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Copyright © 2011 Pearson Education, Inc.
Foundations of Microeconomics, 5e (Bade/Parkin)
Chapter 13 Production and Cost
13.1 Economic Cost and Profit
1) The primary goal of a business firm is to
A) promote fairness.
B) make a quality product.
C) promote workforce job satisfaction.
D) maximize profit.
E) increase its production.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: JC
AACSB: Reflective thinking
2) A firm's fundamental goal is
A) different for each firm.
B) to make a quality product.
C) to maximize profit.
D) to gain market share.
E) decrease its employment of workers in order to cut its costs.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: WM
AACSB: Reflective thinking
3) Accountants calculate
A) economic depreciation as part of the firm's cost.
B) depreciation using Internal Revenue Service rules.
C) the opportunity cost of all the resources the firm uses.
D) all the firm's implicit costs but only a few of its explicit costs.
E) All of the above answers are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: SA
AACSB: Reflective thinking
2
Copyright © 2011 Pearson Education, Inc.
4) John fishes for a living. Last year, he sold $100,000 of fish. Bait, nets and other fishing
supplies cost John $10,000 and he paid $40,000 in salaries to his helpers. Depreciation on his
boat and other equipment, as calculated using IRS rules, was $15,000. What was John's profit as
would be calculated by an accountant?
A) $165,000
B) $100,000
C) $65,000
D) $35,000
E) None of the above answers is correct.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: SB
AACSB: Analytical reasoning
5) Lauren runs a chili restaurant in San Francisco. Her total revenue last year equaled $111,000.
The rent on her restaurant totaled $48,000. Her labor costs totaled $43,000. Her materials, food
and other variable costs totaled $19,000. To Lauren's accountant, Lauren
A) incurred a loss of $1,000.
B) earned a profit of $1,000.
C) incurred a loss of $111,000.
D) earned a profit of $111,000.
E) had a total cost equal to $91,000.
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: JC
AACSB: Analytical reasoning
6) Lauren runs a chili restaurant in San Francisco. Her total revenue last year was $110,000. The
rent on her restaurant was $48,000, her labor costs were $42,000, and her materials, food and
other variable costs were $20,000. Lauren could have worked as a biologist and earned $50,000
per year. An economist calculates her implicit costs as
A) $150,000.
B) $63,000.
C) $50,000.
D) $110,000.
E) $0 because Lauren did not work as a biologist.
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: JC
AACSB: Analytical reasoning
3
Copyright © 2011 Pearson Education, Inc.
7) When an economist uses the term "cost" referring to a firm, the economist refers to the
A) price of the good to the consumer.
B) explicit cost of producing a good or service.
C) implicit cost of producing a good or service.
D) opportunity cost of producing a good or service, which includes both implicit and explicit
cost.
E) cost that can be actually verified and measured.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: PH
AACSB: Reflective thinking
8) From a firm's viewpoint, opportunity cost is the
A) best alternative use customers can find for the firm's output.
B) cost the firm must pay for the factors of production it employs to attract them from their best
alternative use.
C) accounting cost of resources.
D) price a firm can charge for its output.
E) cost of acquiring the opportunity to sell to its customers.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: SB
AACSB: Reflective thinking
9) The cost that a firm pays in money to hire a resource is referred to as a ________ cost.
A) minimized
B) maximized
C) explicit
D) implicit
E) total
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: PH
AACSB: Reflective thinking
4
Copyright © 2011 Pearson Education, Inc.
10) A cost paid in money is
A) not an opportunity cost.
B) an implicit cost and an opportunity cost.
C) an explicit cost and an opportunity cost.
D) not an accounting cost.
E) an explicit cost but not an opportunity cost.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: SB
AACSB: Reflective thinking
11) Which of the following is an explicit cost in Jim's business venture?
A) the salary Jim could have earned at another job
B) the interest Jim does not earn because he invested his savings in his business
C) the wages Jim pays his workers
D) Jim's normal profit
E) Answer A, answer B, and answer D are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: SA
AACSB: Reflective thinking
12) Darryl runs a ranch in Jackson, Wyoming. The interest on the debt he incurred to buy his
ranch totals $3,000 per year. For Darryl, the interest is
A) an implicit cost.
B) an explicit cost.
C) his normal cost.
D) his normal profit.
E) part of his economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: JC
AACSB: Reflective thinking
5
Copyright © 2011 Pearson Education, Inc.
13) Which of the following is an explicit cost of production?
A) wages paid to workers
B) the electric bill
C) purchases of raw material
D) Only answers A and B are explicit costs because the purchases of raw material is only an
opportunity cost.
E) Answers A, B, and C are all correct.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: TS
AACSB: Reflective thinking
14) When Ford hires Ernst and Young Consulting to help Ford redesign its marketing, Ford's
payment to Ernst and Young is classified as
A) an explicit cost.
B) depreciation.
C) an implicit cost.
D) normal profit.
E) economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: TS
AACSB: Reflective thinking
15) A cost incurred in the production of a good or service and for which the firm does not need
to make a direct monetary payment, is referred to as ________ cost.
A) a minimized
B) a maximized
C) an explicit
D) an implicit
E) an invisible
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: PH
AACSB: Reflective thinking
6
Copyright © 2011 Pearson Education, Inc.
16) ________ cost is defined as a cost of production that does not entail a direct money payment.
A) An explicit
B) An implicit
C) A total
D) A fixed
E) A marginal
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: JC
AACSB: Reflective thinking
17) If a business owner decided to expand her business but rather than borrowing money from a
bank used her own funds, then
A) she would be unable to earn a normal profit.
B) there would be no cost associated with the expansion.
C) she would forego the opportunity to earn interest on the money.
D) the money is considered to be an explicit cost.
E) the money is part of her normal profit.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: SB
AACSB: Reflective thinking
18) Which of the following is an implicit cost?
i. wages paid to workers
ii. the normal profit
iii. the electric bill
A) i only
B) ii only
C) i and ii
D) ii and iii
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: TS
AACSB: Reflective thinking
7
Copyright © 2011 Pearson Education, Inc.
19) Which of the following is an example of an implicit cost?
A) rent on a building
B) the cost of fertilizer for a farmer
C) the economic depreciation of capital equipment the business owns
D) the cost of fuel and materials.
E) wages paid to workers
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: JC
AACSB: Reflective thinking
20) Which of the following is an implicit cost in Jim's business venture?
i. the salary Jim could have earned at another job
ii. the interest Jim must pay on the loan he incurred to help open his business
iii. the interest Jim lost when he used his savings to help open his business
A) i only
B) ii only
C) iii only
D) i and iii
E) ii and iii
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: SA
AACSB: Reflective thinking
21) Which of the following are correct statements about implicit and explicit costs?
i. Normal profit is an implicit cost.
ii. Economic depreciation is an explicit cost.
iii. Wages are an explicit cost.
A) ii and iii
B) i and iii
C) iii only
D) i, ii, and iii
E) i only
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: CD
AACSB: Reflective thinking
8
Copyright © 2011 Pearson Education, Inc.
22) The opportunity cost of owning and using a firm's capital is defined as the capital's
A) variable cost.
B) fixed cost.
C) economic depreciation.
D) nonpayment depreciation.
E) explicit cost.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: JC
AACSB: Reflective thinking
23) Economic depreciation is the
A) fall in value of the firm's capital, calculating using IRS rules.
B) opportunity cost of owning and using the firm's capital, measured as the change in market
value.
C) decrease in the value of finished goods and services that are held in inventories prior to being
sold.
D) term given to a fall in a company's stock price.
E) name given to how accountants calculate the depreciation of the company's capital.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: SB
AACSB: Reflective thinking
24) Suppose Billy owns a hair salon in Dallas. He has one large hair dryer for which he paid
$1,000. If he can sell the dryer one year later for $800, his total economic depreciation equals
A) $1,000.
B) $200.
C) $800.
D) $1,800.
E) None of the above answers are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: JC
AACSB: Analytical reasoning
9
Copyright © 2011 Pearson Education, Inc.
25) A firm pays $50,000 for a machine that is used in production for one year, after which it is
sold for $40,000 to another firm. The $10,000 difference is
A) an explicit cost of production.
B) economic depreciation, an implicit cost of production.
C) normal profit.
D) not counted as an economic cost of production.
E) not an opportunity cost because it is not actually paid.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: TS
AACSB: Reflective thinking
26) In economics, a "normal profit" is the return to
A) labor.
B) capital.
C) land.
D) entrepreneurship.
E) Answer B and answer D are correct.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: PH
AACSB: Reflective thinking
27) The return to entrepreneurship is known as
A) economic profit.
B) normal profit.
C) opportunity revenue.
D) normal revenue.
E) explicit profit.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: JC
AACSB: Reflective thinking
10
Copyright © 2011 Pearson Education, Inc.
28) A normal profit is defined as
A) total revenue minus explicit costs.
B) the same thing as accounting profit.
C) the return to entrepreneurship.
D) total revenue minus implicit costs.
E) the economic profit minus the implicit costs.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: WM
AACSB: Reflective thinking
29) Normal profit is
A) part of the firm's opportunity costs.
B) the same as economic profits.
C) part of the firm's explicit costs.
D) Answer A and answer B are correct.
E) Answer A and answer C are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: SA
AACSB: Reflective thinking
30) A normal profit is
A) part of a firm's opportunity cost.
B) equal to total revenue minus total opportunity cost.
C) the same as economic profit.
D) the same as accounting profit.
E) almost always zero if the company is run efficiently.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: MR
AACSB: Reflective thinking
11
Copyright © 2011 Pearson Education, Inc.
31) A firm's total revenue minus its total opportunity cost is called its
A) accounting profit.
B) normal profit.
C) economic profit.
D) abnormal profit.
E) entrepreneur's profit.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: TS
AACSB: Reflective thinking
32) Economic profit equals total revenue minus total
A) explicit costs.
