ECON Micro Canadian 1st Edition

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Chapter 07 Production and Cost in the Firm

MULTICHOICE

1. Why do economists assume that firms try to maximize economic profit?

(A) because, over time, firms that do NOT earn profits will have difficulty securing financing to
survive

(B) because firms in the real world always maximize profit

(C) because profit is easier to calculate than revenues

(D) because if a firm fails to earn a profit in its first year, it will go out of business

Answer : (A)

2. Which of the following is an implicit cost?

(A) salaries

(B) utilities, such as gas and electricity

(C) insurance premiums

(D) a firm owner's time

Answer : (D)

3. Suppose Steve owns the building where his company operates. Which of the following scenarios
represents the opportunity cost of owning the building?

(A) Steve pays no rent, thus there is no opportunity cost.

(B) Steve does NOT rent the building to anyone else, thus there is no opportunity cost.

(C) Steve pays no rent, thus there is an opportunity cost.

(D) Steve's usage of the building precludes him from renting to anyone else, thus there is an
opportunity cost.

Answer : (D)

4. Which of the following are implicit costs for a typical firm?

(A) insurance costs

(B) electricity costs

(C) opportunity costs of capital owned and used by the firm

(D) cost of labour hired by the firm

Answer : (C)

5. Suppose the Ford Motor Company pays cash for the steel if uses to produce cars. What type of
cost is this?

(A) sunk costs

(B) fixed costs

(C) explicit costs

(D) implicit costs

Answer : (C)

6. What is the term for a firm's opportunity costs of using resources provided by the firm's owners?

(A) sunk costs

(B) fixed costs

(C) explicit costs

(D) implicit costs

Answer : (D)

7. How are explicit costs different than implicit costs?

(A) Explicit costs reflect opportunity costs.

(B) Explicit costs include the value of the owner's time.

(C) Explicit costs are NOT included in a firm's accounting statements.

(D) Explicit costs are actual cash payments.

Answer : (D)

8. What is an implicit cost?

(A) any cost a firm cannot avoid in the short run

(B) any expenditure a firm makes

(C) an opportunity cost

(D) actual cash payments

Answer : (C)

9. In terms of costs, what does the opportunity cost of a resource include?

(A) explicit costs and implicit costs

(B) explicit costs only

(C) implicit costs only

(D) sunk costs only

Answer : (A)

10. Which of the following is the best definition of explicit costs?

(A) Explicit costs are NOT part of opportunity cost.

(B) Explicit costs are the only cost considered in opportunity cost.

(C) Explicit costs are exactly the same as implicit costs.

(D) Explicit costs are comprised of actual monetary payments for resources purchased.

Answer : (D)

11. Which term refers to the difference between a firm's total revenue and what must be paid to
attract resources from their best alternative use?

(A) total revenue

(B) utility

(C) economic profit

(D) cost

Answer : (C)

12. Opportunity cost is a concept that is utilized in calculating which of the following?

(A) accounting profit

(B) variable costs

(C) economic profit

(D) sunk costs

Answer : (C)
13. John had been renting office space in a building downtown, but he moved his office to the
carriage house he owns behind his house. How will his costs change?

(A) Explicit and implicit costs will rise.

(B) Explicit costs will rise, and implicit costs will fall.

(C) Explicit and implicit costs will fall.

(D) Explicit costs will fall, and implicit costs will rise.

Answer : (D)

14. A young chef is considering opening his own sushi bar. To do so, he would have to quit his
current job, which pays $30,000 a year, and take over a storefront space in a building that he owns
and currently rents to his brother for $12,000 a year. His expenses at the sushi bar would be
$70,000 for food and $5,000 for utilities. What would his explicit costs be?

(A) $42,000

(B) $75,000

(C) $105,000

(D) $117,000

Answer : (B)

15. A young chef is considering opening his own sushi bar. To do so, he would have to quit his
current job, which pays $30,000 a year, and take over a storefront space in a building that he owns
and currently rents to his brother for $12,000 a year. His expenses at the sushi bar would be
$70,000 for food and $5,000 for utilities. What would his implicit costs be?

(A) $30,000

(B) $42,000

(C) $75,000

(D) $105,000

Answer : (B)

16. Two friends, Diane and Sam, own and run a bar. Diane tends bar on Monday, Wednesday, and
Friday and receives a wage plus tips. Sam tends bar on Tuesday, Thursday, and Saturday and
receives only tips. Which of the following represents an implicit cost of operating the bar?

(A) Diane's wage

(B) Sam's time

(C) Diane's tips

(D) Sam's tips

Answer : (B)

17. Mary-Ann and Don want to open their own sandwich deli. To do so, Mary-Ann must give up her
job, at which she earns $40,000 per year, and Don must give up his part-time job, at which he earns
$30,000 per year. They must liquidate their joint money market fund, which earns $10,000 interest
annually. The rent on the building would be $20,000 per year, and expenses for such necessities as
utilities and food to make the sandwiches would be $55,000 annually. What would be the explicit
cost per year of operating the deli?

(A) $20,000

(B) $55,000

(C) $75,000

(D) $80,000

Answer : (C)

18. Amanda, age 6, opens a lemonade stand. She makes all the lemonade from a mix she found in
her parents' kitchen. The pitcher and paper cups were also taken from the kitchen. Amanda's stand
is an old box she found in the garage. Which of the following best characterizes Amanda's costs?

(A) The opportunity cost of the lemonade is zero.

(B) The only opportunity cost of the lemonade is Amanda's time.

(C) Amanda's explicit costs are zero.

(D) The implicit costs of Amanda's lemonade are zero.

Answer : (C)

19. Which of the following would NOT appear on a firm's accounting statement?

(A) sunk costs

(B) fixed costs

(C) explicit costs

(D) implicit costs

Answer : (D)

20. How is accounting profit calculated?

(A) as explicit costs minus implicit costs

(B) as economic profit minus implicit costs

(C) as economic profit minus explicit costs

(D) as economic profit plus implicit costs

Answer : (D)

21. How is economic profit calculated?

(A) as total revenue plus total costs

(B) as total revenue minus variable costs

(C) as total revenue minus total costs

(D) as total revenue minus fixed costs

Answer : (C)

22. Which of the following is the best definition of economic profit?

(A) total revenue minus implicit costs

(B) total revenue plus explicit costs

(C) total revenue plus implicit costs

(D) total revenue minus (implicit and explicit costs)

Answer : (D)

23. Which of the following would be shown on IBM's accounting statement?

(A) revenue, implicit costs, explicit costs, and economic profit

(B) revenue, implicit costs, explicit costs, and accounting profit

(C) revenue, explicit costs, and economic profit

(D) revenue, explicit costs, and accounting profit

Answer : (D)

24. Mary-Ann and Don want to open their own sandwich deli. To do so, Mary-Ann must give up her
job, at which she earns $40,000 per year, and Don must give up his part-time job, at which he earns
$20,000 per year. They must liquidate their joint money market fund, which earns $2,000 interest
annually. The rent on the building would be $20,000 per year, and expenses for such necessities as
utilities and food to make the sandwiches would be $65,000 annually. What minimum amount of
revenue per year would make it worthwhile, financially, for Mary-Ann and Don to operate the deli?

