Chapter 7 Tutorial
Production Costs
©2000 South-Western College Publishing
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1. Explicit costs are payments to
a. hourly employees.
b. insurance companies.
c. utility companies.
d. all of the above.
D. Explicit costs are payments to non
owners of a firm.
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2. Implicit costs are the opportunity costs of
using the resources of
a. outsiders.
b. owners.
c. banks.
d. retained earnings.
B. Implicit costs are opportunity costs that a
business owner incurs when using resources
owned by the firm.
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3. Which of the following equalities is true?
a. Economic profit = total revenue - accounting
profit.
b. Economic profit = total revenue - explicit
costs - accounting profit.
c. Economic profit = total revenue - implicit
costs - explicit costs.
d. Economic profit = opportunity costs +
accounting costs.
C. The difference between accounting profit
and economic profit is that economic profit is
total revenue minus both explicit and implicit
costs. Accounting profit is total revenue
minus explicit costs only.
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4. Fixed inputs are factors of production that
a. are determined by a firm’s size.
b. can be increased or decreased quickly as
output changes.
c. cannot be increased or decreased quickly as
output changes.
d. none of the above.
C. In the short run, there are two types of
inputs, fixed and variable. Because a firm
cannot change its plant capacity, some of its
inputs are fixed. In the long run, all costs are
variable.
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5. An example of a variable input is
a. raw materials.
b. energy.
c. hourly labor.
d. all of the above
D. As a firm produces more, it will use more
raw materials, energy, and labor.
Therefore, all are variable costs.
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6. Suppose a car wash has 2 washing stations and
5 workers and is able to wash 100 cars per day.
When it adds a third station, but no more
workers, it is able to wash 150 cars per day. The
marginal product of the third washing station is
a. 100 cars per day.
b. 150 cars per day.
c. 5 cars per day.
d. 50 cars per day.
D. 50 cars is how many extra cars can be
washed by adding a new machine, ceteris
paribus.
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7. If the units of variable input in a
production process are 1, 2, 3, 4, and 5 and
the corresponding total outputs are 10, 22,
33, 42, and 48, respectively, the marginal
product of the fourth unit is
a. 2.
b. 6.
c. 9.
d. 42.
C. The difference between 42 and 33 is 9, the
extra output when producing 4 units
instead of 3.
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8. The total fixed cost curve is
a. upward sloping.
b. downward sloping.
c. upward, and then downward sloping.
d. unchanged with the level of output.
D. Fixed costs never change regardless of the
units of output; therefore its curve has to be
horizontal at a fixed cost dollar value.
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9. Assuming that the marginal cost curve is a
smooth U-shaped curve, the corresponding
total cost curve has a (an)
a. linear shape.
b. S-shape.
c. U-shape.
d. reverse S-shape.
D. Marginal cost decreases as output increases
from zero, and then increases beyond a certain
output level. A reverse-S-Shape total cost curve
corresponds to the changes in its slope (MC) as
output expands.
10
$1,500
$1,000
Total Cost
$1,250
Total Cost Curve
Exhibit 10
TC
$750
$500
$250
Quantity of Output
50
100 150
200
250
300
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10. If both the marginal cost and the average
variable cost curves are U-shaped, at the
point of minimum average variable cost, the
marginal cost must be
a. greater than the average variable cost.
b. less than the average variable cost.
c. equal to the average variable cost.
d. at its minimum.
C. If the margin is above the average, the
average will increase. If the margin is less
than the average, the average will decrease. If
the margin equals the average, average does
not change, that is, it is a horizontal curve. 12
11. Which of the following is true at the point
where diminishing returns set in?
a. Both marginal product and marginal
cost are at a maximum.
b. Both marginal product and marginal
cost are at a minimum.
c. Marginal product is at a maximum and
marginal cost at a minimum.
d. Marginal product is at a minimum and
marginal cost at a maximum.
C. The rising portion of the MP curve
corresponds to the declining portion of the
MC curve, and vice versa
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12. As shown in Exhibit 10, total fixed cost for
the firm is
a. Zero.
b. $250
c. $500.
d. $750
e. $1,000
B. $250 is the answer because total cost is 0
when output is zero. These are costs that have
to be paid even when output is zero.
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13. As shown in Exhibit 10, the total cost of
producing 100 units of output per day is
a. Zero.
b. $250.
c. $500.
d. $750.
e. $1,000.
C. A vertical line drawn at 100 units
crosses the total cost curve at $500.
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14. In Exhibit 10, if the total cost of producing
99 units of output per day is $475, the
marginal cost of producing the 100th unit of
output per day is approximately
a. zero.
b. $25.
c. $475.
d. $500
B. When total cost at 99 units is $475 and
total cost at 100 units is $500, the cost of
producing the 100th unit is $25.
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15. Each potential short-run average total cost curve is
tangent to the long-run average cost curve at
a. the level of output that minimizes short-run
average total cost.
b. the minimum point of the average total cost curve.
c. the minimum point of the long-run average total
cost curve.
d. a single point on the short-run average total cost
curve.
D. The long-run average cost curve is derived from
all possible SRAC curves. Geometrically, the only
way to draw this is to connect all the curves by a
smooth curve; thus, the LRAC curve touches each
SRAC curve at only one place.
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Short and Long-run Average Cost Curves
$80
Short-run average
$70
total
cost
curves
$60
$50
$40
$30
$20
$10 Long-run average cost curve
2 4 6 8
Q
10 12 14 16 18
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16. Suppose a typical firm is producing X units
of output per day. Using any other plant size,
the long-run average cost would increase. The
firm is operating at a point which its
a. long-run average cost curve is at a
minimum.
b. short-run average total cost curve is at a
minimum.
c. both (a) and (b)are true.
d. neither (a) nor (b) are true.
C. When a firm is producing at the minimum
points of the long-run average cost curve, it is
operating at the most efficient level possible.
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17. The downward-sloping segment of the longrun average cost curve corresponds to
a. diseconomies of scale.
b. both economies and diseconomies of scale.
c. the decrease in average variable cost.
d. economies of scale.
D. Economies of scale takes place when a
firm increases its efficiency by producing
more units of output.
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Long-run Average Cost Curve
$80
Constant returns to scale
$70
$60 Economies of scale
$50
Diseconomies of scale
$40
$30
$20
$10
2 4 6 8
Q
10 12 14 16 18
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18. Long-run diseconomies of scale exist
when the
a. short-run average total cost curve falls.
b. long-run marginal cost curve rises.
c. long-run average cost curve falls.
d. short-run average cost curve rises.
e. long-run average cost curve rises.
E. Diseconomies of scale are evident when
increasing output leads to inefficiencies.
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19. Long-run constant returns to scale exist
when the
a. short-run average total cost curve is
constant.
b. long-run average cost curve rises.
c. long-run average cost curve is flat.
d. long-run average cost curve falls.
C. Constant returns to scale are
evident when there is no change in
costs as output increases.
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END
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