B) opportunity costs.
C) implicit costs.
D) accounting costs.
E) entrepreneur's costs.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: SB
AACSB: Reflective thinking
33) Which of the following is true?
A) Profit as calculated by accountants and economic profit are not necessarily equal.
B) Profit as calculated by accountants is always smaller than economic profit.
C) Economic profit ignores implicit costs.
D) The Internal Revenue Service taxes the firm's economic profit but not its normal profit.
E) The Internal Revenue Service taxes the firm's normal profit but not its economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: SA
AACSB: Reflective thinking
12
Copyright © 2011 Pearson Education, Inc.
34) April quit her job as an accountant at Ernst and Young, where she was paid $45,000 per year.
She started her own landscaping business. She rents machines and tools for $50,000 and pays
$10,000 as wages to her help. These are her only costs. April earned total revenue of $100,000.
A) Her accountant calculates her profit as $40,000.
B) She has an economic loss.
C) Her explicit cost is $105,000.
D) Both answers A and B are correct.
E) Both answers A and C are correct.
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: SA
AACSB: Analytical reasoning
35) Jennifer owns a pig farm near Salina, Kansas. Last year she earned $39,000 in total revenue
while incurring $38,000 in explicit costs. She could have earned $27,000 as a teacher in Salina.
These are all her revenue and costs. Therefore Jennifer earned an
A) accounting profit of $1,000 but incurred an economic loss of $26,000.
B) accounting profit of $1,000 but incurred an economic loss of $65,000.
C) accounting profit of $1,000 but incurred an economic loss of $38,000.
D) economic profit of $1,000.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: JC
AACSB: Analytical reasoning
36) Suppose a firm's total revenue is $1,000,000. The firm has incurred explicit costs of
$750,000. There is also $50,000 of forgone wages by the owner, $10,000 of forgone interest by
the owner, $3,000 worth of economic depreciation, and $20,000 worth of normal profit. What is
the firm's economic profit?
A) $250,000
B) $200,000
C) $190,000
D) $167,000
E) $180,000
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: PH
AACSB: Analytical reasoning
13
Copyright © 2011 Pearson Education, Inc.
37) Dr. Khan starts his own dental practice after quitting his $150,000 job at The Mall Dental
Clinic. His revenues for the first year are $500,000. He paid $90,000 in rent for the dental office,
$60,000 for his office manager's salary, $24,000 for the dental hygienist, $150,000 for insurance,
and $6,000 for other miscellaneous costs. The normal profit from running his business is
$20,000.
A) His accounting profit is $350,000.
B) His economic profit is $150,000.
C) His economic profit is zero.
D) His accounting profit is zero.
E) None of the above answers are correct.
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: SA
AACSB: Analytical reasoning
38) Dr. Khan starts his own dental practice after quitting his $150,000 job at The Mall Dental
Clinic. His revenues for the first year are $500,000. He paid $90,000 in rent for the dental office,
$60,000 for his office manager's salary, $24,000 for the dental hygienist, $150,000 for insurance,
and $6,000 for other miscellaneous costs. The normal profit from running his business is
$20,000.
A) His explicit costs are $330,000.
B) His implicit costs are $170,000.
C) His economic profit is zero.
D) Only answer A and answer C are correct.
E) Answer A, answer B, and answer C are correct.
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: SA
AACSB: Analytical reasoning
14
Copyright © 2011 Pearson Education, Inc.
39) Suppose that a firm earned $500,000 in total revenue. At the same time, it incurred labor
costs of $200,000; economic depreciation of $50,000; normal profit of $75,000; interest paid to
the bank of $25,000; and used other factors of production that cost $100,000. The economic
profit earned by the firm equals
A) $275,000.
B) $175,000.
C) $50,000.
D) $200,000.
E) $500,000.
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: CD
AACSB: Analytical reasoning
40) Bill is an economics professor who earns $40,000 teaching but decides to leave and fulfill his
dream of catering barbecues. During his first year of barbecuing he earned total revenue of
$60,000. He spent $30,000 on food and supplies. He also paid his wife $10,000 to help serve
food. The normal profit for an entrepreneur running a barbecue business is $3,000. He also
rented an industrial grill/fry truck for $12,000. An accountant would conclude that Bill's profit
was
A) $30,000.
B) $20,000.
C) $8,000.
D) -$2,000.
E) $40,000.
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: WM
AACSB: Analytical reasoning
15
Copyright © 2011 Pearson Education, Inc.
41) Bill is an economics professor who earns $37,000 teaching but decides to leave and fulfill his
dream of catering barbecues. During his year of barbecuing he earned total revenue of $60,000.
He spent $30,000 on food and supplies. He also paid his wife $10,000 to help serve food. The
normal profit for an entrepreneur running a barbecue business is $3,000. Bill also rented an
industrial grill/fry truck for $12,000. Bill had an economic
A) profit of $20,000.
B) loss of -$32,000.
C) loss of -$42,000.
D) profit of $28,000.
E) profit of zero.
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: WM
AACSB: Analytical reasoning
42) The paramount goal of a firm is to
A) maximize profit.
B) maximize sales.
C) maximize total revenue.
D) minimize costs.
E) force its competitors into bankruptcy.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: STUDY GUIDE
AACSB: Reflective thinking
43) For a business, opportunity cost measures
A) only the cost of labor and materials.
B) only the implicit costs of the business.
C) the cost of all the factors of production the firm employs.
D) only the explicit costs the firm must pay.
E) all of the firm's costs including its normal profit and its economic profit.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: STUDY GUIDE
AACSB: Reflective thinking
16
Copyright © 2011 Pearson Education, Inc.
44) Costs paid in money to hire a resource is
A) normal profit.
B) an implicit cost.
C) an explicit cost.
D) an alternative-use cost.
E) economic profit.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: STUDY GUIDE
AACSB: Reflective thinking
45) Which of the following is an example of an implicit cost?
A) wages paid to employees
B) interest paid to a bank on a building loan
C) the cost of using capital an owner donates to the business
D) dollars paid to a supplier for materials used in production
E) liability insurance payments made only once a year
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: STUDY GUIDE
AACSB: Reflective thinking
46) The opportunity cost of a firm using its own capital is
A) economic depreciation.
B) self ownership depreciation.
C) economic loss.
D) normal loss.
E) capital loss.
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: STUDY GUIDE
AACSB: Reflective thinking
17
Copyright © 2011 Pearson Education, Inc.
47) The difference between a firm's total revenue and its total cost is its ________ profit.
A) explicit
B) normal
C) economic
D) accounting
E) excess
Skill: Level 1: Definition
Section: Checkpoint 13.1
Author: STUDY GUIDE
AACSB: Reflective thinking
13.2 Short-Run Production
1) The short run is the time frame
A) during which the quantities of all resources are fixed.
B) that is less than a year.
C) during which the quantities of some resources are fixed.
D) during which the quantities of all resources are variable.
E) during which all costs are implicit costs.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: SA
AACSB: Reflective thinking
2) The short run is
A) less than one year.
B) the time frame in which all resources are fixed.
C) the time frame in which some resources are fixed.
D) the time frame in which output is fixed.
E) a time frame short enough so that some costs are explicit costs.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: WM
AACSB: Reflective thinking
18
Copyright © 2011 Pearson Education, Inc.
3) The short run is a time period that is
A) equal to a day.
B) too short to change the amount of labor hired.
C) too short to change the size of the firm's plant.
D) long enough to change the size of the firm's plant.
E) too short to change the amount of any resource the firm employs.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: TS
AACSB: Reflective thinking
4) To produce more output in the short run, a firm must employ more of
A) all its resources.
B) its fixed resources.
C) its variable resources.
D) the least costly resources regardless of whether they are fixed or variable.
E) Firms cannot produce more output in the short run.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: SB
AACSB: Reflective thinking
5) Which of the following is a list of fixed inputs for a hospital?
A) bandages, casts, and other materials
B) antibiotics, pain medication, and other prescription drugs
C) the emergency room, intensive care unit, and other facilities
D) the nurses, receptionists, and other employees
E) the lobby, the doctors, and the electricity it uses
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: SB
AACSB: Reflective thinking
19
Copyright © 2011 Pearson Education, Inc.
6) The long run is a time period that is
A) five years or longer.
B) long enough to change the amount of labor employed.
C) long enough to change the size of the firm's plant and all other inputs.
D) long enough to change the amount of labor employed but not to change the size of the plant.
E) None of the above answers describe the long run.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: TS
AACSB: Reflective thinking
7) The long run is defined as
A) any time after six months.
B) any time after one year.
C) the period of time when all resources are fixed.
D) the period of time when most (more than 50 percent) resources are variable.
E) the period of time when all resources are variable.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: SB
AACSB: Reflective thinking
8) The long run is a time period in which
A) some of the firm's resources are fixed.
B) all of the firm's resources are fixed.
C) all of the firm's resources are variable.
D) the firm cannot increase its output.
E) all costs become explicit costs.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: PH
AACSB: Reflective thinking
20
Copyright © 2011 Pearson Education, Inc.
9) In the long run,
A) some resources are fixed.
B) all resources are variable.
C) output cannot be varied.
D) all resources are fixed.
E) Both answers B and C are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: TS
AACSB: Reflective thinking
10) In the long run, the firm ________ change the number of workers it employs and ________
change the size of its plant.
A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot
E) In order to answer the question more information is needed about how long is the long run.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: MR
AACSB: Reflective thinking
11) The total product curve shows the relationship between total product and
A) cost.
B) the quantity of labor.
C) the average product.
D) the marginal product.
E) the marginal cost.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: SA
AACSB: Reflective thinking
21
Copyright © 2011 Pearson Education, Inc.
12) Which of the following statements correctly describes a total product curve?
A) Points above the total produce curve are efficient.
B) The curve shows that output always increases as labor employed increases.
