Test Bank For Principles of Economics 3rd Edition Dirk Mateerlee Coppock

Test Bank for Principles of Economics, 3rd Edition Dirk MateerLee Coppock
Test Bank for Principles of Economics, 3rd Edition

Dirk MateerLee Coppock
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CHAPTER 8: Business Costs and Production
MULTIPLE CHOICE
1. What needs to be done to ensure that a company is profitable?

a. The company needs to maximize revenue.
b. The company needs to minimize costs.
c. The company needs to both minimize costs and maximize revenue.
d. The company needs to both maximize costs and minimize revenue.
e. The company needs only to provide products that customers want.
ANS: C DIF: Moderate REF: How Are Profits and Losses Calculated?
OBJ: 8.1 How are profits and losses calculated? MSC: Remembering
2. A restaurant owner just found out that his pizza bistro is losing money. What is one possible
explanation for this loss?
a. The revenue isn’t being maximized.
b. The costs aren’t being maximized.
c. The revenue isn’t being minimized.
d. The costs and the revenue aren’t both being maximized.
e. The costs and the revenue aren’t both being minimized.
ANS: A DIF: Moderate REF: Calculating Profit and Loss
3. Total revenue minus total cost is equal to

a. producer surplus. d. profit.
b. dividends. e. retained earnings.
c. consumer surplus.
ANS: D DIF: Easy REF: Calculating Profit and Loss
OBJ: 8.1 How are profits and losses calculated? MSC: Understanding
4. Which of the following statements is FALSE?

a. Implicit costs are unique to the individual firm.
b. Explicit costs are easy to measure.
c. Implicit costs are opportunity costs.
d. An explicit cost is a nonmonetary opportunity cost.
e. An implicit cost is nonmonetary.
ANS: D DIF: Moderate REF: Explicit Costs and Implicit Costs
5. Which of the following statements is true?

a. An implicit cost is monetary.
b. An explicit cost is an opportunity cost.
c. Economists consider all costs to be explicit costs.
d. Implicit and explicit costs are always equal.
e. Economists consider only some costs to be implicit costs.
ANS: E DIF: Moderate REF: Explicit Costs and Implicit Costs
6. Explicit costs are

a. the opportunity cost of the means of production.
b. always paid out of pocket.
c. always greater than implicit costs.
d. never greater than implicit costs.
e. what a business sacrifices in order to produce a good.
ANS: B DIF: Easy REF: Explicit Costs and Implicit Costs
7. The out-of-pocket expenses incurred in producing a good are also known as

a. implicit costs. d. capital costs.
b. fiduciary costs. e. wages and prices.
c. explicit costs.
ANS: C DIF: Easy REF: Explicit Costs and Implicit Costs
8. Which of the following is true about explicit costs?

a. They are the opportunity costs of production.
b. They are out-of-pocket expenses.
c. They are not measured in terms of dollars.
d. They are not included when measuring economic profit.
e. They are not included when measuring accounting profit.
ANS: B DIF: Easy REF: Explicit Costs and Implicit Costs
9. An explicit cost for a business that manufactures bicycles would be the

a. value of the products that the firm’s employees could produce at another company.
b. salary that the owner of the business could earn elsewhere.
c. goods and services provided by the government with the taxes the firm pays.
d. wages paid to employees.
e. various products that could be made with the steel used to make bicycles.
OBJ: 8.1 How are profits and losses calculated? MSC: Applying
10. If a firm has total costs of $535,000 and its implicit costs are $165,000, how much are its explicit
costs?
a. $3,242 d. $700,000
b. $120,000 e. $308
c. $370,000
ANS: C DIF: Moderate REF: Explicit Costs and Implicit Costs
OBJ: 8.1 How are profits and losses calculated? MSC: Analyzing
11. Remi owns a small pizza restaurant, where he works full-time in the kitchen. His total revenue last
year was $100,000, and his rent was $3,000 per month. He pays his one employee $2,000 per
month, and the cost of ingredients and overhead averages $500 per month. Remi could earn
$35,000 per year as the manager of a competing pizza restaurant nearby. His total explicit costs
last year were
a. $24,000. d. $66,000.
b. $6,000. e. $72,000.
c. $60,000.
12. Lisette is the owner of a bakery that earns zero economic profit. Last year, her total revenue was
$145,000, her rent was $12,000, her labor costs were $65,000, and her overhead expenses were
$15,000. From this information, we know that her total explicit costs were
a. $80,000. d. $77,000.
b. $92,000. e. $53,000.
c. $15,000.
ANS: B DIF: Moderate REF: Explicit Costs and Implicit Costs
13. Implicit costs are

a. the opportunity cost of the means of production.
b. always paid out of pocket.
c. never greater than explicit costs.
d. always greater than explicit costs.
e. not measured in terms of dollars.
ANS: A DIF: Easy REF: Explicit Costs and Implicit Costs
14. Implicit costs can be difficult to measure because

a. business owners cannot always observe them directly.
b. they are not measured in dollars.
c. they are always very expensive.
d. they are always greater than explicit costs.
e. they include expenses like taxes.
ANS: A DIF: Difficult REF: Explicit Costs and Implicit Costs
15. If a firm generates $240,000 in revenue, earns $120,000 in economic profit, and its explicit costs
are $80,000, how much are its implicit costs?
a. $160,000 d. $60,000
b. $80,000 e. $120,000
c. $40,000
ANS: C DIF: Moderate REF: Explicit Costs and Implicit Costs
16. Ramona owns a small coffee shop, where she works full-time. Her total revenue last year was
$100,000, and her rent was $3,000 per month. She pays her one employee $2,000 per month, and
the cost of ingredients and overhead averages $500 per month. Ramona could earn $35,000 per
year as the manager of a competing coffee shop nearby. Her total implicit costs last year were
a. $100,000. d. $66,000.
b. $35,000. e. $72,000.
c. $60,000.
17. Jeremy is the owner of a makeup parlor that earns zero economic profit. Last year, his total
revenue was $145,000, his rent was $12,000, his labor costs were $65,000, and his overhead
expenses were $15,000. From this information, we know that his total implicit costs were
a. $145,000. d. $65.000.
b. $53,000. e. $15,000.
c. $92,000.
18. Economists consider both explicit costs and implicit costs when measuring economic profit. The
reason they consider implicit costs is that
a. they are more conservative than accountants, who consider only accounting costs.
b. most businesses forget to pay their implicit costs.
c. a business must cover its opportunity costs as well as its out-of-pocket expenses to be truly
profitable.
d. implicit costs are typically far larger than explicit costs.
e. implicit costs include expenses like taxes and fees to the government.
ANS: C DIF: Difficult REF: Accounting Profit versus Economic Profit
19. Accountants consider only explicit costs when measuring accounting profit. The reason they
ignore implicit costs is that
a. implicit costs are typically very small.
b. explicit costs are always greater than implicit costs.
c. implicit costs are not out-of-pocket expenses.
d. implicit costs are tax deductible.
e. implicit costs cannot be measured in terms of dollars.
ANS: C DIF: Moderate REF: Accounting Profit versus Economic Profit
20. Accounting profit is equal to

a. total revenue minus explicit costs.
b. total revenue minus implicit costs.
c. explicit costs plus implicit costs.
d. explicit costs minus implicit costs.
e. total revenue minus implicit costs and explicit costs.
ANS: A DIF: Easy REF: Accounting Profit versus Economic Profit
21. Accounting profit ignores which of the following?

