) the declining segment of the long-run average total cost curve. (c) the difference between total revenue and total cost. (da rising marginal cost curve. 26. Ifa firm doubles its output in the long run and its unit costs of production decline, we can conclude that (a) technological progress has occurred. economies of scale are being realized. (©) the firm is encountering diminishing retums. (d)diseconomies of scale are being encountered. 27. 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 comprise a very large number of small firms. 28. A natural monopoly exists when @unit costs are minimized by having one firm produce an industry's entire output. (5) several formerly competing producers merge to become the only firm in an industry. (c) short-run average total cost curves are tangent to long-run average total cost curves. (d) minimum efficient scale is attained at a small level of output. Ul. SHORT-ANSWER, ESSAYS, AND PROBLEM! 1. Discuss whether the cost below is an implicit or explicit cost for Jack’s Pizza Shop. a) Jack was offered a job at a competing pizza restaurant for $50,000 a year. 1 b) Jack pays his niece an hourly wage of $9 an hour to waitress. @ . ©) Jack owns the building for his restaurant. A nearby building rents for $1,000 a month. \ d) Jack’s insurance bill is $2,500. & e) Jack purchases ingredients for his pizzas from a local farmers market each week totaling 200. @2. The table below shows the total production of a firm as the quantity of labor employed increases. The quantities of all other resources employed are constant. Compute the marginal and average products and enter them in the table. - Marginal Average Inputs of Total productot product of labor labor | s go Xe Eg Hep =P. MP 2 mar 1, 7 MP= 0 % a) At what levels are there \roPasing returns to labor and at what levels are there dicing returns to labor? b) Describe the relationship between the total product and marginal product. ¢) Describe the relationship between marginal and average product. 3. You are given the following short-run information for an individual firm. Labor (L) is the only variable input. The price of labor is $200/week. Fixed costs are $100/week. Complete the rest of the table, Describe the relationship between the MP and MC. At which output level does the law of diminishing returns set in? Total product Q WEE Pp twee Tho; Fog ce ke 00 mez BG YP h Mes Vere pe © pa 8 PLeLobe sisal 4. Assume that a firm has a plant of fixed size and that it can vary its output only by varying the amount of labor it employs. The table below shows the relationships among the amount of labor employed, the output of the firm, the marginal product of labor, and the average product of labor. a) Assume each unit of labor costs the firm $20. Compute the total cost of labor for each quantity of labor the firm might employ, and enter these figures in the table. b) Now determine the marginal cost of the firm’s product as the firm increases its output. Enter these figures in the table. 8c) If labor is the only variable input, the total labor cost and total variable cost are equal. Find the average variable cost of the firm’s product. Enter these figures in the table. 4) Describe the relationship between the marginal product of labor and the marginal cost of the firm’s product. e) Describe the relationship between the average product of labor and the average variable cost. of ‘Marginal Average Total labor | Teal, productotprodutot variable Marginal ‘employed est labor labor cost Coat per uri ® 8 7 6 5 4 3 2 ° Arc AF CrflvC TESt EST ee uty 00 arc: c a) How can you tell if these cost curves are for the short run or the long runt 'b) What does the graph indicate about? . AVC at 6000 units of output? 4% pe Cunit . ATC at 6000 units of output? $. 5 . AFC at 6000 units of output? "5 _ TVC at 6000 umits of output? -Q=0h . TEC at all levels of output? AFC - Gz 9M . TC at 10,000 units of output? ~=JGGOO . When diminishing returns set in? AAW 6. Explain what happens to AFC, AVC, ATC, and MC curves in these two situations: (a) fixed cost increase; (b) variable cost increase.7. What effect would each of the following have on the short-run average and marginal costs of an auto dealership: (a) auto mechanies receive a 10% wage increase; (b) property taxes decrease: (¢) auto dealers institute a one-time only promotional campaign?