C) The curve separates attainable outputs from unattainable outputs.
D) The curve shows minimum levels of output.
E) The curve first falls, reaches a minimum, and then rises.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: CD
AACSB: Reflective thinking
13) The marginal product of labor is the change in
A) total cost from employing one more worker.
B) total revenue from employing one more worker.
C) average product from employing one more worker.
D) total output from employing one more worker.
E) total output divided by the change in cost from employing one more worker.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: PH
AACSB: Reflective thinking
14) The marginal product of labor equals the change in ________ from a one-unit increase in the
quantity of labor.
A) total product
B) average product
C) total cost
D) the slope of the average product curve
E) the wage rate
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: SA
AACSB: Reflective thinking
22
Copyright © 2011 Pearson Education, Inc.
15) The marginal product of labor is
A) total product divided by labor.
B) the change in total product divided by the increase in labor.
C) a measure of labor.
D) output that does not meet quality specifications.
E) total product minus the quantity of labor.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: SB
AACSB: Reflective thinking
16) When the slope of the total product curve is steep, the marginal product is
A) zero.
B) negative.
C) high.
D) low.
E) not defined.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: SB
AACSB: Analytical reasoning
17) At the Punjab Bakery, two workers can decorate 14 cakes in an hour and three workers can
decorate 18 cakes in an hour. The marginal product of the third worker is
A) 18 cakes and the average product for three workers is 6 cakes.
B) 9 cakes and is equal to the average product.
C) 4 cakes and the average product for three workers is 6 cakes.
D) 32 cakes and the average product for three workers is 9 cakes.
E) 6 cakes and the average product for three workers is also 6 cakes.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: SA
AACSB: Analytical reasoning
23
Copyright © 2011 Pearson Education, Inc.
18) Jill runs a factory that makes lie detectors in Little Rock, Arkansas. This month, Jill's 34
workers produced 690 machines. Suppose Jill adds one more worker and, as a result, her
factory's output increases to 700. Jill's marginal product of labor from the last worker hired
equals ________.
A) 10
B) 20
C) 690
D) 700
E) None of the above answers is correct.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: JC
AACSB: Analytical reasoning
19) If 9 workers can produce 1,550 units of output and 10 workers can produce 1,700 units of
output, then the marginal product of the 10th worker is
A) 1,700 units.
B) 1,500 units.
C) 150 units.
D) 170 units.
E) It is impossible to calculate with the information given.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: TS
AACSB: Analytical reasoning
20) Increasing marginal returns always occurs when the
A) marginal product of an additional worker exceeds the marginal product of the previous
worker.
B) average product of an additional worker exceeds the average product of the previous worker.
C) marginal product of an additional worker is less than the marginal product of the previous
worker.
D) average product of an additional worker is less than the average product of the previous
worker.
E) marginal product of an additional worker exceeds the average product of the previous worker.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: PH
AACSB: Reflective thinking
24
Copyright © 2011 Pearson Education, Inc.
21) Jeremiah runs a bullfrog farm in Frogville, Oklahoma. Jeremiah notices that each additional
worker he employs adds more to the total output than does the previous worker. Jeremiah must
be
A) experiencing increasing marginal returns to labor.
B) producing at a point where the average product of labor decreases as more workers are
employed.
C) producing at a point below his total product curve.
D) mistaken because the law of decreasing returns points out that it cannot be the case that the
marginal product increases as more workers are employed.
E) producing at a point where the average product of labor exceeds the marginal product of
labor.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: JC
AACSB: Reflective thinking
22) Increasing marginal returns to labor
A) occur when a particularly efficient worker is employed.
B) describe the portion of a total product curve where the marginal product is negative.
C) mean that two workers produce less than twice the output of one worker.
D) are the result of specialization and division of labor in the production process.
E) occur only when there are increasing marginal returns to capital.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: SB
AACSB: Reflective thinking
23) When the marginal product of an additional worker is less than the marginal product of the
previous worker, there are ________ returns to labor.
A) increasing total
B) decreasing total
C) increasing marginal
D) decreasing marginal
E) constant average
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: JC
AACSB: Reflective thinking
25
Copyright © 2011 Pearson Education, Inc.
24) Decreasing marginal returns
A) can be avoided if a firm watches costs.
B) affect all firms, but at different production levels.
C) affect all firms at the same level of production.
D) disappear when the firm produces a large enough level of output.
E) mean that the average product of labor starts as a negative number and then becomes positive.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: WM
AACSB: Reflective thinking
25) Decreasing marginal returns occur in the short run as more labor is hired to work in a fixed
sized plant because
A) less efficient and less productive workers are hired.
B) adding more workers exhausts the possible gains from specialization.
C) the entrepreneur does not know how to manage more workers.
D) each worker will produce more than the worker previously hired.
E) the plant becomes less specialized.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: TS
AACSB: Reflective thinking
26) The law of decreasing returns states that as a firm uses more of a
A) fixed input, with a given quantity of variable inputs, the marginal product of the fixed input
eventually decreases.
B) variable input, total output will increase indefinitely.
C) variable input, with a given quantity of fixed inputs, the marginal product of the variable input
eventually decreases.
D) variable input, output will begin to fall immediately.
E) fixed input and a variable input, the marginal product of the fixed input and the marginal
product of the variable input both decrease.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: JC
AACSB: Reflective thinking
26
Copyright © 2011 Pearson Education, Inc.
27) Average product is equal to
A) marginal product + total product.
B) total product ÷ marginal product.
C) total product ÷ quantity of labor.
D) total product × quantity of labor.
E) marginal product × quantity of labor.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: JC
AACSB: Reflective thinking
28) Jill runs a factory that makes lie detectors in Little Rock, Arkansas. This month, Jill's 34
workers produced 680 machines. Jill's average product of labor equaled ________ lie detectors
per worker.
A) 680
B) 34
C) 23
D) 20
E) None of the above answers is correct.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: JC
AACSB: Analytical reasoning
29) If 9 workers can produce 1,550 units of output and 10 workers can produce 1,700 units of
output, then the average product of 10 workers is
A) 1,700 units.
B) 1,500 units.
C) 170 units.
D) 150 units.
E) It is impossible to calculate with the information given.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: TS
AACSB: Analytical reasoning
27
Copyright © 2011 Pearson Education, Inc.
30) Denise owns a plant that produces watch parts in Ohio. Denise noticed that when she hired
the last worker, that worker's marginal product exceeded the marginal product of the previous
worker. As a result, when the last worker was hired, Denise's average product of labor
A) decreased.
B) increased.
C) did not change.
D) perhaps changed, but there is not enough information to determine whether or not it did
change.
E) equals the marginal product of labor.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: JC
AACSB: Reflective thinking
31) Kenya owns a lawn mowing company. His total product schedule is in the above table. The
marginal product of the fourth worker is ________ lawns mowed per week.
A) 80
B) 25
C) 20
D) 5
E) 320
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: PH
AACSB: Analytical reasoning
28
Copyright © 2011 Pearson Education, Inc.
32) Kenya owns a lawn mowing company. His total product schedule is in the above table. When
4 workers are employed, the average product is ________ lawns mowed per week.
A) 80
B) 25
C) 20
D) 5
E) 320
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: PH
AACSB: Analytical reasoning
33) Kenya owns a lawn mowing company. His total product schedule is in the above table.
Decreasing marginal returns first occur with the
A) first worker.
B) second worker.
C) third worker.
D) fourth worker.
E) fifth worker.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: PH
AACSB: Analytical reasoning
29
Copyright © 2011 Pearson Education, Inc.
34) The above table shows the total product schedule for Hair Today, a hair styling salon. Based
on the table, the marginal product for Hair Today
A) never reaches a maximum.
B) decreases after the 1st worker.
C) reaches a maximum with the 4th worker.
D) reaches a maximum with the 3rd worker.
E) reaches a maximum with the 5th worker.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: WM
AACSB: Analytical reasoning
35) The above table shows the total product schedule for Hair Today, a hair styling salon. The
average product when four workers are hired is
A) 10 hair stylings.
B) 15 hair stylings.
C) 20 hair stylings.
D) 240 hair stylings.
E) the same as when five workers are hired.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: WM
AACSB: Analytical reasoning
30
Copyright © 2011 Pearson Education, Inc.
36) Which of the following is correct about marginal and average products?
A) When the marginal product is increasing, the average product must be increasing.
B) When the marginal product exceeds the average product, the average product must be
increasing.
C) When the average product is increasing, the marginal product must be decreasing.
D) When the marginal product is decreasing, the average product must be decreasing.
E) When the marginal product is increasing, the average product must be decreasing.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: WM
AACSB: Reflective thinking
37) When the average product is at its maximum,
A) the marginal product is increasing as output increases.
B) the marginal product is negative.
C) it is equal to the marginal product.
D) total product is also at its maximum.
E) total product is at its minimum.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: SB
AACSB: Reflective thinking
38) Under which of the following sets of circumstances is it definitely the case that the average
product increases as more labor is hired?
A) Total product increases as more labor is hired.
B) The marginal product is equal to the average product.
C) The marginal product is positive.
D) The marginal product is greater than the average product.
E) The marginal product is less than the average product.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: TS
AACSB: Reflective thinking
31
Copyright © 2011 Pearson Education, Inc.
39) The average product is the greatest in the short run when the
A) total product is maximized.
B) marginal product is equal to zero.
C) marginal product is maximized.
D) marginal product is equal to the average product.
E) marginal product is greater than the average product.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: TS
AACSB: Reflective thinking
40) The table above shows the total product schedule for Rick's Lawn Service, a yard care
company. The total product schedule shows
A) increasing marginal returns when the 6th worker is hired.
B) decreasing marginal returns when the 1st worker is hired.
C) first increasing and then decreasing marginal returns.
D) output first increases then increases.
E) only decreasing marginal returns.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: CD
AACSB: Analytical reasoning
32
Copyright © 2011 Pearson Education, Inc.
