Ch. 8: Firm Production and Cost
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
1) What does it mean to say that a firm is making an economic profit of
1) _______
less than zero?
A) The firm should go out of business.
B) The firm is making more profit than it would in its next-best
activity.
C) The firm is making a positive accounting profit.
D) The firm is making less profit than it would in its next-best
activity.
E) The firm is making a negative accounting profit.
2) Economic profit is defined as
A) total revenue of the firm.
B) explicit costs + implicit costs.
C) explicit costs.
D) total revenue – explicit costs.
E) total revenue – explicit costs – implicit costs.
2) _______
3) A firm has revenues of $1,000,000 and pays $500,000 in salaries and
materials costs. It also has a factory in which it produces. If it did not
use the factory, it could rent it to another manufacturer for $350,000 per
year. What is the economic profit of this firm?
A) -$350,000
B) -$150,000
C) $500,000
D) $150,000
E) Cannot be determined from the information given.
3) _______
4) Which of the following cannot be an example of an opportunity cost for
a firm?
A) The value of the firm's inputs in their next best use.
B) The return that the firm could earn on its next best investment.
C) The cost of purchasing plant and equipment.
D) The rent that the firm could earn by leasing its plant to someone
else.
E) The salary that the owner of the firm could earn in alternative
employment.
4) _______
5) In economics, the long run is
A) one year.
B) a time period in which all inputs can be varied.
C) a time period in which there is at least one fixed input.
D) five years.
E) a time period in which no inputs can be varied.
5) _______
6) When the firm employs one more worker, output increases by 100 units.
This statement describes the
A) marginal product of capital.
6) _______
B)
C)
D)
E)
marginal utility of labor.
total product of labor.
marginal product of labor.
average product of labor.
7) If the average product of labor is falling, which of the following MUST
be true?
A) The marginal product of labor is increasing.
B) The marginal product of the last worker is less than the average
product.
C) The average product of labor is less than the marginal product.
D) The marginal product of the last worker is greater than the average
product.
E) The marginal product of labor is decreasing.
7) _______
Use the figure for the question(s) below.
8) Which shows the marginal product for a firm. At what number of
workers does diminishing marginal returns set in?
A) 1
B) 2
C) 3
D) 4
E) 5
8) _______
9) Diminishing marginal returns must eventually occur because
A) there are insufficient workers, given the amount of capital, and
thus capital is underutilized.
B) increasing units of labor are being added to a fixed input, and thus
each additional worker has less capital to work with.
C) there are insufficient workers, given the amount of capital, and
thus labor is underutilized.
D) each additional worker has fewer skills than the workers hired
previously.
E) specialization requires that a specific number of workers be hired.
9) _______
10) Adding the 5th worker causes the output of the firm to rise from 90 to
125 units, and causes average productivity to rise to 25. Which of the
following is a TRUE statement?
A) Adding one more worker will cause total output to fall.
10) ______
B) There are diminishing returns to labor at this point.
C) The average product of labor was less than 25 when there were
only 3 workers.
D) The marginal product of the 4th worker was less than 25.
E) The average product of labor was 20 when there were only 4
workers.
11) A sunk cost is best described as
A) a cost that is not recoverable.
B) a transactions cost.
C) a marginal cost.
D) a cost that varies with output.
E) an average cost.
11) ______
12) Marginal cost is defined as
A) VC / Q.
B) ΔTC / ΔQ.
C) AVC + AFC.
D) TC / Q.
E) FC / Q.
12) ______
13) Average total cost is defined as
A) TC / Q.
B) VC / Q.
C) ΔTC / ΔQ.
D) ΔVC / ΔQ.
E) FC / Q.
13) ______
14) Average variable cost is defined as
A) FC / Q.
B) ATC + AFC.
C) VC / Q.
D) ΔTC / ΔQ.
E) TC / Q.
14) ______
15) Consider the following two statements:
15) ______
I. If marginal cost is greater than average total cost,
average total cost must be rising.
