1 Chapter 6 Practice Quiz Tutorial Production Costs ©2004 South-Western

2 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.

3 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.

4 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.

5 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 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.

6 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.

7 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.

8 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.

9 8. The total fixed cost curve is a. upward sloping. b. downward sloping. c. upward sloping 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.

10 9. Assuming that the marginal cost curve is a smooth J-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.

11 $1,000 $ $750 $ $1, $1,500 Total Cost Quantity of Output Total Cost Curve Exhibit 9 TC

If both the marginal cost and the average variable cost curves are J-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.

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.

As shown in Exhibit 9, 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.

As shown in Exhibit 9, 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.

In Exhibit 9, 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.

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 cost curve. d. a single point on the long-run average cost curve. D. The long-run LRAC is the summation of all the SRAC. 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.

18 $40 $30 $20 $ $50 $60 $70 $ Short and Long-run Average Cost Curves Short-run average total cost curves Long-run average cost curve Q

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 in which its a. its long-run average cost curve is at a minimum. b. its short-run average total cost curve is at a minimum. c. both (a) and (b) are true. d. neither (a) nor (b) is 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.

The downward-sloping segment of the long- run 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.

21 $40 $30 $20 $ $50 $60 $70 $ Long-run Average Cost Curve Constant returns to scale Diseconomies of scale Economies of scale Q

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.

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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