41) The table above shows the total product schedule for Rick's Lawn Service, a yard care
company. Increasing marginal returns
A) end when the fourth worker is hired.
B) occur at all levels of employment.
C) occur as long as output increases.
D) end when the second worker is hired.
E) never occur.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: CD
AACSB: Analytical reasoning
42) The table above shows the total product schedule for Rick's Lawn Service, a yard care
company. Decreasing marginal returns start to occur after the ________ worker is hired.
A) first
B) fourth
C) fifth
D) sixth
E) third
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: CD
AACSB: Analytical reasoning
43) The table above shows the total product schedule for Rick's Lawn Service, a yard care
company. When the 4th worker is hired, the ________ product of labor equals ________ lawns
mowed.
A) average; 60
B) average; 3.75
C) marginal; 3.75
D) marginal; 0
E) marginal; 15
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: CD
AACSB: Analytical reasoning
33
Copyright © 2011 Pearson Education, Inc.
44) The table above shows the total product schedule for Rick's Lawn Service, a yard care
company. The average product of labor ________ when the 7th worker is hired.
A) reaches its maximum
B) equals 1 lawn mowed
C) equals 28 lawns mowed
D) equals 4 lawns mowed
E) equals 2 lawns mowed
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: CD
AACSB: Analytical reasoning
45) The table above shows the total product schedule for Rick's Lawn Service, a yard care
company. When the ________ worker is hired, the average product of labor ________ the
marginal product of labor.
A) 4th; exceeds
B) 5th; exceeds
C) 6th; exceeds
D) 7th; is less than
E) 7th; equals
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: CD
AACSB: Analytical reasoning
46) The table above shows the total product schedule for Rick's Lawn Service, a yard care
company. When does the average product of labor equal the marginal product of labor?
A) between the 4th and 5th workers
B) at the 5th worker
C) between the 5th and 6th workers
D) between the 6th and 7th workers
E) between 0 workers and the 3rd worker
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: CD
AACSB: Analytical reasoning
34
Copyright © 2011 Pearson Education, Inc.
47) The short run is a time period during which
A) some of the firm's resources are fixed.
B) all of the firm's resources are fixed.
C) all of the firm's resources are variable.
D) the fixed cost equals zero.
E) the firm cannot increase its output.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: STUDY GUIDE
AACSB: Reflective thinking
48) In the short run, firms increase output
A) only by increasing the size of their plant.
B) only by decreasing the size of their plant.
C) only by increasing the amount of labor used.
D) only by decreasing the amount of labor used.
E) either increasing the amount of labor used or increasing the size of their plant.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: STUDY GUIDE
AACSB: Reflective thinking
49) Which of the following is correct?
A) The short run for a firm can be longer than the long run for the same firm.
B) The short run is the same for all firms.
C) The long run is the time frame in which the quantities of all resources can be varied.
D) The long run is the time frame in which all resources are fixed.
E) The long run does not exist for some firms.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: STUDY GUIDE
AACSB: Reflective thinking
35
Copyright © 2011 Pearson Education, Inc.
50) Marginal product equals
A) the total product produced by a certain amount of labor.
B) the change in total product that results from a one-unit increase in the quantity of labor
employed.
C) total product divided by the quantity of labor.
D) the amount of labor needed to produce an increase in production.
E) total product minus the quantity of labor.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: STUDY GUIDE
AACSB: Reflective thinking
51) If 5 workers can wash 30 cars a day and 6 workers can wash 33 cars a day, then the marginal
product of the 6th worker equals
A) 30 cars a day.
B) 33 cars a day.
C) 5 cars a day.
D) 5.5 cars a day.
E) 3 cars a day.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: STUDY GUIDE
AACSB: Analytical reasoning
52) Increasing marginal returns occur when the
A) average product of an additional worker is less than the average product of the previous
worker.
B) marginal product of an additional worker exceeds the marginal product of the previous
worker.
C) marginal product of labor is less than the average product of labor.
D) total output of the firm is at its maximum.
E) total product curve is horizontal.
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: STUDY GUIDE
AACSB: Reflective thinking
36
Copyright © 2011 Pearson Education, Inc.
53) If 25 workers can pick 100 flats of strawberries per hour, then average product is
A) 100 flats per hour.
B) 125 flats per hour.
C) 75 flats per hour.
D) 4 flats per hour.
E) More information is needed about how many flats 24 workers can pick.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: STUDY GUIDE
AACSB: Analytical reasoning
13.3 Short-Run Cost
1) Total cost includes
A) the cost of variable resources only.
B) the cost of fixed resources only.
C) the cost of both variable and fixed resources.
D) the cost of neither variable nor fixed resources.
E) all explicit costs and all the implicit costs that actually must be paid using money.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: SB
AACSB: Reflective thinking
2) Chuck owns a factory that produces leather footballs. His total fixed cost equaled $86,000 last
year. His total cost equaled $286,000 last year. Hence Chuck's
A) total variable cost was zero.
B) incurred an economic loss.
C) total variable cost equaled $200,000.
D) total variable cost equaled $372,000.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: JC
AACSB: Analytical reasoning
37
Copyright © 2011 Pearson Education, Inc.
3) If Melissa owns a software company that incurs no fixed costs, then
A) her total cost equals her total variable cost.
B) she will earn an economic profit.
C) her total variable cost is less than her total cost.
D) her total cost equals zero.
E) her marginal cost must equal zero.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: JC
AACSB: Reflective thinking
4) In the short run, a firm cannot change the amount of capital it uses. Therefore the cost of
capital is a
A) short-run cost.
B) variable cost.
C) productivity cost.
D) fixed cost.
E) marginal cost.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: JC
AACSB: Reflective thinking
5) The cost that does not change as output changes is
A) total fixed cost.
B) average fixed cost.
C) total variable cost.
D) average variable cost.
E) marginal cost.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: SA
AACSB: Reflective thinking
38
Copyright © 2011 Pearson Education, Inc.
6) Which of the following costs can be positive when output is zero?
A) average variable cost
B) total variable cost
C) marginal cost
D) total fixed cost
E) None of the above because when output is zero there are no costs.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: TS
AACSB: Reflective thinking
7) Which of the following is a fixed cost for ACME manufacturing?
A) wages paid to labor
B) the annual fire and theft insurance premiums
C) the utility bill
D) raw material costs
E) the cost of shipping its product to market
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: TS
AACSB: Reflective thinking
8) Because the amount of labor a firm employs can be changed, the cost of labor is known as
A) minimum cost.
B) variable cost.
C) maximum cost.
D) fixed cost.
E) an unavoidable cost.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: JC
AACSB: Reflective thinking
39
Copyright © 2011 Pearson Education, Inc.
9) If a firm does not produce any output, its
A) total fixed cost must be zero.
B) economic profit must be positive.
C) total variable cost must be zero.
D) total costs must be zero.
E) marginal cost must be zero.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: SA
AACSB: Reflective thinking
10) Total variable cost
A) includes the cost of capital.
B) includes the cost of labor.
C) includes both the cost of capital and of labor.
D) does not change when production changes.
E) is positive when output is zero.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: SB
AACSB: Reflective thinking
11) The total variable cost curve ________ because ________ as output increases.
A) slopes upward; variable cost increases
B) slopes upward; marginal cost increases
C) slopes downward; variable cost increases
D) slopes downward; marginal cost increases
E) is horizontal; fixed cost does not change
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: CD
AACSB: Analytical reasoning
40
Copyright © 2011 Pearson Education, Inc.
12) Marginal cost equals
A) total cost minus total variable cost.
B) total fixed cost divided by total output.
C) total variable cost divided by total output.
D) the change in total cost that results from a one-unit increase in output.
E) the change in fixed cost that results from a one-unit increase in output.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: JC
AACSB: Reflective thinking
13) The change in cost that results from a one-unit increase in output is called the
A) average fixed cost.
B) per-unit variable cost.
C) per-unit total cost.
D) marginal cost.
E) average cost change.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: SA
AACSB: Reflective thinking
14) As a typical firm increases its output, its marginal cost
A) is constant.
B) decreases at first and then increases.
C) increases at first and then decreases.
D) decreases.
E) is negative at first and then positive.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: WM
AACSB: Reflective thinking
41
Copyright © 2011 Pearson Education, Inc.
15) When marginal cost is positive, total cost is ________ as output increases.
A) increasing
B) decreasing
C) constant
D) negative
E) undefined
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SB
AACSB: Reflective thinking
16) If total fixed cost increases, which of the following will NOT change?
A) total cost
B) average fixed cost
C) marginal cost
D) average total cost
E) ALL costs increase when total fixed cost increases.
Skill: Level 4: Applying models
Section: Checkpoint 13.3
Author: TS
AACSB: Analytical reasoning
17) Scott owns a law-enforcement training operation in Boise, Idaho. He employs three trainers.
The last trainer Scott hired increased Scott's total cost by $466 per week even though the trainer
brought in only one new client. Hence Scott's
A) total variable cost equals $466.
B) marginal cost of the last client equals $466.
C) marginal cost of the last worker equals $233.
D) total variable cost equals $233.
E) total fixed cost of the last client equals $466.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: JC
AACSB: Analytical reasoning
42
Copyright © 2011 Pearson Education, Inc.
Labor
(workers)
Output
(bikes)
Total fixed
costs
(dollars)
Total
variable cost
(dollars)
Total cost
(dollars)
0 0 200
1 20 100
2 50
3 60
4 64
18) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been
spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production.
What is the total cost of producing 50 bikes?
A) $100
B) $200
C) $300
D) $400
E) $500
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
19) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been
spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production.
What is the total fixed cost of producing 64 bikes?
A) $200
B) $300
C) $400
D) $500
E) $600
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
43
Copyright © 2011 Pearson Education, Inc.