a. implicit costs d. taxes paid
b. labor costs e. explicit costs
c. capital costs
ANS: A DIF: Moderate REF: Accounting Profit versus Economic Profit
22. A firm’s accounting profit is always greater than its economic profit because
a. economic profit considers implicit costs, which accounting profit does not.
b. accounting profit considers explicit costs, which economic profit does not.
c. economic profit is always zero, no matter what kind of firm it is.
d. accounting profit considers implicit costs, which economic profit does not.
e. accounting profit is always positive, no matter what kind of firm it is.
23. Luciana is the owner of a nail salon. Last year, her total revenue was $145,000, her rent was
$12,000, her labor costs were $65,000, and her overhead expenses were $15,000. From this
information, we know that her accounting profit was
a. $145,000. d. $15,000.
b. $53,000. e. $27,000.
c. $65,000.
ANS: B DIF: Moderate REF: Accounting Profit versus Economic Profit
24. Jackie is the owner of a furniture store. Last year, her total revenue was $525,000 and her total
labor costs were $200,000. Her overhead expenses, including insurance and legal fees, were
$175,000. The rent on the building was $45,000. Jackie could earn $105,000 per year working at a
nearby furniture distributor. From this information, we know that her accounting profit was
a. $525,000. d. $175,000.
b. $375,000. e. $105,000.
c. $150,000.
ANS: E DIF: Moderate REF: Accounting Profit versus Economic Profit
25. Kumar owns a small seafood restaurant, where he works full-time in the kitchen. His total revenue
last year was $100,000, and his rent was $3,000 per month. He pays his one employee $2,000 per
month, and the cost of ingredients and overhead averages $500 per month. Kumar could earn
$35,000 per year as the manager of a competing seafood restaurant nearby. His total accounting
profit last year was
a. −$1,000. d. $34,000.
b. $100,000. e. $35,000.
c. $72,000.
ANS: D DIF: Moderate REF: Accounting Profit versus Economic Profit
26. Economic profit is equal to

a. total revenue minus explicit costs.
b. total revenue minus implicit costs.
c. explicit costs plus implicit costs.
d. total revenue minus implicit costs and explicit costs.
e. explicit costs minus implicit costs.
ANS: D DIF: Easy REF: Accounting Profit versus Economic Profit
27. A firm’s economic profit is always less than its accounting profit because
a. accounting profit considers explicit costs, which economic profit does not.
b. economic profit considers implicit costs, which accounting profit does not.
c. economic profit is always zero, no matter what kind of firm it is.
d. accounting profit considers implicit costs, which economic profit does not.
e. accounting profit is always positive, no matter what kind of firm it is.
28. If we were told that a firm earns positive accounting profit and nothing else, what would we know
is true about its economic profit?
a. It is positive because whenever accounting profit is positive, so is economic profit.
b. It cannot be determined without knowing the firm’s implicit costs.
c. It is zero because all firms earn zero economic profit regardless of the industry.
d. It is equal to its accounting profit.
e. It is negative because its accounting profit is probably not high enough to earn positive
economic profit.
ANS: B DIF: Difficult REF: Accounting Profit versus Economic Profit
29. Karolina owns a small diner, where she works full-time in the kitchen. Her total revenue last year
was $100,000, and her rent was $3,000 per month. She pays her one employee $2,000 per month,
and the cost of ingredients and overhead averages $500 per month. Karolina could earn $35,000
per year as the manager of a competing diner nearby. Her total economic profit last year was
a. $34,000. d. $65,000.
b. −$1,000. e. −$35,000.
c. $20,000.
30. Hannah is the owner of a party store. Last year, her total revenue was $145,000, her rent was
$12,000, her labor costs were $65,000, and her overhead expenses were $15,000. If she could earn
$53,000 working for another party store nearby, we know that her economic profit was
a. $145,000. d. $0.00.
b. $53,000. e. $15,000.
c. $12,000.
ANS: D DIF: Moderate REF: Accounting Profit versus Economic Profit
31. Belinda is the owner of a department store. Last year, her total revenue was $525,000 and her total
labor costs were $200,000. Her overhead expenses, including insurance and legal fees, were
$175,000. The rent on the building was $45,000. Belinda could earn $105,000 per year working at
a nearby department store. If her total revenue increases to $600,000 this year and all of her other
expenses are held constant, we know that her economic profit is now
a. $75,000. d. $105,000.
b. $600,000. e. $200,000.
c. $0.00.
32. A firm’s inputs are also known as its

a. outputs. d. revenues.
b. profits. e. costs.
c. factors of production.
ANS: C DIF: Easy REF: The Production Function
OBJ: 8.2 How much should a firm produce? MSC: Remembering
33. The production function shows the relationship between the

a. costs of inputs and the price of the output.
b. quantity of inputs and the quantity of outputs.
c. quantity of total outputs and total costs.
d. quantity of the labor input needed for each unit of capital to minimize costs.
e. level of outputs that maximize revenue.
ANS: B DIF: Moderate REF: The Production Function
34. According to the concept of the production function, if a firm is inefficient then it must mean
a. for the same amount of inputs, the output is less than the production function would have
calculated.
b. for the same amount of output, the number of inputs required is less than the production
function would have calculated.
c. the achieved level of output is exactly the same as the production function would have
calculated.
d. the firm is producing too many outputs.
e. the inputs are being overused.
ANS: A DIF: Moderate REF: The Production Function
OBJ: 8.2 How much should a firm produce? MSC: Understanding
35. Which of the following statements is true?

a. The production function shows the trade-off in inputs that produce the same amount of
output.
b. The production function shows the trade-off between producing different kinds of outputs.
c. An inefficient firm is unable to achieve as much output as the production function shows.
d. The short-run production function includes both fixed and variable inputs.
e. The short-run production function includes both fixed and variable costs.
ANS: C DIF: Moderate REF: The Production Function
36. A decade ago, Nino decided to open a used car lot. This car lot required her to hire some sales
agents and buy some computers to track the sales of the vehicles. After a few years, Nino opened
up a second location and hired more sales agents and purchased more computers. When this
expansion occurred, which of the following statements is FALSE?
a. More inputs were used.
b. Total possible output increased.
c. The production function changed.
d. Fewer inputs and outputs were used.
e. The business became inefficient during the expansion.
OBJ: 8.2 How much should a firm produce? MSC: Applying
37. What would cause a firm’s production function to change?