(A) $60,000

(B) $62,000

(C) $85,000

(D) $147,000

Answer : (D)

25. Suppose Ernie gives up his job as financial advisor, at which he earned $30,000 per year, to
open up an online store selling cleaning products. He invests $10,000 of his own money in the store.
This money had been earning 5 percent interest. This year's revenues in the new business were
$50,000, and explicit costs were $10,000. What is Ernie's economic profit?

(A) $0

(B) $9,500

(C) $10,000

(D) $40,000

Answer : (B)

26. What is Canadian Tire's accounting profit equal to?

(A) its total revenue plus opportunity costs

(B) its total revenue minus imputed costs

(C) its total revenue minus explicit costs

(D) its total revenue minus explicit and implicit costs

Answer : (C)

27. What is the definition of economic profit?

(A) total revenue minus price

(B) total revenue minus what must be paid to resources in order to attract them from their best
alternative use

(C) total revenue divided by what must be paid to resources in order to attract them from their best
alternative use

(D) total revenue plus what must be paid to resources to attract them from their best alternative use
Answer : (B)

28. What is Canadian Tire's economic profit equal to?

(A) its total revenue minus accounting profit

(B) its total revenue minus explicit costs

(C) its total revenue plus opportunity costs

(D) its accounting profit minus implicit costs

Answer : (D)

29. How does accounting profit compare to economic profit?

(A) Accounting profit is always less than economic profit.

(B) Accounting profit is never less than economic profit.

(C) Accounting profit is equal to economic profit if a normal profit is earned.

(D) Accounting profit is less than economic profit only when implicit costs are greater than explicit
costs.

Answer : (B)

30. Suppose Ben buys out Jerry's ownership in their firm but retains him as a salaried employee.
How will profits be affected?

(A) They will increase.

(B) Economic profits will decrease.

(C) Profits will NOT change.

(D) Accounting profits will increases.

Answer : (C)

31. How is normal profit defined?

(A) as accounting profit

(B) as economic profit

(C) as the profit necessary to ensure that opportunity costs are covered

(D) as accounting profit minus economic profit

Answer : (C)
32. Suppose a retail sales clerk has been making $25,000 per year but gives up his job in order to
make and sell pottery. And suppose his revenue from the sale of pottery is $50,000 and his materials
cost is $20,000. What is his economic profit?

(A) $5,000

(B) $25,000

(C) $30,000

(D) $50,000

Answer : (A)

33. Suppose Bob leaves his $50,000-a-year job as a financial advisor and starts his own business
selling cleaning products. In the first year his accounting profit is $70,000. Based on this level of
success, how should Bob proceed?

(A) He should return to his old job because his economic profit is smaller than his accounting profit.

(B) He should return to his old job because his economic profit is less than his old salary.

(C) He should stay with his new firm because his economic profit is positive.

(D) He should stay with his new firm because accounting profit is positive.

Answer : (C)

34. Suppose a sales person leaves his $50,000-a-year job and starts his own firm breeding dogs. In
the first year, his accounting profit is $70,000. He finances his new business with $100,000 from his
savings account, which had been earning 10 percent interest. What is his economic profit?

(A) -$90,000

(B) -$80,000

(C) $10,000

(D) $60,000

Answer : (C)

35. What is the relationship between economic profit and accounting profit?

(A) Economic profit will never exceed accounting profit.

(B) Economic profit is most often equal to accounting profit.

(C) Economic profit is always at least as large as accounting profit.

(D) Economic profit is a less complete measure of profitability than accounting profit.
Answer : (A)

36. Suppose the Money Store earns a normal profit this year. How does this affect the owner's
economic profit?

(A) It is equal to accounting profit.

(B) It is zero.

(C) It is equal to the average accounting profit in other industries.

(D) It is more than accounting profit.

Answer : (B)

37. What is a firm's economic profit if the firm earns more than a normal profit this year?

(A) It must be greater than the firm's accounting profit.

(B) It is positive.

(C) It is equal to its accounting profit.

(D) It is zero.

Answer : (B)

38. Suppose a professor gives up her teaching job to devote her time to writing textbooks. And
suppose soon after this the salaries of professors rise. What will happen to her profits?

(A) Her accounting profit will rise.

(B) Her accounting profit will fall.

(C) Her economic profit from textbooks will fall.

(D) Her economic profit from textbooks will rise.

Answer : (C)

39. Suppose Joan uses her savings to purchase computer equipment for her new consulting
business. And suppose soon after this, the market interest rate rises. As a result, what happens to
her profits?

(A) Accounting profit falls.

(B) Accounting profit rises.

(C) Economic profit rises.

(D) Economic profit falls.

Answer : (D)

40. John had been renting office space in a building downtown, but he moved his office to the
carriage house he owns behind his house. How will his profit change?

(A) Implicit costs will fall.

(B) Economic profit will fall.

(C) Explicit costs will rise.

(D) Accounting profit will rise.

Answer : (D)

41. Exhibit 7-1

Total Revenue $100,000

Assistant's salary $ 20,000
Material & equipment 15,000
Forgone salary 30,000
Forgone interest 1,000
Forgone building rental 10,000

Refer to the table in the exhibit. Sally owns a small business that she operates in a small building
she owns. What is Sally's accounting profit?

(A) $24,000

(B) $35,000

(C) $50,000

(D) $65,000

Answer : (D)

42. Exhibit 7-1

Total Revenue $100,000

Assistant's salary $ 20,000
Material & equipment 15,000
Forgone salary 30,000
Forgone interest 1,000
Forgone building rental 10,000

Refer to the table in the exhibit. Sally owns a small business that she operates in a small building
she owns. What is Sally's normal profit?

(A) $24,000

(B) $35,000

(C) $41,000

(D) $65,000

Answer : (C)

43. Exhibit 7-1

Total Revenue $100,000

Assistant's salary $ 20,000
Material & equipment 15,000
Forgone salary 30,000
Forgone interest 1,000
Forgone building rental 10,000

Refer to the table in the exhibit. Sally owns a small business that she operates in a small building
she owns. What is Sally's economic profit?

(A) $24,000

(B) $35,000

(C) $50,000

(D) $65,000

Answer : (A)

44. Suppose Joe has $1,000 to invest in a one-year GIC. Scotiabank offers 5 percent interest, CIBC
offers 5.25 percent, and the Bank of Montreal offers 5.40 percent. If Joe places his money in the
Bank of Montreal's GIC, what will his economic profit on the investment be?