20) The table above gives costs at Jan's Bike Shop. Unfortunately, Jan's record keeping has been
spotty. Each worker is paid $100 a day. Labor costs are the only variable costs of production.
What is the total variable cost of producing 60 bikes?
A) $200
B) $300
C) $400
D) $500
E) None of the above answers are correct.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
21) The Jerry-Berry Ice Cream Shoppe's total cost schedule is in the above table. Based on the
table, which of the following is correct?
A) The total fixed cost is $1.
B) The average fixed cost of 1 gallon is $1.00.
C) The average variable cost of 2 gallons of ice cream is $1.00 per gallon.
D) Only answer A and answer B are correct.
E) Answer A, answer B, and answer C are correct.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: SA
AACSB: Analytical reasoning
44
Copyright © 2011 Pearson Education, Inc.
22) The Jerry-Berry Ice Cream Shoppe's total cost schedule is in the above table. Based on the
table, the marginal cost of producing the fourth gallon of ice cream is
A) $2.
B) $3.
C) $5.
D) $8.
E) $32.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: SA
AACSB: Analytical reasoning
23) Paulette owns a pizza parlor. Her total cost schedule is in the above table. Her total fixed cost
is equal to
A) $20.
B) $35.
C) $79.
D) $85.
E) Some amount but more information is needed to determine her fixed cost.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: PH
AACSB: Analytical reasoning
45
Copyright © 2011 Pearson Education, Inc.
24) Paulette owns a pizza parlor. Her total cost schedule is in the above table. Her total variable
cost of producing four pizzas per hour is
A) $20.
B) $49.
C) $51.
D) $71.
E) Some amount but more information is needed to determine this total variable cost.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: PH
AACSB: Analytical reasoning
25) Paulette owns a pizza parlor. Her total cost schedule is in the above table. Her marginal cost
of producing the fifth pizza is
A) $8.
B) between $8.01 and $10.00.
C) between $10.01 and $14.00.
D) between $14.01 and $78.00.
E) more than $78.01.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: PH
AACSB: Analytical reasoning
46
Copyright © 2011 Pearson Education, Inc.
26) In the above figure, curve A is the ________ curve and curve B is the ________ curve.
A) total variable cost; total fixed cost
B) total cost; total fixed cost
C) total fixed cost; total variable cost
D) total cost; total variable cost
E) total variable cost; total cost
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SA
AACSB: Analytical reasoning
27) In the above figure, curve A is the ________ curve and curve C is the ________ curve.
A) total variable cost; total fixed cost
B) total cost; total fixed cost
C) total fixed cost; total variable cost
D) total cost; total variable cost
E) total variable cost; total cost
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SA
AACSB: Analytical reasoning
47
Copyright © 2011 Pearson Education, Inc.
28) Average variable cost equals
A) fixed cost divided by output.
B) total variable cost divided by output.
C) marginal cost divided by output.
D) marginal cost plus fixed cost.
E) marginal cost multiplied by output.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: JC
AACSB: Reflective thinking
29) Average total cost is equal to
A) average fixed cost + average variable cost.
B) total cost ÷ quantity.
C) the change in total cost when output changes by one unit.
D) Answer A and answer B are correct.
E) Answer A and answer C are correct.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: SA
AACSB: Reflective thinking
30) Average total cost equals
A) the change in total cost divided by the change in output.
B) total fixed cost divided by output.
C) average fixed cost plus average variable cost.
D) total cost minus total variable cost.
E) average fixed cost plus average variable cost plus marginal cost.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: SB
AACSB: Reflective thinking
48
Copyright © 2011 Pearson Education, Inc.
31) Which of the following always decreases when output increases?
A) total fixed cost
B) marginal cost
C) average variable cost
D) average fixed cost
E) total cost
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: TS
AACSB: Reflective thinking
32) The average fixed cost curve
A) is always positively sloped.
B) is U-shaped.
C) has an upside-down U shape.
D) is always negatively sloped.
E) is horizontal.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SB
AACSB: Reflective thinking
33) The total product is 10 units. The average total cost is $30 and the average fixed cost is $10.
What is the amount of the total variable cost?
A) $20
B) $200
C) $300
D) $10
E) It is impossible to determine with the information given.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: TS
AACSB: Analytical reasoning
49
Copyright © 2011 Pearson Education, Inc.
34) If average variable costs increase as output increases, then
A) total fixed cost must be increasing also.
B) marginal cost must be greater than average variable cost.
C) total cost must be constant.
D) output must be zero.
E) average total cost must be increasing also.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: TS
AACSB: Reflective thinking
35) An insurance agent rents a building and has a three-year lease. An increase in the rent for the
building increases the agent's
A) total cost and average variable cost.
B) total variable cost and average variable cost.
C) total fixed cost and total variable cost.
D) total fixed cost and average fixed cost.
E) total variable cost and total cost.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SA
AACSB: Analytical reasoning
50
Copyright © 2011 Pearson Education, Inc.
36) The table above shows a total product schedule. Suppose that labor cost $20 per worker and
fixed costs are $60. The total variable cost of producing 80 units equals
A) less than $50.
B) more that $50 and less than $70.
C) more than $70 and less than $90.
D) more than $90 and less than $120.
E) more than $120.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
37) The table above shows a total product schedule. Suppose that labor cost $20 per worker and
fixed costs are $60. The total cost of producing 80 units equals
A) less than $5.
B) more than $5 and less than $110.
C) more than $110 and less than $120.
D) more than $120 and less than $150.
E) more than $150.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
51
Copyright © 2011 Pearson Education, Inc.
38) The table above shows a total product schedule. Suppose that labor cost $20 per worker and
fixed costs are $60. The average variable cost of producing 80 units equals ________ per unit.
A) $0.75
B) $1.00
C) $1.75
D) $20
E) $0.25
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
39) The table above shows a total product schedule. Suppose that labor cost $20 per worker and
fixed costs are $60. The average total cost of producing 80 units equals ________ per unit.
A) $0.75
B) $1.00
C) $1.75
D) $60
E) $0.25
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
52
Copyright © 2011 Pearson Education, Inc.
40) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total
product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for
her salon. These are her only costs. When Anna has a staff of 2 workers, her total cost equals
A) $1,200.
B) $300.
C) $10.00.
D) $12.00.
E) $600.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
41) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total
product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for
her salon. These are her only costs. When Anna has a staff of 2 workers, her average total cost
equals
A) $2,400.
B) $300.
C) $10.00.
D) $12.00.
E) $1,200.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
53
Copyright © 2011 Pearson Education, Inc.
42) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total
product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for
her salon. These are her only costs. When Anna has a staff of 2 workers, her average variable
cost equals
A) $2,400.
B) $300.
C) $6.00.
D) $10.00.
E) $600.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
43) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total
product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for
her salon. These are her only costs. When Anna has a staff of 2 workers, her average fixed cost
equals
A) $600.
B) $6.00.
C) $7.50.
D) $10.00.
E) $2,400.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
44) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total
product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for
her salon. These are her only costs. When Anna has a staff of 6 workers, her total cost equals
A) $2,400.
B) $300.
C) $7.50.
D) $10.00.
E) $1,800.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: JC
AACSB: Analytical reasoning
54
Copyright © 2011 Pearson Education, Inc.
45) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total
product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for
her salon. These are her only costs. When Anna has a staff of 6 workers, her average total cost
equals
A) $2,400.
B) $300.
C) $7.50.
D) $10.00.
E) $4,200.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: JC
AACSB: Analytical reasoning
46) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total
product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for
her salon. These are her only costs. When Anna has a staff of 6 workers, her average variable
cost equals
A) $2,400.
B) $300.
C) $7.50.
D) $10.00.
E) $1,800.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: JC
AACSB: Analytical reasoning
47) Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total
product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for
her salon. These are her only costs. When Anna has a staff of 6 workers, her average fixed cost
equals
A) $600.
B) $2.50.
C) $7.50.
D) $10.00.
E) $6.00.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
55
Copyright © 2011 Pearson Education, Inc.
Labor
(workers)
Output
(frijoles)
Total cost
(dollars)
0 0 1,000
5 1,000 3,000
10 3,000 5,000
15 4,000 7,000
20 4,500 9,000
48) The above table gives some production and cost information for Flaming Fernando's, a
restaurant that sells Fiery Frijoles. What is the total fixed cost of producing 4,500 frijoles?
A) $1000
B) $8000
C) $9000
D) $2,000
E) More information is needed to determine the answer.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
49) The above table gives some production and cost information for Flaming Fernando's, a
restaurant that sells Fiery Frijoles. Between what two levels of output does the marginal cost of
producing Fiery Frijoles first begin to rise?
A) 0 and 1000
B) 1000 and 3000
C) 3000 and 4000
D) 4000 and 4500
E) None of the above answers are correct.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
56
Copyright © 2011 Pearson Education, Inc.
50) The above table gives some production and cost information for Flaming Fernando's, a
restaurant that sells Fiery Frijoles. What is the average variable cost of producing 1,000 frijoles?
A) $1
B) $2
C) $3
D) $3,000
E) More information is needed to determine the answer.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
51) The above table gives some production and cost information for Flaming Fernando's, a
restaurant that sells Fiery Frijoles. What is the average total cost of producing 4,500 frijoles?
A) $2
B) $225
C) $9,000
D) $8,000
E) More information is needed to determine the answer.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: MR
AACSB: Analytical reasoning
52) The production and cost information provided in the table above for Flaming Fernando's, a
restaurant that sells Fiery Frijoles, is for the
A) short run because there are no variable costs.
B) short run because there is a fixed cost.
C) long run because there are no variable costs.
D) long run because there are no fixed costs.
E) short run and long run because the total cost increases as production increases.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: MR
AACSB: Reflective thinking
57
Copyright © 2011 Pearson Education, Inc.
53) The vertical distance between total cost curve and total variable cost curve is equal to
A) average fixed cost.
B) total fixed cost.