a. expanding the size of the factories
b. increasing the quantity of labor and capital
c. increasing the quantity of capital
d. increasing the quantity of labor
e. the adoption of new technology
ANS: E DIF: Moderate REF: The Production Function
38. What happens when a firm adopts a new technology?
a. The firm must increase its losses.
b. The firm must increase its profit.
c. The firm will have a new production function.
d. The firm must have higher costs.
e. The firm must have higher revenue.
39. Another term for factors of production is

a. outputs. d. revenues.
b. inputs. e. costs.
c. profits.
ANS: B DIF: Easy REF: The Production Function
40. The three primary factors of production are

a. revenue, profits, and costs. d. labor, wages, and training.
b. price, quantity, and profits. e. land, labor, and capital.
c. capital, interest, and savings.
ANS: E DIF: Easy REF: The Production Function
41. The three primary inputs are

a. revenue, profits, and costs. d. labor, wages, and training.
b. price, quantity, and profits. e. capital, interest, and savings.
c. land, labor, and capital.
ANS: C DIF: Easy REF: The Production Function
42. A firm has a certain amount of capital and land. As it hires more labor, each worker is able to
a. earn a higher wage. d. purchase more capital.
b. specialize. e. purchase more land.
c. work more overtime.
43. As a firm hires more labor and each worker is able to specialize, what happens to each additional
worker’s marginal productivity?
a. It increases at first, then decreases.
b. It increases continuously.
c. It decreases continuously.
d. It decreases at first, then increases.
e. It remains constant, no matter how much labor is hired.
44. A firm’s production function is similar to a recipe used to make a cake in the sense that the
production function shows us the combination of ________ used to produce ________.
a. inputs; output d. expenses; revenue
b. outputs; input e. taxes; deductions
c. costs; profit
45. The production function of a restaurant includes items such as labor (i.e., cooks, waiters, and a
manager), capital (i.e., ovens, counters, tables, chairs, and a building), and land. In the short run,
the owner of the restaurant will optimize production by employing a variable amount of ________
given a fixed amount of ________.
a. capital; labor and land d. labor; capital and raw materials
b. land; capital and labor e. land; labor and raw materials
c. labor; capital and land
ANS: C DIF: Difficult REF: The Production Function
46. If all workers are able to specialize and become more productive as more labor is hired, the amount
of total output produced
a. increases at a decreasing rate. d. decreases at an increasing rate.
b. increases at a constant rate. e. decreases at a constant rate.
c. increases at an increasing rate.
47. The production function for automobiles includes

a. farmland, seeds, rain, and tractors.
b. an aircraft carrier, planes, helicopters, sailors, and pilots.
c. a mall, racks and shelves, mannequins, and sales clerks.
d. lumber, shingles, windows, doors, and carpenters.
e. a factory, an assembly line, workers, and robots.
48. The production function for bookshelves includes

a. yeast, flour, pans, ovens, and bakers.
b. electric guitars, drums, microphones, musicians, and a stage.
c. foam cushions, fabric, wood, nails, and furniture makers.
d. wood, nails, carpenters, saws, and hammers.
e. wool fabric, buttons, a zipper, a sewing machine, and a tailor.
ANS: D DIF: Moderate REF: The Production Function
49. If workers are unable to specialize and become more productive as more labor is hired, the amount
of total output produced
a. increases at an increasing rate. d. decreases at an increasing rate.
b. increases at a constant rate. e. decreases at a constant rate.
c. increases at a decreasing rate.
50. The change in total output divided by the change in input is known as
a. marginal product. d. total product.
b. marginal cost. e. marginal profit.
c. specialization.
ANS: A DIF: Easy REF: The Production Function
51. Marginal product is the change in

a. total output divided by the change in input.
b. total output plus the change in input.
c. total output minus the change in input.
d. total output times the change in input.
e. input divided by the change in total output.
ANS: A DIF: Easy REF: The Production Function
52. When a firm hires another employee and, as a result, total output increases, this change in total
output is also known as
a. total output. d. labor contribution.
b. marginal employment. e. marginal benefit.
c. marginal product.
53. If there are gains from specialization in a workplace, hiring another employee means that the
marginal product of labor will
a. decrease. d. be zero.
b. remain the same. e. be negative.
c. increase.
54. Lester owns a candy store that produces, among other things, chocolate fountains. He currently has
5 employees; with 5 employees, his candy store can produce 7 chocolate fountains per day. If he
hired a sixth employee, he’d be able to produce 9 chocolate fountains per day. Therefore, the
marginal product of the sixth employee is ________ chocolate fountain(s).
a. 5 d. 2
b. 7 e.
c. 9
OBJ: 8.2 How much should a firm produce? MSC: Analyzing
55. Fathima owns a car shop that repairs, among other things, spoilers. She currently has 6 employees;
with 6 employees, her repair shop can repair 9 spoilers per day. If she hired a seventh employee,
she’d be able to repair 12 spoilers per day. Therefore, the marginal product of the seventh
employee is ________ car spoiler(s).
a. 9 d. 3
b. 7 e. 5
c. 1.71
56. Gerald owns a factory that produces, among other things, wheelbarrows. He currently has 7
employees; with 7 employees, his factory can produce 12 wheelbarrows per day. If he hired an
eighth employee, he’d be able to produce 16 wheelbarrows per day. Therefore, the marginal
product of the eighth employee is ________ wheelbarrow(s).
a. 2 d. 16
b. 1 e. 4
c. 8
57. If a firm hires another worker and her marginal product of labor is positive, we know that the
firm’s total output is
a. decreasing.
b. unchanged.
c. increasing.
d. zero.
e. equal to the marginal product of that worker.
58. If a firm hires another worker and her marginal product of labor is negative, we know that the
firm’s total output is
a. increasing.
b. decreasing.
c. equal to the marginal product of that worker.
d. unchanged.
e. zero.
59. If a firm hires another worker and her marginal product of labor is zero, we know that the firm’s
total output is
a. zero.
b. unchanged.
c. increasing.
d. decreasing.
e. equal to the marginal product of that worker.
60. If the marginal product of labor for a firm decreases as more workers are hired, we know that
a. all workers are paid the same wage.
b. the marginal cost of producing output is decreasing.
c. the gains from specialization are exhausted.
d. the marginal cost of producing output is constant.
e. there are still gains from specialization left to be exploited.
ANS: C DIF: Difficult REF: Diminishing Marginal Product
61. As a firm hires more workers, its marginal product of labor increases only if
a. each worker does the same tasks as all others.
b. all workers are paid the same wage.
c. the firm produces commodities.
d. employees are assigned specialized tasks.
e. all workers are paid different wages.
ANS: D DIF: Difficult REF: Diminishing Marginal Product
62. In the accompanying table, diminishing marginal product begins after the ________ unit of input.
Input Total Product
0 0
1 10
2 35
3 70
4 120
5 165
6 175
7 170
8 155
a. first d. fourth
b. second e. sixth
c. seventh
ANS: D DIF: Moderate REF: Diminishing Marginal Product
63. In the accompanying table, diminishing marginal product begins after the ________ unit of output.
Output Total Product
0 —
1 3
2 8
3 10
4 6
5 −1
6 −9
a. second d. third
b. fourth e. first
c. fifth
ANS: A DIF: Moderate REF: Diminishing Marginal Product
64. Assume that a firm hires an additional employee. If the marginal product for that employee is
greater than for the previous employee hired, it must be because
a. the marginal product of labor is diminishing.
b. all workers are paid the same wage.
c. the workers all perform the exact same set of tasks.
d. there are gains from specialization.
e. all workers are not paid the same wage.
ANS: D DIF: Difficult REF: Diminishing Marginal Product
65. If the marginal product of an input is falling, then what must be true?
a. Average fixed costs must be constant.
b. Marginal cost must be rising.
c. Average total cost must be constant.
d. Marginal cost must be constant.
e. Marginal cost must be falling.
OBJ: 8.3 What costs do firms consider in the short run and the long run?
MSC: Understanding
66. The diminishing marginal product is NOT responsible for the shape of ________ cost curve.
a. total fixed d. average variable
b. total variable e. average total
c. total
Refer to the accompanying graph to answer the following questions.
67. If the firm depicted in the graph had to pay higher rent to its landlord, we would expect its
________ curve to shift ________.
a. average total cost (ATC); down
b. average variable cost (AVC); down
c. average total cost (ATC); up
d. marginal cost (MC); up
e. average variable cost (AVC); up
ANS: C DIF: Moderate REF: Costs in the Short Run
MSC: Analyzing
68. The average total cost of production is minimized at what level of output?
a. Q5 d. Q3
b. Q1 e. Q2
c. Q4
MSC: Analyzing
69. Is this firm earning positive, negative, or zero economic profits?