(A) -0.40 percent

(B) 0.15 percent

(C) 0.40 percent

(D) 5.40 percent

Answer : (B)

45. Suppose that at the current level of output, Pat's Hats has fixed costs of $500, variable costs of
$1,000, and total revenue of $2,000. What is Pat's accounting profit in the short run and in the long
run?

(A) Profit is currently $500, and in the long run it will be $1,000 because there will be no fixed costs.

(B) Profit is currently $500, and in the long run it will be $1,500 because there will be no variable
costs.

(C) Profit is currently $500, and in the long run it will also be $500.

(D) Profit is currently $500, but in the long run it will be much less because fixed costs are too high.

Answer : (C)

46. A young retail worker in a small town is considering opening his own sushi bar. To do so, he
would have to quit his current job, which pays $20,000 a year, and take over a building he owns and
currently rents out for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and
$2,000 for utilities. What is the minimum revenue he must earn per year to make it worthwhile to
open his sushi bar?

(A) $52,000

(B) $66,000

(C) $72,000

(D) $78,000

Answer : (D)

47. How is a firm's total profit calculated?

(A) marginal revenue minus marginal cost

(B) average revenue minus average cost

(C) marginal revenue minus marginal cost

(D) total revenue minus total cost

Answer : (D)

48. By comparing marginal revenue and marginal cost, firms are able to adjust production to the
level that achieves the firm's objective. What is this objective assumed to be?

(A) maximization of total revenue

(B) maximization of profit

(C) minimization of variable cost

(D) minimization of average total cost

Answer : (B)

49. If a firm's marginal cost exceeds its marginal revenue, how should the firm adjust its level of
output in order to maximize profit?

(A) The firm should increase the level of production to maximize profit.

(B) The firm should increase production levels to minimize losses.

(C) The firm should decrease the level of production to maximize profit.

(D) The firm should keep the level of production where it is to maximize profit.

Answer : (C)

50. Managers of a firm think at the margin and make incremental adjustments to the level of
production. For a firm's managers to be satisfied that the level of production is correct, which of the
following must occur?

(A) Average variable cost must exceed marginal cost.

(B) Total cost must be less than average revenue.

(C) Costs must be minimized.

(D) Profit must be maximized.

Answer : (D)

51. In order for a firm to calculate marginal cost, what other type of cost must the firm know?

(A) sunk cost

(B) variable cost

(C) fixed cost

(D) unavoidable cost

Answer : (B)

52. What is the term for inputs that can be increased or decreased in the short run?

(A) fixed inputs

(B) variable inputs

(C) economic inputs

(D) accounting inputs

Answer : (B)

53. Which of the following is most likely to be a fixed resource for Paul's Country Fresh Pies, Inc.?

(A) berries

(B) flour

(C) eggs

(D) ovens

Answer : (D)

54. A boy named Bart operates a lemonade stand in front of his house. His father works at the
Springfield Nuclear Power Plant. Which of the following describes the long run for each of these
types of businesses?

(A) The long run is the same for both businesses.

(B) The long run is longer for the power plant than it is for the lemonade stand.

(C) The long run is shorter for the power plant than it is for the lemonade stand.

(D) The long run is initially shorter for the power plant and then longer for the lemonade stand.

Answer : (B)

55. Which of the following best describes the short run?

(A) a period of time when all resources may be varied

(B) a period of time when all resources are fixed

(C) a period of time when at least one resource is fixed

(D) a period of time when at least one resource may be varied

Answer : (C)

56. Which of the following is most likely to be a fixed resource for the City Slicker's Dude Ranch?

(A) the lodge where the guests stay

(B) food for the guests

(C) stable hands to take care of the horses

(D) hay for the horses

Answer : (A)
57. Which of the following is most likely to be a fixed resource for the Speedy Word Processing and
Résumé Company?

(A) paper

(B) typists

(C) computer terminals

(D) electricity

Answer : (C)

58. Which of the following probably has the shortest long run?

(A) a law firm

(B) a steel mill

(C) an automobile plant

(D) a tire factory

Answer : (A)

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

(A) A new economics professor is hired on campus.

(B) General Motors increases its orders for steel.

(C) Microsoft cuts back its hiring of new graduates.

(D) Ontario Power Generation disassembles one of its nuclear power plants.

Answer : (D)

60. Which of the following represents a short-run adjustment?

(A) Toyota builds an automobile plant in Ontario.

(B) Faced with increasing enrolment, a private college constructs a new building for its School of
Business.

(C) Because of staggering losses, three insurance companies exit the industry.

(D) A branch of TD Canada Trust hires two new bank tellers to meet increased demand for customer
service.

Answer : (D)
61. Which of the following would most likely reach the long run most rapidly?

(A) a nuclear power plant

(B) a hot dog stand

(C) a lumber mill

(D) a shopping mall

Answer : (B)

62. Which of the following statements best characterizes the long run?

(A) It is greater than one year long.

(B) It is greater than six months long.

(C) It is always longer in service industries than in manufacturing industries.

(D) It varies from industry to industry.

Answer : (D)

63. Which of the following best characterizes the short run?

(A) It is less than one year long.

(B) It is greater than one year long.

(C) It is a period of time when at least one resource is fixed.

(D) It is a period of time when at least one resource is variable.

Answer : (C)

64. Which of the following best characterizes the long run?

(A) It is a period of time when at least one resource is fixed.

(B) It is a period of time when all resources are variable.

(C) It is a period of time when all resources are fixed.

(D) It is a period greater than one year long.

Answer : (B)

65. What is the term for the additional output obtained by adding another unit of labour to the
production process?
(A) marginal cost of labour

(B) average output of labour

(C) marginal utility of labour

(D) marginal product of labour

Answer : (D)

66. What is the definition of marginal product?

(A) the increase in revenue that occurs when an additional unit of a resource is added

(B) the increase in output that occurs when all resources are increased by the same proportion

(C) the increase in output that occurs when an additional unit of a resource is added, holding all
other resources constant

(D) the amount of additional resources needed to increase output by one unit when all resources are
increased by the same amount

Answer : (C)

67. Exhibit 7-2

Total product
Labour (pairs of shoes)
0 0
1 20
2 50
3 75
4 80
5 75

Refer to the table in the exhibit. What is the marginal product of the third unit of labour?

(A) 15 pairs of shoes

(B) 25 pairs of shoes

(C) 45 pairs of shoes

(D) 75 pairs of shoes

Answer : (B)

68. Exhibit 7-2

 Total product
Labour (pairs of shoes)
0 0
1 20
2 50
3 75
4 80
5 75

Refer to the table in the exhibit. What is the average product of the third unit of labour?