C) average variable cost.
D) average total cost.
E) marginal cost.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: SA
AACSB: Reflective thinking
54) The U-shaped average total cost curve is
A) a result of firms' wanting to find the output level where cost is at its minimum.
B) unrealistic because average total cost always increases as output increases.
C) the result of average fixed cost falling and decreasing marginal returns as output increases.
D) a result of constant marginal returns.
E) a result of increasing marginal returns.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SA
AACSB: Reflective thinking
55) The U-shape of the average variable, average total, and marginal cost curves reflects
A) increasing marginal returns.
B) decreasing marginal returns.
C) both increasing and decreasing marginal returns.
D) decreasing marginal product.
E) the point that implicit costs become a smaller fraction of total cost as output increases.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: PH
AACSB: Reflective thinking
58
Copyright © 2011 Pearson Education, Inc.
56) The short-run average total cost, average variable cost, and marginal cost curves are all U-
shaped because of
i. constant total fixed cost.
ii. increasing and then decreasing marginal returns as more labor is hired.
iii. economies and diseconomies of scale as the plant size increases.
A) only i
B) only ii
C) i and iii
D) ii and iii
E) i, ii, and iii
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: TS
AACSB: Reflective thinking
57) In a graph of a typical firm's AFC, ATC, and AVC curves, the
A) AVC curve lies above the ATC curve.
B) ATC curve lies below the AFC curve.
C) distance between the ATC curve and the AVC curve equals the AFC.
D) distance between the AVC curve and the AFC curve equals the ATC.
E) AVC curve crosses the MC curve at the point where the MC is at its minimum.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: WM
AACSB: Reflective thinking
58) As we observe the cost curves' graph, we see that the
A) MC curve intersects the ATC curve at its maximum.
B) MC curve can not be U-shaped.
C) ATC curve always has a negative slope.
D) MC curve intersects the AVC curve and ATC curve at their minimums.
E) MC constantly falls as output increases.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: WM
AACSB: Reflective thinking
59
Copyright © 2011 Pearson Education, Inc.
59) In a figure showing the average total cost curve and the average variable cost curve, the
vertical distance between the two curves is equal to the
A) marginal cost.
B) average fixed cost.
C) total fixed cost.
D) total variable cost.
E) average marginal cost.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: SA
AACSB: Analytical reasoning
60) The vertical distance between the total cost curve and the total variable cost curve ________
as output increases and the vertical distance between the average total cost curve and average
variable cost curve ________ as output increases.
A) is constant; decreases
B) decreases; is constant
C) increases; decreases
D) decreases; increases
E) decreases; decreases
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: SA
AACSB: Analytical reasoning
61) The marginal cost curve is U-shaped. Over the range of output for which the marginal cost is
falling as output increases, the marginal product is
A) increasing.
B) decreasing.
C) constant.
D) probably changing, but there is no stable relationship between the marginal cost and the
marginal product.
E) not defined.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: SA
AACSB: Reflective thinking
60
Copyright © 2011 Pearson Education, Inc.
62) The relationship between the MP and MC curves is
A) over the range where the MP curve has a negative slope, the MC curve also has a negative
slope.
B) there is no predictable relationship.
C) over the range where the MC curve has a positive slope, the MP curve also has a positive
slope.
D) over the range where the MP curve has a positive slope, the MC curve has a negative slope.
E) that the MP is not defined when the MC curve has a negative slope.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: WM
AACSB: Reflective thinking
63) If marginal cost increases when output increases, then
A) marginal product must decrease when output increases.
B) average fixed cost is constant.
C) total cost is constant.
D) average variable cost must increase when output increases.
E) average total cost must decrease when output increases.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: TS
AACSB: Reflective thinking
64) If another worker is hired with a marginal product greater than the previously hired worker,
which of the following will be true?
A) total costs will decrease
B) fixed costs will decrease
C) marginal cost will increase
D) marginal cost will decrease
E) average fixed costs will increase
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: TS
AACSB: Reflective thinking
61
Copyright © 2011 Pearson Education, Inc.
65) When the marginal product is increasing as the quantity increases, then as the quantity
increases the
A) average product is decreasing.
B) marginal cost is decreasing.
C) total cost is decreasing.
D) total product is decreasing.
E) fixed cost is increasing.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: SB
AACSB: Reflective thinking
66) If we know the amount of total cost, average total cost, average variable cost, and marginal
cost for each level of output, how can we find the level of output where the marginal product is
the greatest?
A) It is the output for which the marginal cost equals average variable cost.
B) It is the output for which the total cost is maximized.
C) It is the output for which the marginal cost is minimized.
D) It is the output for which the marginal cost equals average total cost.
E) There is no way to find where marginal product is the greatest knowing only cost data.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: TS
AACSB: Reflective thinking
67) Cost curves shift if
i. technology changes.
ii. the prices of factors of production change.
iii. productivity changes.
A) only i
B) i and iii
C) only ii
D) i and ii
E) i, ii, and iii
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SB
AACSB: Reflective thinking
62
Copyright © 2011 Pearson Education, Inc.
68) An increase in the price of labor (a variable resource) shifts
A) all cost curves upward.
B) the variable cost curves upward but leaves the fixed cost curves unchanged.
C) the fixed cost curves upward but leaves the variable cost curves unchanged.
D) the marginal cost curve rightward.
E) none of the cost curves.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SB
AACSB: Analytical reasoning
69) Total cost is equal to the sum of
A) total revenue and total cost.
B) total variable cost and total product.
C) total variable cost and total fixed cost.
D) total fixed cost and total product.
E) the marginal cost plus the total fixed cost plus the total variable cost.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: STUDY GUIDE
AACSB: Reflective thinking
70) Total fixed cost is the cost of
A) labor.
B) production.
C) a firm's fixed factors of production.
D) only implicit factors of production.
E) only explicit factors of production.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: STUDY GUIDE
AACSB: Reflective thinking
63
Copyright © 2011 Pearson Education, Inc.
71) Jay set up his hot dog stand near the business district. His total variable cost includes the
A) annual insurance for the hot dog stand.
B) cost of buying the hot dog stand.
C) cost of the hot dogs and condiments.
D) interest he pays on the funds he borrowed to pay for advertising.
E) revenue he gets when he sells his first hot dog each day.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: STUDY GUIDE
AACSB: Reflective thinking
72) Marginal cost is equal to
A) the total cost of a firm's production.
B) total cost minus fixed cost.
C) a cost that is not related to the quantity produced.
D) the change in total cost that results from a one-unit increase in output.
E) the change in fixed cost that results from a one-unit increase in output.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: STUDY GUIDE
AACSB: Reflective thinking
73) To produce 10 shirts, the total cost is $80; to produce 11 shirts, the total cost is $99. The
marginal cost of the 11th shirt is equal to
A) $8.
B) $9.
C) $80.
D) $99.
E) $19.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: STUDY GUIDE
AACSB: Analytical reasoning
64
Copyright © 2011 Pearson Education, Inc.
74) Average total cost equals
A) marginal cost divided by output.
B) average fixed cost plus average variable cost.
C) total fixed cost plus total variable cost.
D) marginal cost plus opportunity cost.
E) marginal cost multiplied by the quantity of output.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: STUDY GUIDE
AACSB: Reflective thinking
75) To produce 10 shirts, the total cost is $80; to produce 11 shirts, the total cost is $99. The
average total cost of the 11th shirt is equal to
A) $8.
B) $9.
C) $80.
D) $99.
E) $19.
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: STUDY GUIDE
AACSB: Analytical reasoning
76) One of the major reasons for the U-shaped average total cost curve is the fact that
A) there are increasing returns from labor regardless of the number of workers employed.
B) there eventually are decreasing returns from labor as more workers are employed.
C) prices fall as output increases.
D) the average fixed cost increases as more output is produced.
E) the variable cost decreases as more output is produced.
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: STUDY GUIDE
AACSB: Reflective thinking
65
Copyright © 2011 Pearson Education, Inc.
13.4 Long-Run Cost
1) Which of the following statements is true?
A) In the long run, the average cost curve is always downward sloping.
B) In the long run, the quantities of all inputs are fixed.
C) In the long run, the firms' fixed costs are greater than its variable costs.
D) In the long run, all costs are variable costs.
E) In the long run, the total variable cost equals the total fixed cost.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: MR
AACSB: Reflective thinking
2) Which of the following is FALSE?
A) Long-run average variable costs equal long-run average total costs.
B) Fixed costs increase in the long run.
C) As a firm produces more output, eventually it experiences diseconomies of scale.
D) In the long run, both the amount of capital and labor used by the firm can be changed.
E) In the long run, the firm has no fixed inputs.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: MR
AACSB: Reflective thinking
3) In the long run,
A) all inputs can be varied.
B) all inputs are fixed.
C) some inputs are variable and other inputs are fixed.
D) output is fixed.
E) total variable cost cannot be changed.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: MR
AACSB: Reflective thinking
66
Copyright © 2011 Pearson Education, Inc.
4) When a firm's long-run average total cost decreases as its output increases, the firm is
experiencing
A) economies of scale.
B) diseconomies of scale.
C) constant returns to scale.
D) decreasing marginal returns.
E) decreasing cost of marginal returns.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: SB
AACSB: Reflective thinking
5) As output increases, economies of scale occur when the
A) long-run average cost increases.
B) long-run average cost decreases.
C) short-run average total cost decreases.
D) long-run average cost stays constant.
E) long-run fixed cost decreases.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: SA
AACSB: Reflective thinking
6) A firm has economies of scale when its average total cost of production ________ as the size
of a its plant and its labor force ________.
A) decreases; increase by the same percentage
B) does not change; increase by the same percentage
C) increases; increase by the same percentage
D) decreases; do not change
E) decreases; decrease by the same percentage
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: JC
AACSB: Reflective thinking
67
Copyright © 2011 Pearson Education, Inc.