a. We cannot determine the firm’s level of profit because we do not know about its revenues.
b. It is earning positive economic profit.
c. Because this is the short run, all firms earn positive economic profit.
d. It is earning zero economic profit.
e. It is earning negative economic profit.
ANS: A DIF: Moderate REF: Costs in the Short Run
MSC: Analyzing
70. The accompanying graph represents the ________ for a firm.

a. production function d. marginal product
b. short-run cost curves e. economies of scale
c. long-run cost curves
ANS: B DIF: Moderate REF: Costs in the Short Run
MSC: Understanding
71. The firm is experiencing gains from specialization up to what level of output along the marginal
cost curve?
a. Q2 d. Q3
b. Q5 e. Q4
c. Q1
ANS: C DIF: Difficult REF: Costs in the Short Run
MSC: Analyzing
72. The firm is experiencing diminishing marginal product beyond what level of output along the
marginal cost curve?
a. Q5 d. Q3
b. Q1 e. Q4
c. Q2
ANS: B DIF: Difficult REF: Costs in the Short Run
MSC: Analyzing
73. The gap between the average total cost (ATC) and average variable cost (AVC) curves represents
________ cost.
a. average fixed d. average total
b. total fixed e. total variable
c. average variable
MSC: Analyzing
74. The average total cost (ATC) and average variable cost (AVC) converge as the level of output
produced increases because
a. the firm is able to purchase more capital and exploit economies of scale.
b. the firm experiences gains in productivity from employee specialization.
c. average total cost decreases as output increases.
d. average fixed cost decreases as output increases.
e. the firm is able to drive its competitors out of business by lowering its price.
ANS: D DIF: Difficult REF: Costs in the Short Run
MSC: Analyzing
75. In the short run, the cost of ________ is variable, whereas the cost of ________ is fixed.
a. capital; labor d. labor; capital
b. electricity; wages e. raw materials; labor
c. capital; raw materials
ANS: D DIF: Moderate REF: Costs in the Short Run
MSC: Understanding
76. Economists assume that the cost of ________ is fixed in the short run.
a. labor d. legal expenses
b. capital e. repairs
c. raw materials
MSC: Understanding
77. Which of the following can we learn by looking at a firm’s short-run costs?
a. the profit-maximizing level of output
b. whether the firm will experience economies of scale
c. the optimal number of employees to hire
d. whether the firm is earning economic profit
e. the cost-minimizing level of output
ANS: E DIF: Difficult REF: Costs in the Short Run
MSC: Understanding
78. Which of the following costs is fixed in the short run?

a. wages d. raw materials
b. utilities e. office supplies
c. capital
MSC: Understanding
79. Lisette owns a bakery. Her total costs are $150,000 per year, and her variable costs are $85,000.
This means that her fixed costs are
a. $65,000. d. $235,000.
b. $150,000. e. $70,000.
c. $85,000.
MSC: Analyzing
80. Ralph owns a pool store. His total costs are $225,000 per year, and his variable costs are $75,000
per year. This means that his fixed costs are
a. $75,000. d. $50,000.
b. $225,000. e. $150,000.
c. $300,000.
ANS: E DIF: Moderate REF: Costs in the Short Run
MSC: Analyzing
81. Selene owns a craft store. Her total costs are $1.2 million per year, and her variable costs are
$750,000 per year. This means that her fixed costs are
a. $1.2 million. d. $300,000.
b. $750,000. e. $1.95 million.
c. $450,000.
MSC: Analyzing
82. When output is 100 units, the firm’s total fixed cost is $500. What will this firm’s total fixed cost
be if output doubles to 200 units?
a. $250 d. $1,000
b. $500 e. $125
c. $750
MSC: Analyzing
83. Igor owns a movie theater. His total costs are $150,000 per year, and his fixed costs are $65,000.
This means that his variable costs are
a. $65,000. d. $235,000.
b. $150,000. e. $70,000.
c. $85,000.
MSC: Analyzing
84. Ingrid owns a lamp store. Her total costs are $225,000 per year, and her fixed costs are $150,000
per year. This means that her variable costs are
a. $150,000. d. $50,000.
b. $225,000. e. $75,000.
c. $375,000.
MSC: Analyzing
85. Juan owns an antique shop. His total costs are $1.2 million per year, and his fixed costs are
$450,000 per year. This means that his variable costs are
a. $1.2 million. d. $300,000.
b. $750,000. e. $1.65 million.
c. $450,000.
MSC: Analyzing
86. Vanessa owns a horse ranch. Her total costs are $550,000 per year, and her fixed costs are
$205,000 per year. This means that her variable costs are
a. $550,000. d. $755,000.
b. $205,000. e. $108,000.
c. $345,000.
MSC: Analyzing
87. Which of the following is the best example of a variable cost in the short run?
a. rent for an office d. debt payments for a loan
b. rent for a restaurant e. rent for factory space
c. wages for employees
MSC: Evaluating
88. In the short run, average total costs and average variable costs converge as output increases
because
a. marginal cost is below average total cost.
b. marginal cost is below average fixed cost.
c. average fixed costs continually increase.
d. average fixed costs continually decrease.
e. total cost continually increases.
MSC: Understanding
Use the following scenario to answer the following questions:

Kareem owns a bike store. His total costs are $1.2 million per year, his variable costs are
$750,000, and his fixed costs are $450,000 per year. Last year, Kareem sold 1,200 bikes.
89. Kareem’s average total cost was ________ per bike.

a. $625 d. $1,200
b. $1,000 e. $600
c. $375
MSC: Analyzing
90. Kareem’s average variable cost was ________ per bike.

a. $375 d. $2,000
b. $625 e. $600
c. $1,000
MSC: Analyzing
91. Kareem’s average fixed cost was ________ per bike.

a. $600 d. $2,000
b. $625 e. $375
c. $1,000
MSC: Analyzing
92. In the short run, average total costs at first decrease and then increase as more output is produced
because
a. marginal cost is at first greater than average total costs, then falls below it.
b. average fixed costs continually decrease.
c. average variable costs at first decrease and then increase at the same level of output.
d. total cost continually increases.
e. marginal cost is at first less than average total costs, then rises above it.
ANS: E DIF: Difficult REF: Costs in the Short Run
MSC: Understanding
93. When the average total cost curve is at its minimum, we know that the
a. average variable cost curve intersects the average total cost curve.
b. average variable cost curve is above the average total cost curve.
c. marginal cost curve intersects the average total cost curve.
d. marginal cost curve is above the average total cost curve.
e. average fixed cost curve is above the marginal cost curve.
MSC: Understanding
94. A firm’s short-run cost curves show us