(A) 15 pairs of shoes

(B) 25 pairs of shoes

(C) 45 pairs of shoes

(D) 70 pairs of shoes

Answer : (B)

69. Exhibit 7-2

Total product
Labour (pairs of shoes)
0 0
1 20
2 50
3 75
4 80
5 75

Refer to the table in the exhibit. What is the marginal product of the fourth unit of labour?

(A) 5 pairs of shoes

(B) 10 pairs of shoes

(C) 20 pairs of shoes

(D) 50 pairs of shoes

Answer : (A)

70. Exhibit 7-2

Total product
Labour (pairs of shoes)
0 0
1 20
2 50
3 75
4 80
5 75

Refer to the table in the exhibit. What is the average product of the fourth unit of labour?

(A) 5 pairs of shoes

(B) 10 pairs of shoes

(C) 20 pairs of shoes

(D) 50 pairs of shoes

Answer : (C)

71. Exhibit 7-2

Total product
Labour (pairs of shoes)
0 0
1 20
2 50
3 75
4 80
5 75

Refer to the table in the exhibit. At what point do diminishing marginal returns set in?

(A) before the first unit of labour

(B) between the first and second units of labour

(C) between the second and third units of labour

(D) between the third and fourth units of labour

Answer : (C)

72. Exhibit 7-2

Total product
Labour (pairs of shoes)
0 0
1 20
2 50
3 75
4 80
5 75
Refer to the table in the exhibit. At what point do negative marginal returns set in?

(A) between the first and second units of labour

(B) between the second and third units of labour

(C) between the third and fourth units of labour

(D) between the fourth and fifth units of labour

Answer : (D)

73. Which of the following would lead to increasing marginal returns?

(A) diseconomies of scale

(B) increasing costs

(C) specialization and division of labour

(D) labour unions

Answer : (C)

74. As Product Co. adds the first four workers to its production process in the short run, its output
rises successively from 0 to 12, 25, 35, and 43. Suppose a fifth worker is added. What will the total
output most likely be after the fifth worker is added?

(A) >51

(B) between >8 and <43

(C) between >3 and <51

(D) <8

Answer : (C)

75. Which of the following can be explained by the law of diminishing returns?

(A) why monopolies have a guaranteed profit margin

(B) why short-run MC and AVC curves are U-shaped

(C) why the production possibilities curve is bowed out

(D) why long-run supply curves are downward sloping

Answer : (B)

76. Suppose a firm is experiencing diminishing marginal returns to labour. Which of the following
best describes what is happening to this firm?

(A) The first workers the firm hired were better than the workers hired later on.

(B) The firm is experiencing decreasing returns to scale.

(C) The positive effect of specialization in production is being offset by the negative effect of
crowding of inputs.

(D) Output is decreasing.

Answer : (C)

77. Exhibit 7-3

Number Total
of workers output
0 0
1 10
2 40
3 100
4 140
5 160
6 170
7 150

Refer to the table in the exhibit. What is the total product of four workers?

(A) 0

(B) 10

(C) 20

(D) 140

Answer : (D)

78. Exhibit 7-3

Number Total
of workers output
0 0
1 10
2 40
3 100
4 140
5 160
6 170
7 150
Refer to the table in the exhibit. What is the marginal product of the third worker?

(A) 20

(B) 40

(C) 60

(D) 100

Answer : (C)

79. Exhibit 7-3

Number Total
of workers output
0 0
1 10
2 40
3 100
4 140
5 160
6 170
7 150

Refer to the table in the exhibit. When do diminishing marginal returns set in?

(A) with the addition of the first worker

(B) with the addition of the third worker

(C) with the addition of the fourth worker

(D) with the addition of the fifth worker

Answer : (C)

80. What is the law of diminishing marginal returns?

(A) Long-run average cost declines as output increases.

(B) If the marginal product is above the average product, the average will rise.

(C) As units of a variable input are added to a given amount of fixed inputs, the marginal product of
the variable input eventually diminishes.

(D) As a person consumes more of a good, the marginal satisfaction from that good eventually
diminishes.

Answer : (C)
81. Suppose the total product for each of five units of labour is 10, 16, 20, 30, and 34, respectively.
What is the marginal product of the third unit?

(A) 0

(B) 4

(C) 6

(D) 20

Answer : (B)

82. Exhibit 7-4

Units of Total Marginal

labour product product
0 0 -
1 6 6
2 14 8
3 24 10
4 36 12
5 42 6
6 46 4

Refer to the table in the exhibit. When do marginal returns increase?

(A) with the hiring of up to two workers

(B) with the hiring of up to three workers

(C) with the hiring of up to four workers

(D) with the hiring of up to five workers

Answer : (C)

83. Exhibit 7-4

Units of Total Marginal

labour product product
0 0 -
1 6 6
2 14 8
3 24 10
4 36 12
5 42 6
6 46 4

Refer to the table in the exhibit. When do marginal returns begin to diminish?
(A) with the hiring of the second worker

(B) with the hiring of the third worker

(C) with the hiring of the fourth worker

(D) with the hiring of the fifth worker

Answer : (D)

84. Exhibit 7-5

Labour Total
Input Product
0 0
1 10
2 22
3 33
4 40
5 45
6 42

Refer to the table in the exhibit. When is the law of diminishing marginal returns first evident?

(A) when the first labour unit is added

(B) when the second labour unit is added

(C) when the third labour unit is added

(D) when the sixth labour unit is added

Answer : (C)

85. What is the effect on total product when diminishing marginal returns set in?

(A) Total product decreases at an increasing rate.

(B) Total product decreases at a decreasing rate.

(C) Total product increases at an increasing rate.

(D) Total product increases at a decreasing rate.

Answer : (D)

86. What is the effect on marginal product when diminishing marginal returns set in?

(A) Marginal product is positive and increasing.

(B) Marginal product is positive and decreasing.

(C) Marginal product is negative and increasing.

(D) Marginal product is negative and decreasing.

Answer : (B)

87. In the range of increasing marginal returns, what is happening to total product?

(A) It is increasing at a constant rate.

(B) It is increasing at an increasing rate.

(C) It is increasing at a decreasing rate.

(D) It is decreasing at an increasing rate.

Answer : (B)

88. What does the slope of the total product curve look like at the point where diminishing marginal
returns set in?

(A) It is positive and increasing.

(B) It is positive and decreasing.

(C) It is negative and increasing.

(D) It is negative and decreasing.

Answer : (B)

89. Which statement best characterizes the relationship between marginal product and total
product?

(A) When marginal product is increasing, total product is increasing by decreasing amounts.

(B) When marginal product is falling, total product is increasing by increasing amounts.

(C) When marginal product is falling, total product is falling by decreasing amounts.

(D) When marginal product is increasing, total product is increasing by increasing amounts.