7) If a firm increases both its plant and labor by the same percentage and its average cost
decreases, the firm is experiencing which of the following?
A) increasing marginal returns
B) diseconomies of scale
C) economies of scale
D) random luck
E) decreasing cost of marginal returns
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: TS
AACSB: Reflective thinking
8) When a firm experiences economies of scale,
A) its short-run average total cost decreases as its output increases.
B) its marginal cost decreases as its output increases.
C) it increases the amount of labor and capital it uses by an equal percentage and its output
increases by a larger percentage.
D) its marginal cost increases as output increases.
E) it increases the amount of labor and capital it uses by an equal percentage and its average cost
increases by a larger percentage.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: CD
AACSB: Reflective thinking
9) The main source of economies of scale is
A) reductions in the price of factors of production.
B) greater specialization of both labor and capital.
C) increasing average costs.
D) decreasing marginal product.
E) the ability to hire less labor.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: SB
AACSB: Reflective thinking
68
Copyright © 2011 Pearson Education, Inc.
10) The main sources of economies of scale are
A) increasing marginal cost and decreasing marginal product.
B) specialization of resources such as labor and capital.
C) caused by the difficulty of coordinating and controlling large enterprises.
D) decreasing marginal cost and increasing marginal product.
E) an increase in a firm's bargaining power to lower the wage rate and the cost of capital as the
firm's output increases.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: PH
AACSB: Reflective thinking
11) Economies of scale can occur as a result of which of the following?
A) increasing marginal returns as the firm increases its size
B) lower fixed cost as the firm increases its size
C) management difficulties as the firm increases its size
D) greater specialization of labor and capital as the firm increases its size
E) increased total cost when the firm increases its size
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: TS
AACSB: Reflective thinking
12) Diseconomies of scale is
A) a short run phenomenon.
B) the result of decreasing marginal returns.
C) a long run phenomenon.
D) the result of increasing marginal returns.
E) possible only when the firm's plant size is fixed.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: PH
AACSB: Reflective thinking
69
Copyright © 2011 Pearson Education, Inc.
13) Diseconomies of scale occurs when a firm's average total cost of production ________ as its
size of a plant and its labor force ________.
A) decreases; increase by the same percentage
B) does not change; increase by the same percentage
C) increases; increase by the same percentage
D) decreases; do not change
E) increases; do not change
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: MR
AACSB: Reflective thinking
14) If a firm increases the size of its plant and its labor force by the same percentage and as a
result its average total cost increases, then the firm is experiencing
A) economies of scale.
B) diseconomies of scale.
C) constant returns to scale.
D) decreasing marginal returns.
E) increasing marginal returns.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: SB
AACSB: Reflective thinking
15) When a firm ________ the size of its plant and labor force by the same percentage and, as a
result, its average total cost ________, then the firm experiences diseconomies of scale.
A) increases; increases
B) increases; does not change
C) increases; decreases
D) decreases; does not change
E) None of the above answers are correct because diseconomies of scale occur when the firm
only changes its variable inputs and leaves the fixed inputs constant.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: JC
AACSB: Reflective thinking
70
Copyright © 2011 Pearson Education, Inc.
16) A firm decreases its scale of operation and discovers that its long-run average costs decrease.
Which of the following does this indicate?
A) Labor's marginal product has increased.
B) Diseconomies of scale were absent in the larger plant.
C) The firm's scale initially was so large that it experienced diseconomies of scale.
D) The firm's scale initially was too small to experience economies of scale.
E) Its long-run marginal cost was smaller with the larger plant than with the smaller plant.
Skill: Level 3: Using models
Section: Checkpoint 13.4
Author: TS
AACSB: Reflective thinking
17) Diseconomies of scale is a result of
A) mismanagement.
B) difficulties of coordinating and controlling a large enterprise.
C) specialization of labor, capital, and management.
D) technological progress.
E) larger fixed costs as the firm's production increases.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: PH
AACSB: Reflective thinking
18) When a firm becomes so large it is difficult to coordinate and control, it is most likely that
A) economies of scale have begun.
B) diseconomies of scale have begun.
C) average total cost begins to fall.
D) long-run average costs become negative.
E) there is increasing marginal returns to increasing the firm's plant size.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: SB
AACSB: Reflective thinking
71
Copyright © 2011 Pearson Education, Inc.
19) Bob is an entrepreneur who hires college students to sell hot dogs in the busy downtown area
of his hometown. Each student is paid the same wage rate, given an identically supplied hot dog
cart, and assigned to a specific area. If as Bob increases his scale of operation from 3 carts to 4
carts, each cart produces and sells the same number of hot dogs per day, Bob experiences
A) economies of scale.
B) diseconomies of scale.
C) constant returns to scale.
D) decreasing total costs.
E) zero marginal cost.
Skill: Level 3: Using models
Section: Checkpoint 13.4
Author: SB
AACSB: Reflective thinking
20) The long run average cost curve
A) is the sum of a firm's short run average cost curves.
B) shows the lowest average cost facing a firm as it increases output changing both its plant and
labor force.
C) initially rises when output increases and then falls when output increases.
D) always falls as output increases.
E) always rises as output increases.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: CD
AACSB: Reflective thinking
21) What does the long-run average cost curve show?
A) the interaction between average fixed cost and marginal cost
B) the lowest average cost to produce each output level in the long run
C) the distinction between long-run fixed and long-run variable costs
D) the lowest average marginal cost of producing each output level at any time.
E) Answers A, B, and C are correct.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: TS
AACSB: Reflective thinking
72
Copyright © 2011 Pearson Education, Inc.
22) The long-run average cost curve is U-shaped because of which of the following?
A) decreasing marginal returns as more labor is hired
B) constant fixed costs as output is increased
C) economies and diseconomies of scale
D) increasing marginal returns as more labor is hired
E) decreasing average fixed costs as output is increased
Skill: Level 3: Using models
Section: Checkpoint 13.4
Author: TS
AACSB: Reflective thinking
23) The long-run average cost curve
A) is an upside down U-shape.
B) is constructed using the short-run marginal cost curves.
C) shows economies and diseconomies of scale.
D) Both answer A and answer B are correct.
E) Both answer A and answer C are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: SA
AACSB: Reflective thinking
24) The portion of the long-run average cost curve in which economies of scale are experienced
shows that as plant size increases, the
A) average total cost decreases.
B) average total cost increases.
C) marginal cost increases.
D) marginal cost decreases.
E) average variable cost is constant and the average fixed cost decreases.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: PH
AACSB: Reflective thinking
73
Copyright © 2011 Pearson Education, Inc.
25) If a company triples its plant size and its average cost decreases, then the firm is definitely
experiencing
A) diseconomies of scale.
B) decreasing marginal returns.
C) increasing marginal returns.
D) economies of scale.
E) Both answer C and answer D are correct.
Skill: Level 3: Using models
Section: Checkpoint 13.4
Author: PH
AACSB: Reflective thinking
26) When the long-run average cost curve is downward sloping,
A) economies of scale are present.
B) diseconomies of scale are present.
C) the firm experiences constant returns to scale.
D) the average fixed cost curve must be upward sloping.
E) The premise of the question is wrong because long-run average cost curves never slope
downward.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: SB
AACSB: Reflective thinking
27) Which of the following is true in the long run?
A) Total cost equals fixed cost.
B) Total cost is constant.
C) All costs are variable.
D) Marginal cost equals zero.
E) None of the above are true in the long run.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: TS
AACSB: Reflective thinking
74
Copyright © 2011 Pearson Education, Inc.
28) Economies of scale occur whenever
A) marginal cost decreases as production increases.
B) total cost increases as production is increased by increasing all inputs by the same percentage.
C) marginal product increases as labor increases and capital decreases.
D) a firm increases its plant size and labor employed, and its output increases by a larger
percentage.
E) marginal product decreases as labor increases and capital increases.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: STUDY GUIDE
AACSB: Reflective thinking
29) The main source of economies of scale is
A) better management.
B) constant returns to plant size.
C) specialization.
D) long-run cost curves eventually sloping downward.
E) increases in the labor force not matched by increases in the plant size.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: STUDY GUIDE
AACSB: Reflective thinking
30) Diseconomies of scale can occur as a result of which of the following?
A) increasing marginal returns as the firm increases its size
B) lower total fixed cost as the firm increases its size
C) management difficulties as the firm increases its size
D) greater specialization of labor and capital as the firm increases its size
E) increases in the labor force not matched by increases in the plant
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: STUDY GUIDE
AACSB: Reflective thinking
75
Copyright © 2011 Pearson Education, Inc.
31) Constant returns to scale occur when an equal percentage increase in plant size and labor
A) increases total cost.
B) does not change total cost.
C) increases long-run average cost.
D) does not change long-run average cost.
E) does not change production.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: STUDY GUIDE
AACSB: Reflective thinking
32) A firm's long-run average cost curve shows the ________ average cost at which it is possible
to produce each output when the firm has had ________ time to change both its labor force and
its plant.
A) highest; sufficient
B) lowest; sufficient
C) lowest; insufficient
D) highest; insufficient
E) average; sufficient
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: STUDY GUIDE
AACSB: Reflective thinking
33) Economies of scale and diseconomies of scale explain
A) cost behavior in the short run.
B) profit maximization in the long run.
C) the U-shape of the long-run average cost curve.
D) the U-shape of the short-run average total cost curve.
E) the U-shape of the marginal cost curves.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: STUDY GUIDE
AACSB: Reflective thinking
76
Copyright © 2011 Pearson Education, Inc.
13.5 Chapter Figures
The figure above shows a firm's total product curve.
1) Which of the points show efficient production points?
A) All points above the TP curve
B) All points on the TP curve
C) All the darkened points below the TP curve
D) All the points above and on the TP curve
E) All the darkened points below and on the TP curve
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: MR
AACSB: Analytical reasoning
77
Copyright © 2011 Pearson Education, Inc.