a. the lowest-cost level of output.
b. the highest-profit level of output.
c. what will happen if the firm doubles its capital.
d. how many other firms are in the industry.
e. how many employees the firm has.
MSC: Understanding
95. By looking at the full set of short-run cost curves for a firm, we can determine
a. the profit-maximizing level of output.
b. the optimal number of employees to hire.
c. what will happen if the firm increases its capital.
d. the level of output with the cost-minimizing level of output.
e. what will happen if the firm decreases its capital.
MSC: Understanding
96. The full set of short-run cost curves for a firm tells us
a. the profit-maximizing level of output.
b. the cost-minimizing level of output.
c. how many other firms are competing with that firm.
d. how many employees the firm has hired.
e. whether the firm will experience economies of scale.
MSC: Understanding
97. When the average total cost curve is downward sloping, what must be true about the marginal cost
curve?
a. It is U-shaped.
b. It is a straight line.
c. It is upward sloping.
d. It is below the average total cost curve.
e. It is above the average total cost curve.
MSC: Analyzing
98. If the marginal cost curve is U-shaped

a. there are no productivity gains from specialization, only diminishing marginal product.
b. average fixed costs are continually decreasing.
c. there are productivity gains from specialization before diminishing marginal product sets
in.
d. the average total cost curve is continually upward sloping.
e. the average variable cost curve is a straight line.
MSC: Understanding
99. When the average variable cost curve is upward sloping, what must be true about the marginal cost
curve?
a. It is U-shaped.
b. It is above the average variable cost curve.
c. It is upward sloping.
d. It is below the average variable cost curve.
e. It is a straight line.
MSC: Analyzing
100. The change in total cost given a change in output is also known as ________ cost.
a. differential d. short-run
b. marginal e. long-run
c. average
ANS: B DIF: Easy REF: Costs in the Short Run
MSC: Remembering
101. If the marginal product of labor is increasing, the marginal cost of output must be
a. decreasing. d. unchanged.
b. constant. e. increasing.
c. equal to average total cost.
ANS: A DIF: Difficult REF: Costs in the Short Run
MSC: Analyzing
102. If a firm experiences diminishing marginal product of labor, its marginal cost
a. increases at an increasing rate. d. decreases at a constant rate.
b. decreases at a decreasing rate. e. increases at a decreasing rate.
c. increases at a constant rate.
ANS: A DIF: Difficult REF: Costs in the Short Run
MSC: Analyzing
103. If a firm experiences productivity gains from employee specialization, its marginal cost
a. increases at an increasing rate. d. decreases at a constant rate.
b. decreases at an increasing rate. e. increases at a decreasing rate.
c. decreases at a decreasing rate.
MSC: Analyzing
104. Pablo owns a record store. His total costs are $1.2 million per year, his variable costs are $750,000,
and his fixed costs are $450,000 per year. Last year, Pablo sold 1,200 records. If Pablo sells 1,250
records this year (50 more than last year) and his average total cost increases to $1.28 million, we
know that the
a. average total cost of selling 1,250 records is $1,000.
b. average variable cost of selling records has decreased.
c. average fixed cost of selling records is unchanged.
d. marginal cost of those 50 records is $80,000.
e. marginal cost of those 50 records is $1.28 million.
MSC: Analyzing
105. Should a firm always produce the level of output where marginal cost is lowest?
a. Yes. That is the level of output where costs are lowest.
b. No. That is the level of output where employees are most efficient.
c. No. Firms should produce where marginal cost equals average variable cost.
d. No. That might be the best choice, but it depends on the firm’s profits.
e. Yes. Any other level of output will have higher marginal cost.
MSC: Understanding
106. Where would we find a firm’s minimum efficient scale of production?

a. at the lowest point on its long-run average total cost curve
b. at the highest point on its long-run average total cost curve
c. in the middle of its long-run average total cost curve
d. at the highest point on its long-run average fixed cost curve
e. in the middle of its long-run average variable cost curve
MSC: Understanding
107. It is important for a firm to know its minimum efficient scale of production because that is where
a. it faces the least amount of competition.
b. its tax burden will be lowest.
c. long-run costs are minimized.
d. long-run average total cost is greatest.
e. it turns into a monopoly.
MSC: Understanding
108. How will a firm know if it has grown too large, that is, when it has exceeded its minimum efficient
scale of production?
a. Its long-run average costs begin to decrease.
b. Its long-run average costs begin to increase.
c. Its market power begins to diminish.
d. The number of other firms in the market rises.
e. All of its workers quit and go to work for the competition.
MSC: Understanding
109. Refer to the following table. What is the total cost of producing five units of the good?
Total Total Average Average Average
Fixed Variable Total Fixed Variable Total Marginal
Output Cost Cost Cost Cost Cost Cost Cost
1 $500 $200 — — — — —
2 — — $800 — — — —
3 — — $875 — — — $25
4 — — $925 — — — —
5 — — ???? $100 — — —
6 — $450 — — — — —
a. $1,050 d. $825
b. $950 e. $1,000
c. $1,025
MSC: Analyzing
110. Refer to the following table. What is the average variable cost of producing three units of the
good?
Total Total Average Average Average
Fixed Variable Total Fixed Variable Total Marginal
Output Cost Cost Cost Cost Cost Cost Cost
1 — — — — — — —
2 — — $600 — — — —
3 — — — — ????? — $20
4 — $440 — — — — —
5 $500 — — — — — —
a. $80 d. $20
b. $120 e. $420
c. $140
MSC: Analyzing
111. Which of the following is an example of a long-run cost for a manufacturing firm?
a. the purchase of additional raw materials
b. hiring more employees
c. an increase in the size of its factory
d. paying higher tax rates
e. increasing the size of its management team
ANS: C DIF: Easy REF: Costs in the Long Run
MSC: Understanding
112. The long-run average total costs for a firm are equal to short-run average total costs when
a. the long-run average total cost curve is declining.
b. the long-run average total cost curve is at a minimum point.
c. the long-run average total cost curve is increasing.
d. production is maximized.
e. production is at any point along the long-run average cost curve.
ANS: B DIF: Moderate REF: Costs in the Long Run
MSC: Understanding
113. Which of the following is a question that a firm must answer in the long run but not in the short
run?
a. What is the profit-maximizing level of output?
b. How many workers should it hire?
c. What is the optimal amount of capital to employ?
d. What prices should it charge for its products?
e. How much should it pay its workers?
ANS: C DIF: Moderate REF: Costs in the Long Run
MSC: Understanding
114. If a firm’s average total costs decrease as it increases its scale of production, the firm is
experiencing
a. economies of scale. d. diminishing marginal product.
b. diseconomies of scale. e. constant returns to scale.
c. increasing returns from specialization.
ANS: A DIF: Easy REF: Costs in the Long Run
MSC: Remembering
115. Lukas owns a bookstore. He currently sells 1,200 books per year. If he doubles the size of his store
so he can sell 2,400 books per year and his long-run average total cost per book decreases, we
know that Lukas is experiencing
a. diseconomies of scale. d. economies of scale.
b. diminishing marginal product. e. constant returns to scale.
c. increasing marginal product.
ANS: D DIF: Moderate REF: Costs in the Long Run
MSC: Applying
116. Annabelle owns an Italian ice shop. If she decided to expand the size of her shop so that she could
sell more Italian ices, how would she know if she is experiencing economies of scale in the long
run?
a. Her long-run average cost of selling each Italian ice remains unchanged.
b. Her long-run average cost of selling each Italian ice decreases.
c. Her long-run average cost of selling each Italian ice increases.
d. Her long-run total cost of selling Italian ices increases.
e. Her long-run fixed cost of selling Italian ices increases.
MSC: Applying
117. Josephina owns a boxing gym. She recently expanded the size of her gym by adding another
boxing ring and moving into a larger building so that she can serve more clients. How would
Josephina know if she is experiencing economies of scale from increasing the size of her boxing
gym?
a. Her average cost per client increases.
b. Her total cost increases.
c. Her average cost per client remains the same.
d. Her average cost per client decreases.
e. Her total cost remains unchanged.
MSC: Applying
118. Which is the best example of economies of scale?
a. the local power company d. a parking garage
b. the pizza business e. a small family farm
c. the restaurant industry
ANS: A DIF: Moderate REF: Costs in the Long Run
MSC: Evaluating
Use the following graph to answer the following questions.
119. Which of the curves depicts economies of scale?