Answer : (D)

90. What is the marginal product of labour?

(A) the change in output from using one more unit of labour

(B) the average output per worker

(C) the change in revenue from selling one more unit of output

(D) the change in revenue from using one more unit of labour

Answer : (A)

91. When a firm is facing constant input prices, what can cause marginal returns to increase?

(A) if each additional unit of output costs more to produce than the previous unit

(B) if the marginal product of the variable input decreases as more of the input is used

(C) if specialization and division of labour occur

(D) if rates of output are very high

Answer : (C)

92. Exhibit 7-6

Refer to the total product curve in the exhibit. What is the marginal product between points a and b?

(A) 5

(B) 10

(C) 20

(D) 30

Answer : (C)

93. Exhibit 7-6

Refer to the total product curve in the exhibit. What is the average product at point c?

(A) 6

(B) 10

(C) 25

(D) 60

Answer : (B)

94. Which of the following is most likely to be a fixed cost for any firm?

(A) the monthly electric bill

(B) sales taxes

(C) shipping and postage

(D) rent on office space

Answer : (D)

95. Which of the following is a fixed cost for Wendy's Hamburgers?

(A) the cost of beef

(B) electricity to light up the exterior signage the Wendy's head office

(C) gasoline for the trucks that deliver supplies to the various franchise locations

(D) interest on funds borrowed to build new facilities

Answer : (D)

96. When does a variable cost change?

(A) in the long run only

(B) in the short run only

(C) as output changes

(D) as inputs change

Answer : (C)

97. Which of the following represents, respectively, a fixed cost and a variable cost that would be
incurred by a person who owns and operates an automobile?

(A) maintenance/repairs and licence plate fees

(B) insurance premiums and maintenance/repairs

(C) oil changes and licence plate fees

(D) gasoline and car loan payments

Answer : (B)

98. Which of the following is generally considered a fixed cost of preparing meals?

(A) dishwasher detergent

(B) electricity

(C) food ingredients

(D) a microwave oven

Answer : (D)

99. Which of the following is a fixed cost of driving a car?

(A) gasoline

(B) maintenance

(C) tires

(D) license plates

Answer : (D)

100. For a physician, which of the following is likely to be a variable cost in the short run?

(A) office space

(B) computers

(C) liability insurance

(D) insurance forms

Answer : (D)

101. Suppose fixed costs at output level Q = 100 are $130. Which of the following represents fixed
costs at other units of output?

(A) fixed costs at Q = 0 is $0

(B) fixed costs at Q = 0 is >$130

(C) fixed costs at Q = 200 is $260

(D) fixed costs at Q = 200 is $130

Answer : (D)

102. Which of the following would NOT be considered a fixed cost for a law firm?

(A) paper for the photocopy machine

(B) property taxes

(C) insurance premiums

(D) license fees

Answer : (A)

103. What is the definition of fixed costs?

(A) the total costs of a firm's production

(B) the additional cost of the last unit produced

(C) costs that increase proportionately as the quantity produced increases

(D) costs that do NOT vary as quantity produced increases

Answer : (D)

104. Which of the following best explains why marginal cost eventually increases as output
increases?

(A) because economies of scale occur

(B) because average cost increases

(C) because total cost increases

(D) because marginal product decreases

Answer : (D)

105. What is the effect on marginal cost when marginal returns are increasing?

(A) Marginal cost is negative and increasing.

(B) Marginal cost is negative and decreasing.

(C) Marginal cost is positive and increasing.

(D) Marginal cost is positive and decreasing.

Answer : (D)

106. What is the effect on marginal cost when marginal returns are decreasing?

(A) Marginal cost is negative and increasing.

(B) Marginal cost is negative and decreasing.

(C) Marginal cost is positive and increasing.

(D) Marginal cost is positive and decreasing.

Answer : (C)

107. What is the relationship between marginal cost and marginal product?

(A) When marginal product increases, marginal cost increases.

(B) When marginal product increases, marginal cost falls.

(C) When marginal product is negative, marginal costs are negative.

(D) When diminishing marginal returns set in, marginal costs fall.

Answer : (B)

108. What is the effect on marginal cost when a firm experiences diminishing marginal returns?

(A) Marginal cost rises.

(B) Marginal cost falls.

(C) Marginal cost remains constant.

(D) Marginal cost rises at first, and then falls.

Answer : (A)

109. As output rises, marginal product eventually diminishes. When this occurs, which of the
following best characterizes what would be happening on the cost side?

(A) Marginal cost increases.

(B) Average cost falls.

(C) Total cost falls.

(D) Fixed cost is increasing.

Answer : (A)

110. The Toys"R"Us, Inc. toy company can produce 500 toy water pistols for a total cost of $1,400.
Suppose the variable cost of producing 500 water pistols is $1,300. Which of the following best
characterizes what is happening to costs?

(A) Fixed cost must be $100.

(B) Marginal cost must be $1,300.

(C) Marginal cost must be increasing.

(D) Average variable cost must be decreasing.

Answer : (A)

111. The Toys"R"Us, Inc. toy company can produce 500 toy water pistols for a total cost of $1,400.
The company can also produce 1,000 water pistols for a total cost of $3,000, but it would have costs
of $200 even if it produced no water pistols. Which of the following best reflects what is happening
to costs?

(A) Total cost is increasing at a decreasing rate.

(B) Total cost is increasing at a constant rate.

(C) Marginal cost is positive and increasing as output increases.

(D) Variable cost is positive and decreasing as output increases.

Answer : (C)

112. Suppose variable cost at each output level doubles. Which of the following best characterizes
what is happening to other costs?

(A) ATC doubles.

(B) AFC doubles.

(C) MC remains unchanged.

(D) MC doubles.

Answer : (D)

113. Suppose variable cost rises from $60 to $100 as output increases from 15 to 20 units. What is
the marginal cost of the twentieth unit?

(A) $5

(B) $8

(C) $40

(D) $100

Answer : (B)

114. Suppose the Guild guitar company produces 5,000 guitars per year. Its average total cost is
$90, and its total fixed cost is $250,000. What is the company's total variable cost?

(A) $56,000

(B) $200,000

(C) $250,000

(D) $450,000

Answer : (B)

115. When the marginal product of labour diminishes what will happen to other cost curves?

(A) Average fixed cost will rise.

(B) Average variable cost will be constant.

(C) Marginal cost will rise.

(D) Marginal cost will fall.

Answer : (C)

116. If labour is a firm's only variable input, what does marginal cost ultimately depend on?

(A) fixed cost

(B) how much profit is made

(C) the price of the good produced

(D) how much output each worker produces

Answer : (D)

117. On a graph of production costs, what does the vertical distance between the fixed cost curve
and the total cost curve at a specific quantity represent?