II. If average total cost is greater than marginal cost,
marginal cost must be rising.
A)
B)
C)
D)
E)
I is true; II is false.
Both statements are true.
I is false; II is true.
Both statements are false.
There is insufficient information to tell whether the statements are
true or false.
Use the table for the question(s) below.
16) The table above shows the total cost and quantity produced for a small
firm. What is fixed cost for this firm?
A) 110
B) 10
C) 0
D) 100
E) Fixed cost cannot be determined from the information in the table.
16) ______
17) The table above shows the total cost and quantity produced for a small
firm. What is the average variable cost of producing 4 units?
A) 10
B) 25
C) 17.5
D) 170
E) 70
17) ______
18) The table above shows the total cost and quantity produced for a small
firm. What is the marginal cost of producing the 4th unit?
A) 10
B) 70
C) 17.5
D) 170
E) 25
18) ______
19) The table above shows the total cost and quantity produced for a small
firm. Which of the following is NOT a correct statement about the cost
curves represented by this table?
A) Worker productivity is increasing for this firm.
B) Total costs of production are increasing at an increasing rate for
this firm.
C) The slope of the average variable cost curve is positive.
D) Because there is a fixed cost, this must be a short-run cost function.
E) Marginal product is increasing at an increasing rate.
19) ______
20) Consider the following statements about cost curves.
20) ______
I. Marginal cost is equal to average total cost at the minimum
average total cost.
II. Marginal cost is equal to average variable cost at the minimum
average
variable cost.
III. Marginal cost is equal to average total cost at the minimum
marginal cost.
A)
B)
C)
D)
E)
All three statements are false.
All three statements are true.
I and II are true; III is false.
I and III are true; II is false.
I is true; II and III are false.
21) An increase in the cost of raw materials will increase
21) ______
A)
B)
C)
D)
E)
average total cost.
marginal cost.
average variable cost.
total cost.
All of the above.
22) An increase in the cost of rental on the building in which a store
operates will increase
A) only average fixed cost.
B) only marginal cost.
C) both average fixed cost and average total cost.
D) only average total cost.
E) only average variable cost.
22) ______
Use the figure for the question(s) below.
23) Which shows long- and short-run average costs for a firm. Each shortrun average total cost curve corresponds with a different level of
A) technology.
B) minimum efficient scale.
C) raw materials.
D) labor.
E) capital.
23) ______
24) Which shows long- and short-run average costs for a firm. If this firm
expects to produce 200 units, in the long run, it should build a factory
that corresponds with
A)
.
B)
.
C)
.
D) LRAC.
E)
.
24) ______
25) If a firm has economies of scale, which of the following graphs shows
the shape of the long-run average cost curve?
A)
B)
C)
D)
E)
25) ______
26) Use the figure below for this question.
26) ______
Refer to the figure above, which shows a long-run average cost curve.
The portion of the curve in which the firm has diseconomies of scale is
________; the portion of the curve in which the firm has economies of
scale is ________; the portion of the curve in which the firm has constant
returns to scale is ________.
A) A; C; B
B) A; B; C
C) C; B; A
D) B; C; A
E) C; A; B
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the
question.
27) What are economies and diseconomies of scale, and why do
27) _____________
they occur?
28) Economists often say that the long-run average cost curve is the
“envelope” of the short-run average cost curves. Why is that
true?
28) _____________
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
20)
21)
22)
23)
24)
25)
26)
27)
D
E
D
C
B
D
B
C
B
C
A
B
A
C
A
D
C
E
A
C
E
C
E
B
D
C
Economies of scale mean that long run average costs are falling, and occur due to
specialization and other reasons. Diseconomies of scale refers to rising long-run average
costs and is related to coordination and management problems.
28) The long-run average cost curve envelops or encloses all of the short-run cost curves; in
other words, average costs may be lower in the long run than in the short run, but not vice
versa. This is because the long-run average cost curve represents optimal adjustment of all
inputs and thus minimal costs; in the short run, not all factors of production can be
adjusted and thus costs might not be minimized.