a. LRATC1 and LRATC3 d. LRATC1
b. LRATC2 e. LRATC3
c. LRATC2 and LRATC3
ANS: D DIF: Easy REF: Costs in the Long Run
MSC: Analyzing
120. A firm expands its scale of production and finds that its long-run average total cost curve looks
like LRATC1. It might look this way because the firm
a. adds several additional layers of management, which increase its costs.
b. is able to pay its employees more.
c. has to pay higher rent.
d. is able to negotiate lower prices with its suppliers.
e. is able to sell more output.
MSC: Evaluating
121. If the firm expanded its scale of production and found that its average costs decreased, which of
the curves would reflect this situation?
b. LRATC2 e. LRATC1 and LRATC2
c. LRATC1
MSC: Analyzing
122. A firm expands its scale of production and finds that it is able to negotiate better prices with its
suppliers. Which of the curves best applies to this firm?
a. LRATC1 d. LRATC1 and LRATC2
c. LRATC3
MSC: Analyzing
123. A firm expands its scale of production and finds that its long-run average total cost curve looks
like LRATC3. It might look this way because the firm
a. is able to pay its employees less.
b. adds several additional layers of management, which increase its costs.
c. is able to reduce its tax burden.
d. is able to produce output more efficiently.
e. is able to sell more output.
MSC: Evaluating
124. If the firm expanded its scale of production and found that its average costs increased, which of the
curves would reflect this situation?
c. LRATC3
MSC: Analyzing
125. If the firm expanded its scale of production and found that its average costs did not change, which
of the curves would reflect this situation?
c. LRATC2
MSC: Analyzing
126. When firms grow larger, they sometimes acquire more market power, meaning that they have
greater ability to negotiate lower prices with their suppliers. This ability to negotiate lower prices
with their suppliers leads to
a. diseconomies of scale. d. constant returns to scale.
b. diminishing marginal returns. e. increasing marginal returns.
c. economies of scale.
MSC: Applying
127. If a firm’s long-run average total costs increase as it increases its scale of production, the firm is
experiencing
a. economies of scale. d. diminishing marginal product.
b. constant returns to scale. e. diseconomies of scale.
c. increasing returns from specialization.
ANS: E DIF: Easy REF: Costs in the Long Run
MSC: Remembering
128. A firm is considering changing its plant size. It calculates the amount of output it would be able to
produce and the total cost for various plant sizes, as shown in the accompanying table. If the firm
is currently using plant size C, the firm is experiencing which of the following?
Plant Size Quantity Total Cost ($)
A 1 10
B 10 80
C 100 900
D 200 2,000
E 500 5,500
F 1,000 15,000
a. economies of scale d. diminishing marginal product

b. diseconomies of scale e. increasing marginal product
c. constant returns to scale
MSC: Analyzing
129. Which is the best example of diseconomies of scale?

a. the local power company d. a parking garage
b. the pizza business e. a small family farm
c. the restaurant industry
MSC: Evaluating
130. Samantha owns a gas station. If she moves into a larger lot but finds that her average costs have
increased in the long run, we know that Samantha is experiencing
a. increasing marginal product. d. constant returns to scale.
b. diminishing marginal product. e. economies of scale.
c. diseconomies of scale.
MSC: Applying
131. Matilda owns an office supply store. If she decided to expand the size of her store in order to sell
more supplies, how would she know if she is experiencing diseconomies of scale?
a. Her total cost of selling supplies decreases.
b. Her average cost of selling supplies increases.
c. Her total cost of selling supplies remains unchanged.
d. Her average cost of selling supplies remains unchanged.
e. Her average cost of selling supplies decreases.
MSC: Applying
132. When firms grow larger, they sometimes add many additional layers of managers between the top
executives and the entry-level employees. Because these managers do not actually produce any
output themselves, we expect more layers of management to lead to
a. diminishing marginal returns. d. constant returns to scale.
b. diseconomies of scale. e. increasing marginal returns.
MSC: Applying
133. Joshua owns a suit store. He currently sells around 10,000 suits per year. If he increases the size of
his store so that he can display and sell even more suits, and his long-run average total cost
remains unchanged, we know that Joshua is experiencing
a. diseconomies of scale. d. constant returns to scale.
b. diminishing marginal product. e. economies of scale.
c. increasing marginal product.
MSC: Applying
134. Rahim owns a candy factory. If he decided to expand the size of his factory so that he could make
more candy, how would he know if he is experiencing constant returns to scale?
a. His long-run average cost of making each piece of candy remains unchanged.
b. His long-run total cost of making candy decreases.
c. His long-run average cost of making each piece of candy decreases.
d. His long-run total cost of making candy remains unchanged.
e. His long-run average cost of making each piece of candy increases.
MSC: Applying
135. Jamal owns a coffee roasting company. He buys raw coffee beans, roasts them, grinds them, and
sells them to stores. He recently moved into a larger factory so that he can sell coffee to more
stores. How would Jamal know if he is experiencing constant returns to scale from increasing the
size of his factory?
a. His long-run average cost per pound of coffee remains the same.
b. His long-run total cost of roasting coffee remains the same.
c. His long-run total cost of roasting coffee decreases.
d. His long-run average cost per pound of coffee increases.
e. His long-run average cost per pound of coffee decreases.
MSC: Applying
136. When a firm grows larger, many additional layers of managers are sometimes added that do not
actually produce any output. At the same time, the firm gains additional bargaining power over the
prices it pays to its suppliers. If both of these factors have an equal effect, we would expect this
firm to experience
a. diminishing marginal returns. d. economies of scale.
b. diseconomies of scale. e. increasing marginal returns.
c. constant returns to scale.
MSC: Applying
137. If a firm experiences economies of scale, its long-run average cost curve is
a. a horizontal line. d. upward sloping.
b. downward sloping. e. U-shaped.
c. a vertical line.
ANS: B DIF: Easy REF: Costs in the Long Run
MSC: Understanding
138. If a firm experiences diseconomies of scale, its long-run average cost curve is
a. upward sloping. d. a horizontal line.
c. a vertical line.
ANS: A DIF: Easy REF: Costs in the Long Run
MSC: Understanding
139. Geoffrey owns a wedding dress store. If he increases the size of his store and experiences constant
returns to scale as a result, his long-run average total cost curve should be
a. vertical. d. downward sloping.
b. upward sloping. e. U-shaped.
c. horizontal.
MSC: Applying
140. Rebecca owns a fitness gym. If she increases the size of her fitness gym and experiences
diseconomies of scale as a result, her long-run average total cost curve should be
a. vertical. d. upward sloping.
c. horizontal.
MSC: Applying
141. Timothy owns a landscaping company. If he increases the size of his company and experiences
constant returns to scale as a result, his long-run average total cost curve should be
a. vertical. d. horizontal.
c. upward sloping.
MSC: Applying
142. Hubert owns a scooter store. Last year his average cost of selling a scooter was $1,000. If he
expands the size of his store this year and sees his average cost remain the same, his long-run
average total cost curve should be
a. horizontal. d. downward sloping.
c. vertical.
MSC: Applying
143. Shawn owns a stroller store. Last year his average cost of selling a stroller was $1,000. If he
expands the size of his store this year and sees his average cost increase to $1,050, his long-run
a. horizontal. d. downward sloping.
b. U-shaped. e. upward sloping.
c. vertical.
ANS: E DIF: Moderate REF: Costs in the Long Run
MSC: Applying
144. Ting owns a diamond shop. Last year her average cost of selling a diamond was $900. If she
expands the size of her store this year and sees her average cost decrease to $850, her long-run
a. vertical. d. downward sloping.
c. horizontal.
MSC: Applying
145. If a firm experiences gains from specialization as it increases its scale of production, we would
expect its long-run average cost curve to be
a. upward sloping. d. vertical.
b. horizontal. e. U-shaped.
c. downward sloping.
MSC: Analyzing
146. If a firm adds multiple layers of management as it increases its scale of production, thus adding to
its costs, we would expect its long-run average cost curve to be
a. downward sloping. d. vertical.
b. horizontal. e. U-shaped.
c. upward sloping.
MSC: Analyzing
147. When a firm is at its efficient scale of operation it produces the