(A) variable cost

(B) average variable cost

(C) average total cost

(D) average fixed cost

Answer : (A)

118. What does total fixed cost divided by the level of output yield?

(A) average variable cost per unit

(B) average fixed cost per unit

(C) marginal fixed cost per unit

(D) total fixed cost per unit

Answer : (B)

119. Exhibit 7-7

Output Workers Total

per day per day cost
0 0 $10
5 1 20
15 2 30
18 3 40
20 4 50

Refer to the table in the exhibit. What is the fixed cost at 15 units of output?

(A) $0

(B) $10

(C) $20

(D) $30

Answer : (B)
120. Exhibit 7-7

Output Workers Total

per day per day cost
0 0 $10
5 1 20
15 2 30
18 3 40
20 4 50

Refer to the table in the exhibit. What is the fixed cost at 20 units of output?

(A) $0

(B) $10

(C) $40

(D) $150

Answer : (B)

121. Exhibit 7-7

Output Workers Total

per day per day cost
0 0 $10
5 1 20
15 2 30
18 3 40
20 4 50

Refer to the table in the exhibit. What is the variable cost when no output is being produced?

(A) $0

(B) $10

(C) $20

(D) $30

Answer : (A)

122. Exhibit 7-7

Output Workers Total

per day per day cost
0 0 $10
5 1 20
15 2 30
18 3 40
20 4 50

Refer to the table in the exhibit. What are the variable costs at 15 units of output?

(A) $1

(B) $10

(C) $20

(D) $30

Answer : (C)

123. Exhibit 7-7

Output Workers Total

per day per day cost
0 0 $10
5 1 20
15 2 30
18 3 40
20 4 50

Refer to the table in the exhibit. What is the marginal cost of the fifteenth unit of output?

(A) $1

(B) $10

(C) $20

(D) $30

Answer : (A)

124. Exhibit 7-7

Output Workers Total

per day per day cost
0 0 $10
5 1 20
15 2 30
18 3 40
20 4 50

Refer to the table in the exhibit. What is the average total cost of producing 20 units?
(A) $2

(B) $20

(C) $30

(D) $100

Answer : (C)

125. Exhibit 7-7

Output Workers Total

per day per day cost
0 0 $10
5 1 20
15 2 30
18 3 40
20 4 50

Refer to the table in the exhibit. What is the average variable cost of producing 20 units?

(A) $20

(B) $22

(C) $25

(D) $250

Answer : (A)

126. Exhibit 7-8

Cost of
Output
Labour
(units) Rent Materials
0 $200 $0 $0
10 200 100 100
20 200 200 200
30 200 250 300
40 200 350 400
50 200 500 500

Refer to the table in the exhibit. What is the fixed cost?

(A) $0

(B) $200
(C) $500

(D) $1200

Answer : (B)

127. Exhibit 7-8

Cost of
Output
Labour
(units) Rent Materials
0 $200 $0 $0
10 200 100 100
20 200 200 200
30 200 250 300
40 200 350 400
50 200 500 500

Refer to the table in the exhibit. What is the marginal cost of the fortieth unit of output?

(A) $20

(B) $35

(C) $200

(D) $350

Answer : (A)

128. Exhibit 7-8

Cost of
Output
Labour
(units) Rent Materials
0 $200 $0 $0
10 200 100 100
20 200 200 200
30 200 250 300
40 200 350 400
50 200 500 500

Refer to the table in the exhibit. Which costs are fixed costs?

(A) rent, labour costs, and material costs

(B) rent and labour costs

(C) rent and material costs

(D) rent only

Answer : (D)

129. Exhibit 7-9

Refer to the graph in the exhibit. What is the fixed cost?

(A) $20

(B) $30

(C) $50

(D) $280

Answer : (C)

130. How is total cost calculated?

(A) as average fixed cost plus average variable cost

(B) as fixed cost plus variable cost

(C) as marginal cost plus variable cost

(D) as marginal cost plus fixed cost

Answer : (B)

131. Which equation is used to calculate total cost?

(A) FC + MC

(B) FC / MC
(C) (VC + FC) / MC

(D) VC + FC

Answer : (D)

132. Suppose a firm enters into a consent decree to avoid an even greater legal setback. And
suppose the terms of the consent decree effectively double the firm's fixed costs. What will happen
to marginal cost?

(A) It will more than double.

(B) It will double.

(C) It will remain unchanged.

(D) It will equal fixed costs.

Answer : (C)

133. When marginal product is decreasing, what is happening to marginal cost?

(A) It is less than zero.

(B) It is increasing.

(C) It is constant.

(D) It is decreasing.

Answer : (B)

134. Suppose a firm shuts down in the short run and produces no output. What will its total cost be?

(A) zero

(B) equal to total variable cost

(C) equal to total fixed cost

(D) equal to explicit costs only

Answer : (C)

135. At a given rate of output, which slope is marginal cost equal to?

(A) the slope of the long-run average cost curve

(B) the slope of the short-run average total cost curve

(C) the slope of the planning curve

(D) the slope of the total cost curve

Answer : (D)

136. Suppose total cost at output level Q = 0 is $100 and total cost at Q = 10 is $500. What is the
average variable cost at Q = 10?

(A) $10

(B) $40

(C) $50

(D) $400

Answer : (B)

137. Exhibit 7-10

Refer to the graph in the exhibit. Suppose A is marginal cost, B is average variable cost, and C is
average total cost. What does the vertical distance between lines B and C at any level of output
represent?

(A) average marginal cost

(B) average total cost

(C) average variable cost

(D) average fixed cost

Answer : (D)

138. Exhibit 7-10

Refer to the graph in the exhibit. When output is 10, what will happen to cost?

(A) Total cost will equal $10.

(B) Fixed cost will equal $10.

(C) Variable cost will equal $10.

(D) Marginal cost will equal $10.

Answer : (C)

139. Exhibit 7-10

Refer to the graph in the exhibit. When output is 10, what will happen to cost?

(A) Total cost will equal $80.

(B) Fixed cost will equal $10.

(C) Variable cost will equal $70.

(D) Marginal cost will equal $10.

Answer : (A)

140. Exhibit 7-10

Refer to the graph in the exhibit. What does curve B represent?

(A) marginal cost

(B) average total cost

(C) average variable cost

(D) average fixed cost

Answer : (C)

141. What is the shape of the short-run average variable cost curve?

(A) It is always downward sloping.

(B) It starts at the origin and always slopes upward.

(C) It starts above the origin and always slopes upward.

(D) It slopes downward at low rates of output, then slopes upward at higher rates of output.

Answer : (D)

142. Which statement best characterizes the relationship between average total and average
variable costs?

(A) They are closer together as output increases, with average variable cost reaching its minimum
level first.

(B) They are closer together as output increases, with average total cost reaching its minimum level
first.

(C) They are farther apart as output increases, with average variable cost reaching its minimum
level first.

(D) They are farther apart as output increases, with average total cost reaching its minimum level
first.