a. maximum rate of output at which long-run average cost is at a minimum.
b. minimum rate of output at which long-run average cost is at a minimum.
c. maximum rate of output where we have lowest long-run marginal cost.
d. minimum rate of output where we have lowest long-run marginal cost.
e. minimum rate of output where we have highest long-run marginal cost.
MSC: Understanding
Use the following graph to answer the following questions.
148. The long-run cost curve between points A and B illustrates

a. efficient scale. d. diminishing marginal product.
MSC: Remembering
149. The long-run cost curve between points E and F illustrates

a. efficient scale. d. diminishing marginal product.
ANS: B DIF: Easy REF: Costs in the Long Run
MSC: Remembering
150. If a firm experiences some gains from specialization as it expands its scale of production, and adds
additional layers of management as it does so, assuming they have the same effect, we would
expect its long-run average total cost curve to be
a. downward sloping. d. vertical.
c. horizontal.
MSC: Analyzing
SHORT ANSWER
1. Explain the difference between an implicit cost and an explicit cost, and how both costs relate to
economic and accounting profits.
ANS:
An implicit cost is the opportunity cost of some factor of production, such as the next-best
alternative use of the business owner’s time. An explicit cost is an out-of-pocket expense paid for a
factor of production, such as the salary paid to a business owner. Both costs are measured in
dollars. Economists include both implicit costs and explicit costs when computing economic profit.
Only explicit costs are considered when computing accounting profit.
DIF: Moderate REF: Explicit Costs and Implicit Costs

2. What is an implicit cost?
ANS:
An implicit cost is the opportunity cost of a factor of production, for example, the value of what an
employee or employer could be making at another place of employment. An implicit cost measures
the next-best highest valued alternative of what could have been produced using an input like labor
or capital. Implicit costs are included when measuring the full total costs of producing a good.
DIF: Easy REF: Explicit Costs and Implicit Costs

3. How will a firm know when it has reached its minimum efficient scale of production?
ANS:
The minimum efficient scale is the level of output where long-run average total cost is lowest. A
firm will know when it has reached its minimum efficient scale of production when subsequent
increases in the scale of production, such as by increasing the size of a factory, do not result in
additional decreases in the average total cost of production. The minimum efficient scale is found
where there are no more gains from economies of scale. It is also found at the level of output after
economies of scale have ended and before diseconomies of scale occur.
DIF: Easy REF: Costs in the Short Run

MSC: Understanding
4. Explain why it is important for a firm to know its efficient scale of production.
ANS:
It is important because that is where a firm’s long-run costs are minimized. It is assumed that all
firms want to minimize costs and thus potentially maximize profits. By expanding its scale of
production to the efficient scale of production, the firm knows that economies of scale are fully
exploited and that its long-run profit is potentially maximized. If the firm does not know its
efficient scale of production, it might expand to the point that it experiences diseconomies of scale,
which could harm its long-run potential profit.
DIF: Difficult REF: Costs in the Short Run

MSC: Understanding
5. Quinn owns a DVD store. Give some examples of Quinn’s fixed costs for the store.
ANS:
Any costs that do not vary with the amount of DVDs Quinn sells would be fixed costs. Quinn’s
fixed costs could include the rent for the store, debt payments on loans, pension costs for retired
employees, insurance on her property, and so on. In general, any cost that does not vary with the
amount of output produced is a fixed cost. For example, the cost of capital is a fixed cost.
DIF: Moderate REF: Costs in the Short Run

MSC: Applying
6. Explain what would happen to a graphed production function if the firm used more automation.
ANS:
Automation is a technology that raises the productivity of workers. Since the production function
shows the relationship between inputs and maximum possible output, the production function will
shift upward such that for each level of input there will be a higher level of output.
DIF: Moderate REF: The Production Function

7. Describe what a production function is and what would happen if a firm becomes less efficient
because of a law that requires a certain number of workers per unit of capital.
ANS:
The production function is the maximum possible output that can be produced with a given set of
inputs. If the firm becomes less efficient because of labor market regulations, the production
function will either rotate downward or the slope of the function will change.

8. Explain what a production function is. Is the production function an economic or technological
relationship?
ANS:
A production function shows the number of inputs required to produce a specific amount of output.
This relationship is technological and not economic because technology allows the inputs to be
combined in a particular way to produce the output.
9. What is the concept of diminishing marginal product?
ANS:
The concept of diminishing marginal product states that, at some point, successive increases in an
input are associated with a slower (diminishing) increase in the output.
DIF: Easy REF: Diminishing Marginal Product

10. Explain what the marginal product curve for a labor input typically looks like.
ANS:
The marginal product of labor typically increases at low levels of the labor input due to
specialization. However, as the labor input continues to increase, some workers will have fewer
units of capital with which to work and the marginal product of labor will decrease. The marginal
product curve increases at first and then decreases as the labor input increases.
DIF: Moderate REF: Diminishing Marginal Product

11. What is the difference between average variable cost and average total cost? Be sure to explain
each of the cost concepts in your answer.
ANS:
Average total costs equal average variable costs plus average fixed costs. Total fixed costs are
constant and do not vary with the level of output, with the result being that average fixed costs
decline as output increases. As output increases, the average variable and average total costs curves
get closer together.
DIF: Moderate REF: Long-Run Cost Curves

MSC: Understanding
12. Explain the relationship between the marginal cost curve and the average cost curve.
ANS:
When the marginal cost is less than the average variable cost curve and average total cost curve,
the average variable and average total cost curves fall. The marginal cost curve intersects at the
minimum of the average variable and average total cost curves. When the marginal cost curve is
greater than the average variable cost curve and average total cost curve, the average variable and
average total cost curves rise.