Answer : (A)
143. When a firm expands into overseas markets, it may encounter information problems and
complexities associated with operating within foreign cultures and economies. What will these
difficulties likely lead to?

(A) economies of scale

(B) diminishing marginal returns

(C) declining long-run marginal cost

(D) diseconomies of scale

Answer : (D)

144. Suppose the average height of students in one classroom was 178 cm (5 feet 10 inches). And a
new student with a height of 213 cm (7 feet) joins the class. What would happen to the average
height?

(A) It would rise to 213 cm (7 feet).

(B) It would decrease.

(C) It would NOT change.

(D) It would rise somewhat.

Answer : (D)

145. Which of the following describes the relationship between the marginal cost curve and the
average variable cost curve?

(A) The marginal cost curve is everywhere above the average variable cost curve.

(B) The average variable cost curve is everywhere above the marginal cost curve.

(C) The marginal cost curve crosses the average variable cost curve at the average variable cost
curve's minimum point.

(D) The marginal cost curve crosses the average variable cost curve at the marginal cost curve's
minimum point.

Answer : (C)

146. If marginal cost exceeds average variable cost, what does this reveal about average variable
cost?

(A) It is negative.

(B) It is increasing.

(C) It does NOT change.

(D) It is decreasing.

Answer : (B)

147. If marginal cost is less than average total cost, what does this reveal about average variable
cost?

(A) It must be increasing.

(B) It equals average total cost.

(C) It must be decreasing.

(D) It may be increasing or decreasing.

Answer : (D)

148. Where does the marginal cost curve intersect other cost curves?

(A) It intersects the average total cost curve at its minimum, but it does NOT intersect the average
variable cost curve at its minimum.

(B) It intersects the average variable cost curve at its minimum, but it does NOT intersect the
average total cost curve at its minimum.

(C) It intersects the average total cost curve at its minimum and the average variable cost curve at
its minimum.

(D) It intersects the average total cost curve at its minimum and the average fixed cost curve at its
minimum.

Answer : (C)

149. As output expands, what is the effect on the slope of the average total cost curve?

(A) It stays negative throughout.

(B) It stays positive throughout.

(C) It is first negative and then positive.

(D) It is first positive and then negative.

Answer : (C)

150. When the average total cost curve is at a minimum, what is its relationship with other cost
curves?

(A) Marginal cost equals average total cost.

(B) Average variable cost equals fixed cost.

(C) Marginal cost equals average variable cost.

(D) Average total cost equals average fixed cost.

Answer : (A)

151. Where does the marginal cost curve intersect the average total cost curve?

(A) at the average total cost curve's minimum point

(B) at the average total cost curve's average point

(C) at the average total cost curve's maximum point

(D) at the average total cost curve's marginal point

Answer : (A)

152. Where does the marginal cost curve intersect the average variable cost curve?

(A) at the average variable cost curve's average point

(B) at the average variable cost curve's maximum point

(C) at the average variable cost curve's minimum point

(D) at the average variable cost curve's marginal point

Answer : (C)

153. What is the relationship between the average total cost curve and the marginal cost curve if
marginal cost is greater than average total cost?

(A) Average total cost is rising.

(B) Average total cost is falling.

(C) Marginal cost is falling.

(D) Marginal cost is constant.

Answer : (A)

154. Where does the marginal cost curve intersect the average cost curves?

(A) It intersects each of the average total cost, average fixed cost, and average variable cost curves
at their minimum points.

(B) It intersects each of the average total cost, average fixed cost, and average variable cost curves
at their maximum points.

(C) It intersects only the average total cost and average variable cost curves at their minimum
points.

(D) It intersects the average total cost curve where it is increasing and the average variable cost
curve where it is decreasing.

Answer : (C)

155. How is the shape of a short-run variable cost curve determined?

(A) by the firm's effort to minimize cost

(B) by the firm's effort to maximize profit

(C) by variable competition in the industry

(D) by the marginal productivity of the variable inputs the firm uses

Answer : (D)

156. When do economies of scale occur?

(A) when long-run average cost falls as new firms enter the industry

(B) when short-run average cost falls as new firms enter the industry

(C) when long-run average cost falls as one firm expands plant size

(D) when short-run average cost falls as one firm expands plant size

Answer : (C)

157. Which economic concept explains why a large drugstore chain can produce at a lower average
cost than an individually owned drugstore?

(A) increasing marginal returns

(B) constant returns to scale

(C) economies of scale

(D) diseconomies of scale

Answer : (C)

158. Doubling the circumference of an oil pipeline more than doubles the volume of oil that can be
pumped through. What concept is this an example of?
(A) increasing marginal returns

(B) diseconomies of scale

(C) constant returns to scale

(D) economies of scale

Answer : (D)

159. For building contractors, doubling the size of an office building does NOT require double the
inputs because there are common walls. What concept is this an example of?

(A) increasing marginal returns

(B) constant returns to scale

(C) economies of scale

(D) diseconomies of scale

Answer : (C)

160. How must a firm maximize profit in the long run?

(A) by charging the highest price possible

(B) by producing where demand is unit elastic

(C) by selling the most output possible

(D) by minimizing the cost of producing any given amount of output

Answer : (D)

161. Which of the following can cause economies of scale?

(A) short-run increases in marginal productivity

(B) the use of larger, more specialized machines

(C) higher information costs as a firm expands

(D) bureaucratic red tape as a firm expands

Answer : (B)

162. What is the minimum efficient scale for a firm?

(A) the lowest rate of output at which long-run average cost is at a minimum
(B) the lowest rate of output at which short-run average total cost is at a minimum

(C) the lowest rate of output at which short-run average variable cost is at a minimum

(D) the lowest rate of output at which long-run average fixed cost is at a minimum

Answer : (A)

163. Generally, as a movie theatre adds more screens, its average costs fall. When this occurs, what
is the movie theatre experiencing?

(A) declining profit

(B) higher prices

(C) diseconomies of scale

(D) economies of scale

Answer : (D)

164. Which of the following scenarios indicates that economies of scale have been overridden by
other factors?

(A) A company wanted to save on architect's fees when it constructed a new branch office building in
Toronto. So the company copied the architecture of its head office building in Vancouver, where
earthquake-proofing standards for buildings are very high. Now the Toronto branch occupies an
office building that can withstand severe earthquakes.

(B) Denny's Restaurants in Canada serve pan-fried potatoes with their breakfasts. But in the United
States breakfast diners can order mashed potatoes with gravy instead.

(C) The Creepy Critters Summer Camp does NOT give campers a choice between hamburgers and
hot dogs for lunch, but instead serves corned beef sandwiches to all the campers.

(D) Henry Ford said "Any customer can have a car painted any colour that he wants, so long as it is
black."

Answer : (B)

165. Which concept best explains the decision of McDonald's corporation to adopt a uniform menu
across all their restaurant sites by spreading the cost of menu development over a large output?

(A) economies of scale

(B) diminishing returns

(C) constant returns to scale

(D) rising marginal product

Answer : (A)

166. For a McDonald's franchise, when do economies of scale occur at the restaurant level?

(A) over the range of output for which that restaurant's average cost curve is upward sloping

(B) over the range of output for which that restaurant's average cost curve is horizontal

(C) over the range of output for which that restaurant's average cost curve is downward sloping

(D) at all levels of output

Answer : (C)

167. Which statement best explains why economies of scale occur at the firm level of the
McDonald's corporation?

(A) Economies of scale can be traced to factors such as the use of centralized training and common
menus for all restaurants.

(B) Economies of scale exist only in the short run.

(C) Economies of scale occur above the firm's minimum efficient scale.

(D) Economies of scale can be traced to the diminishing marginal productivity of a variable resource,
such as labour.

Answer : (A)

168. Since 2000, the number of movie screens in Canada has grown faster than the number of
theatres. What concept does this illustrate?

(A) the benefits of economies of scale

(B) the benefits of constant long-run average cost

(C) the benefits of diseconomies of scale

(D) the benefits of increasing long-run average cost

Answer : (A)

169. In recent years, the number of farms has fallen in Canada while the average farm size has
increased. What concept may explain this phenomenon?

(A) diminishing marginal returns

(B) declining productivity

(C) diseconomies of scale

(D) economies of scale

Answer : (D)

170. Which of the following characterizes diseconomies of scale?

(A) Short-run marginal cost increases as output increases.

(B) Long-run marginal cost increases as output increases.

(C) Short-run average cost increases as output increases.

(D) As output doubles, long-run total cost more than doubles.

Answer : (D)

171. Suppose the General Electric company finds that when it doubles both its plant size and the
amount of associated inputs, its output level does NOT double. What is the explanation?

(A) The law of diminishing returns is in effect.

(B) Long-run average costs must be decreasing.

(C) The firm is experiencing diseconomies of scale.

(D) The firm is experiencing constant returns to scale.

Answer : (C)

172. As output increases, what do diseconomies of scale lead to?

(A) rising long-run average costs

(B) declining long-run average costs

(C) rising short-run average total costs

(D) declining short-run total cost

Answer : (A)

173. Suppose a firm it triples all of its inputs and its output doubles. What is a firm experiencing?

(A) diminishing marginal returns

(B) increasing marginal returns

(C) diseconomies of scale

(D) economies of scale

Answer : (C)

174. Exhibit 7-11

Refer to the graph in the exhibit. What does the movement from point b to point c indicate?

(A) The firm is experiencing economies of scale.

(B) The firm is experiencing increasing average cost.

(C) The firm is experiencing a decrease in average plant size.

(D) The firm is experiencing diseconomies of scale.

Answer : (D)

175. Exhibit 7-11

Refer to the graph in the exhibit. What does the movement from point a to point b indicate?

(A) The firm is experiencing economies of scale.

(B) The firm is experiencing increasing average cost.

(C) The firm is experiencing a decrease in average plant size.

(D) The firm is experiencing diseconomies of scale.

Answer : (A)

176. On a graph, which curve's upward-sloping portion shows diseconomies of scale?

(A) the short-run marginal cost curve

(B) the long-run marginal cost curve

(C) the short-run average cost curve

(D) the long-run average cost curve

Answer : (D)

177. When do diseconomies of scale at the firm level occur?

(A) wherever the firm's long-run average cost curve is horizontal

(B) wherever the firm's long-run total cost curve is horizontal

(C) where marginal cost equals marginal revenue

(D) if a firm becomes "too large"

Answer : (D)

178. Which of the following is an example of an uncontrollable resource that contributes to

diseconomies of scale for a movie theatre?

(A) concession stand staff

(B) public roads congested with traffic

(C) volume discounts from movie distributors

(D) having only one lobby in the theatre

Answer : (B)

179. Which of the following is NOT an effort by the McDonald's restaurant corporation to cope with
diseconomies of scale?

(A) being exposed to country and regions risk, such as environmental protests

(B) putting mini-restaurants in airports, gas stations, and Wal-Mart stores

(C) allowing restaurant managers in each region of Canada more leeway in pricing and promotion

(D) reducing product development time

Answer : (A)

180. What is another name for a firm's long-run average cost curve?

(A) explicit cost curve

(B) opportunity cost curve

(C) production curve

(D) planning curve

Answer : (D)

181. What is another name for a firm's planning curve?

(A) average total cost curve

(B) total cost curve

(C) long-run average cost curve

(D) long-run marginal cost curve

Answer : (C)

182. Why are long run average total cost curves often U-shaped?

(A) because of economies of scale

(B) because of constant returns to scale

(C) because of increasing coordination problems at low levels of production and because of
increasing specialization of workers at high levels of production

(D) because of increasing specialization of workers at low levels of production and because of
increasing coordination problems at high levels of production

Answer : (C)

183. According to empirical studies of production, what is the likely shape of the long-run average
cost curve?

(A) U-shaped

(B) an inverted L shape

(C) L-shaped

(D) horizontal
Answer : (A)

184. Exhibit 7-12

Refer to the graph in the exhibit. The firm represented wants to produce output level q. Which
average total cost curve represents the size of plant the firm should build in the long run?

(A) curve 1

(B) curve 2

(C) curve 3

(D) curve 4

Answer : (B)

185. Exhibit 7-13

Refer to the graph in the exhibit. What do lines H, J, and K represent, respectively?

(A) marginal product, average product, and total product

(B) average fixed cost, average total cost, and average variable cost

(C) marginal cost, average total cost, and average variable cost

(D) average total cost, marginal cost, and average variable cost
Answer : (C)

186. What does the shape of the long-run average cost curve reflect?

(A) market demand

(B) economies and diseconomies of scale

(C) increasing and diminishing marginal returns

(D) productivity of fixed inputs

Answer : (B)

187. Suppose Toyota produces 100,000 cars per year in Cambridge Ontario at an average cost of
$15,000 each. And suppose Toyota doubles output and total costs by building an identical plant in
Woodstock, Ontario. Which of the following has Toyota exhibited?

(A) diminishing marginal returns

(B) economies of scale

(C) constant average costs

(D) an upward-sloping planning curve

Answer : (C)

188. Which of the following occurs at the minimum efficient scale level of output?

(A) short-run average total cost stops decreasing

(B) short-run average total cost stops increasing

(C) long-run average cost stops decreasing

(D) long-run average cost stops increasing

Answer : (C)

189. The least-cost way of producing a particular rate of output is represented by a point of
tangency between two curves. One is a short-run average cost curve. What is the other curve?

(A) a total cost curve

(B) a short-run average total cost curve

(C) a average variable cost curve

(D) a long-run average cost curve

Answer : (D)