MSC: Understanding
13. Explain the relationship between the marginal cost curve and the marginal product curve.
ANS:
The marginal cost curve is the inverse of the marginal product of the variable input. When the
marginal product is increasing, the marginal cost decreases. When the marginal product is
decreasing, the marginal costs begin to rise.
DIF: Moderate REF: What Costs Do Firms Consider in the Short Run and the Long Run?
MSC: Understanding
14. What determines the shape of the short-run cost curves?
ANS:
The short-run cost curves get their shape from the concept of the diminishing marginal product. If
the price of the variable input is constant, the marginal costs will rise as the marginal product of
the input diminishes. Additionally, the short-run cost curves get their U-shape from the
mathematical relationship between marginal and average curves.

MSC: Understanding
15. Why is the long-run average cost curve important to a firm?
ANS:
The long-run average cost curve helps a firm decide whether to expand or shrink its plant size.
DIF: Easy REF: Costs in the Short Run

MSC: Understanding
16. What causes diseconomies of scale for a firm?
ANS:
A firm becoming larger and harder to efficiently manage causes diseconomies of scale for a firm.
As the firm grows larger, a firm needs to hire more managers and supervisors and create a
bureaucracy, and this increases the firm’s long-run average costs.
DIF: Moderate REF: Costs in the Long Run

MSC: Understanding
17. What creates economies of scale for a firm?
ANS:
Economies of scale are generated as workers and the capital they use can become more
specialized. Also, as the firm becomes bigger, the way that labor and capital are combined to
produce an output generates more efficiencies.

MSC: Understanding
18. If an industry is experiencing average costs that are always declining as the output increases, what
would you expect the efficient scale to be?
ANS:
If an industry is experiencing costs that decline at all levels of output, the industry is then in the
economies of scale region for all levels of output. Thus, the efficient scale for this industry does
not exist.

MSC: Understanding
19. Is it possible for a firm to experience both economies of scale and diminishing marginal product at
the same time? Explain.
ANS:
Yes, it is possible for a firm to experience both economies of scale and a diminishing marginal
product at the same time. The diminishing marginal product concept exists in the short run where
one input is fixed. Economies of scale exist in the long run when both inputs can change in
quantity.
DIF: Difficult REF: Costs in the Long Run

MSC: Understanding
20. Explain how the long-run average cost curve is constructed graphically.
ANS:
The long-run average cost curve is constructed as an envelope of all the possible short-run average
cost curves for all possible plant and firm sizes in the short run.
DIF: Moderate REF: Long-Run Cost Curves

MSC: Understanding
21. Kareem owns a bike store. If Kareem decides to double the size of his bike store, his rent will
increase as well. Is this increase in rent a short-run cost or a long-run cost?
ANS:
The increase in rent is a long-run cost because it represents the cost of an increase in land. In this
example, Kareem’s rent for his bike store is a land expense, and land expenses change only in the
long run. Kareem’s short-run costs include, for example, wages paid to his employees, the cost of
raw materials, or the cost of electricity and other utilities. Kareem’s land costs (i.e., fixed costs) do
not change in the short run.

MSC: Applying
22. How are long-run costs different from short-run costs?
ANS:
Long-run costs are different from short-run costs in that the decision and cost of hiring more
capital is considered in the long run, not the short run. In the short run, capital is fixed at a certain
level, and thus capital costs are fixed and do not change in the short run. These are called fixed
costs in the short run. But because the amount of capital employed can change in the long run,
capital costs can change as well. There are no fixed costs, and all costs are variable in the long run.
Test Bank for Principles of Economics, 3rd Edition Dirk MateerLee Coppock
DIF: Easy REF: Costs in the Long Run

MSC: Understanding
23. What are economies of scale?
ANS:
Economies of scale occur when a firm expands its scale of production, say, by increasing the size
of a factory. As a result of this expansion, the long-run average total cost of producing output
decreases. This decrease in long-run average total cost represents economies of scale. Economies
of scale can result from an increase in efficiency when firms grow in size, increased specialization
of inputs, and buying inputs in bulk.
DIF: Easy REF: Costs in the Long Run

MSC: Understanding
24. Explain the differences between diminishing marginal returns and diseconomies of scale.
ANS:
Diminishing marginal returns occur as more labor is added to a fixed amount of capital or land.
Diseconomies of scale occur when more capital or land is added to a variable amount of labor.
Also, diminishing marginal returns occur in the short run, whereas diseconomies of scale occur in
the long run.
DIF: Difficult REF: Costs in the Long Run

MSC: Understanding
25. Lisette owns a bakery. If she expands the size of her bakery but her average total cost of producing
bread remains unchanged in the long run, what is Lisette experiencing?
ANS:
She is experiencing constant returns to scale, which occur when an increase in the scale of
production has no effect on the long-run average total cost of producing output. If her long-run
average total cost had decreased, she would be experiencing economies of scale. Alternately, if her
long-run average total cost had increased, she would be experiencing diseconomies of scale.

MSC: Applying
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1. What needs to be done to ensure that a company is profitable?

3. Total revenue minus total cost is equal to

4. Which of the following statements is FALSE?

5. Which of the following statements is true?

6. Explicit costs are

7. The out-of-pocket expenses incurred in producing a good are also known as

8. Which of the following is true about explicit costs?

9. An explicit cost for a business that manufactures bicycles would be the

13. Implicit costs are

14. Implicit costs can be difficult to measure because

20. Accounting profit is equal to

21. Accounting profit ignores which of the following?

26. Economic profit is equal to

32. A firm’s inputs are also known as its

33. The production function shows the relationship between the

35. Which of the following statements is true?

37. What would cause a firm’s production function to change?

39. Another term for factors of production is

40. The three primary factors of production are

41. The three primary inputs are

47. The production function for automobiles includes

48. The production function for bookshelves includes

51. Marginal product is the change in

Refer to the accompanying graph to answer the following questions.

69. Is this firm earning positive, negative, or zero economic profits?

70. The accompanying graph represents the ________ for a firm.

78. Which of the following costs is fixed in the short run?

Use the following scenario to answer the following questions:

89. Kareem’s average total cost was ________ per bike.

90. Kareem’s average variable cost was ________ per bike.

91. Kareem’s average fixed cost was ________ per bike.

94. A firm’s short-run cost curves show us

98. If the marginal cost curve is U-shaped

106. Where would we find a firm’s minimum efficient scale of production?

Use the following graph to answer the following questions.

119. Which of the curves depicts economies of scale?

a. economies of scale d. diminishing marginal product

129. Which is the best example of diseconomies of scale?

147. When a firm is at its efficient scale of operation it produces the

Use the following graph to answer the following questions.

148. The long-run cost curve between points A and B illustrates

149. The long-run cost curve between points E and F illustrates

DIF: Moderate REF: Explicit Costs and Implicit Costs

2. What is an implicit cost?

DIF: Easy REF: Explicit Costs and Implicit Costs

DIF: Easy REF: Costs in the Short Run

DIF: Difficult REF: Costs in the Short Run

DIF: Moderate REF: Costs in the Short Run

DIF: Moderate REF: The Production Function

DIF: Moderate REF: The Production Function

9. What is the concept of diminishing marginal product?

DIF: Easy REF: Diminishing Marginal Product

DIF: Moderate REF: Diminishing Marginal Product

DIF: Moderate REF: Long-Run Cost Curves

DIF: Moderate REF: Costs in the Short Run

14. What determines the shape of the short-run cost curves?

DIF: Moderate REF: Costs in the Short Run

15. Why is the long-run average cost curve important to a firm?

DIF: Easy REF: Costs in the Short Run