The figure above shows some of a firm's cost curves.
2) Curve A is the firm's
A) marginal cost curve.
B) total cost curve.
C) average total cost curve.
D) total variable cost curve.
E) total fixed cost curve.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: MR
AACSB: Analytical reasoning
3) Curve B is the firm's
A) marginal cost curve.
B) total cost curve.
C) average total cost curve.
D) total variable cost curve.
E) total fixed cost curve.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: MR
AACSB: Analytical reasoning
78
Copyright © 2011 Pearson Education, Inc.
4) Curve C is the firm's
A) marginal cost curve.
B) total cost curve.
C) average total cost curve.
D) total variable cost curve.
E) total fixed cost curve.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: MR
AACSB: Analytical reasoning
The figure above shows some of a firm's cost curves.
5) Based on the figure above, curve A is the firm's
A) marginal cost curve.
B) total cost curve.
C) average total cost curve.
D) average variable cost curve.
E) average fixed cost curve.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: MR
AACSB: Analytical reasoning
79
Copyright © 2011 Pearson Education, Inc.
6) Based on the figure above, curve B is the firm's
A) marginal cost curve.
B) total cost curve.
C) average total cost curve.
D) average variable cost curve.
E) average fixed cost curve.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: MR
AACSB: Analytical reasoning
7) Based on the figure above, curve C is the firm's
A) marginal cost curve.
B) total cost curve.
C) average total cost curve.
D) average variable cost curve.
E) average fixed cost curve.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: MR
AACSB: Analytical reasoning
8) Based on the figure above, curve D is the firm's
A) marginal cost curve.
B) total cost curve.
C) average total cost curve.
D) average variable cost curve.
E) average fixed cost curve.
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: MR
AACSB: Analytical reasoning
80
Copyright © 2011 Pearson Education, Inc.
9) A firm's rent is a fixed cost. If the rent increases, then in the figure above ________ upward.
A) only curve A shifts
B) only curve B shifts
C) only curve C shifts
D) both curves A and C shift
E) both curves B and C shift
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: MR
AACSB: Analytical reasoning
10) A firm's utility bill is a variable cost. If the cost of utilities increases, then in the figure above
________ upward.
A) only curve A shifts
B) only curve B shifts
C) only curve C shifts
D) both curves A and C shift
E) both curves B and C shift
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: MR
AACSB: Analytical reasoning
81
Copyright © 2011 Pearson Education, Inc.
The figure above shows a firm's average total cost and marginal cost curves.
11) Based on the figure above, the firm's marginal product curve slopes upward at levels of
output between ________ and the firm's average product curve slopes upward at levels of output
between ________.
A) 4.0 and 7.0; 4.0 and 7.0
B) 0 and 7.0; 4.0 and 7.0
C) 4.0 and 7.0; 0 and 4.0
D) 0 and 4.0; 0 and 7.0
E) More information is needed to answer the question.
Skill: Level 4: Applying models
Section: Checkpoint 13.2
Author: MR
AACSB: Analytical reasoning
82
Copyright © 2011 Pearson Education, Inc.
13.6 Integrative Questions
1) The table above table shows
A) a total product schedule.
B) the market for labor.
C) a production possibility frontier.
D) a supply schedule.
E) a demand for labor schedule.
Skill: Level 1: Definition
Section: Integrative
Author: CD
AACSB: Reflective thinking
2) Which of the following variables do you need to know to calculate marginal cost?
i) change in total cost
ii) marginal product of labor
iii) change in quantity of labor used
iv) change in output
A) i and ii
B) i and iv
C) ii and iv
D) i, iii, and iv
E) Only ii
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
83
Copyright © 2011 Pearson Education, Inc.
3) The average product curve
A) initially falls then rises.
B) rises as average variable cost increases.
C) initially rises and then falls.
D) shows how productivity changes as output changes.
E) intersects the marginal cost curve when the average product curve is at its maximum.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
4) Which of the following contributes to increasing marginal returns?
A) decreasing implicit costs
B) increasing explicit costs
C) specialization of labor
D) Both answer A and answer B are correct.
E) Both answer A and answer C are correct.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
5) The law of decreasing returns applies to
A) the long-run average cost curve.
B) average total cost.
C) diseconomies of scale.
D) changes in a variable input with a given quantity of fixed inputs.
E) changes in a fixed input with a given quantity of variable inputs.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
84
Copyright © 2011 Pearson Education, Inc.
6) Once production has reached the maximum average product of labor, if production increases
then
A) average fixed cost rises.
B) total costs decrease.
C) total product decreases.
D) decreasing marginal returns occur.
E) the plant size must be increased.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
7) As output increases, average total cost decreases
A) constantly.
B) as the average product of labor decreases.
C) initially and then starts to increase.
D) in the long run and the short run.
E) as long as average fixed cost decreases.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
8) Marginal cost
A) is the difference between total cost and total fixed cost.
B) increases as the marginal product of labor increases.
C) decreases as the average product of labor increases.
D) is the change in total cost arising from a one-unit increase in output.
E) equals the change in variable cost divided by the change in fixed cost when output increases
by one unit.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
85
Copyright © 2011 Pearson Education, Inc.
9) Which of the following curves are U-shaped?
i) average variable cost curve
ii) average fixed cost curve
iii) average total cost curve
A) i and ii
B) i and iii
C) ii and iii
D) i, ii, and iii
E) Only ii
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
10) The marginal cost curve intersects the ________ curves at their ________ points.
A) average total cost and average fixed cost; minimum
B) average product and marginal product; maximum
C) average variable cost and total variable cost; maximum
D) average total cost and average variable cost; minimum
E) average product and marginal product; minimum
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
11) If the average product of labor curve is rising,
i) the average variable cost curve is falling.
ii) the marginal cost curve is definitely falling.
iii) the marginal product curve has reached its maximum.
A) i and iii
B) i only
C) ii and iii
D) i, ii, and iii
E) ii only
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
86
Copyright © 2011 Pearson Education, Inc.
12) Suppose one week Mike's Bikes uses 10 units of labor and 10 units of capital to make 20
bikes. The next year Mike hires 1 extra unit of labor and buys 1 extra unit of capital and
produces 21 bikes. Mike's Bikes has experienced
A) increasing returns to scale.
B) decreasing returns to scale.
C) decreasing marginal product of labor.
D) an upward shift of its cost curves.
E) a decrease in its variable costs.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
13) Suppose one week Fresh Cuts Lawn Service hires 10 units of labor and 10 units of capital,
and cuts 50 yards. The next week, Fresh Cuts increases its labor and its capital by 10 percent,
and cuts 60 yards. Fresh Cuts definitely has experienced
A) increasing marginal returns.
B) increasing returns to scale.
C) decreasing marginal returns.
D) decreasing returns to scale.
E) an increase in its marginal cost.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
14) Suppose one week Fresh Cuts Lawn Service hires 10 units of labor and 10 units of capital,
and cuts 50 yards. The next week, Fresh Cuts increases its labor hired and its capital by 10
percent, and cuts 55 yards. Which of the following statements correctly describes Fresh Cuts?
i) Fresh Cuts has increased its explicit costs.
ii) Fresh Cuts has definitely experienced increasing marginal costs.
iii) Fresh Cuts has experienced economies of scale.
A) i only
B) i and ii
C) ii and iii
D) i, ii, and iii
E) Only iii
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
87
Copyright © 2011 Pearson Education, Inc.
13.7 Essay: Economic Cost and Profit
1) Jake opens a pig farm in Idaho. To start his farm, he uses his entire $50,000 of savings from
his savings account. The bank was paying him $2,500 interest on his saving. Explain why the
$2,500 is one of Jake's costs.
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: PH
AACSB: Communication
2) What is a normal profit? Is it part of the firm's opportunity costs, total revenue, or neither?
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: SB
AACSB: Reflective thinking
3) What is the difference between a normal profit and an economic profit?
Skill: Level 2: Using definitions
Section: Checkpoint 13.1
Author: MR
AACSB: Communication
88
Copyright © 2011 Pearson Education, Inc.
4) Professor Rush decided to quit teaching economics and opens a shoe store out at the mall. He
gave up an annual income of $50,000 to open the store. A year after opening the shoe store, the
total revenue for the year was $200,000. Rush's expenses were $30,000 for labor, rent was
$18,000, and utilities were $1,200. He also had to purchase new shoes from manufacturers, at a
cost of $60,000, which was financed by cashing in his savings of $60,000 that had been in a bank
earning 8 percent per year. The normal profit from operating a shoe store in the mall is $20,000.
Determine Professor Rush's explicit costs, implicit costs, and economic profit.
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: TS
AACSB: Analytical reasoning
5) Jessica is a young doctor who has just started her own practice. Her previous position paid her
$80,000 a year. For office space, she uses a building which she owns and which she has rented in
the past for $40,000 a year. Her total revenue from her new practice is $250,000. She pays
$50,000 to other firms for materials and supplies, and she pays $40,000 in wages to her office
nurse. Assume that Jessica's building and equipment do not depreciate and that her normal profit
is $20,000.
a. Which of Jessica's costs are explicit costs and what is their total?
b. Which of Jessica's costs are implicit costs and what is their total?
c. What is the opportunity cost of all factors of production employed by Jessica?
d. What is Jessica's economic profit?
Skill: Level 3: Using models
Section: Checkpoint 13.1
Author: SB
AACSB: Analytical reasoning
89
Copyright © 2011 Pearson Education, Inc.
13.8 Essay: Short-Run Production
1) What resources can a firm change in the short run? In the long run?
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: WM
AACSB: Communication
2) What do economists mean when they say that a firm's plant is fixed?
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: SB
AACSB: Communication
3) What is the difference between decreasing marginal returns and negative marginal returns?
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: CD
AACSB: Communication
4) What does the average product of labor equal?
Skill: Level 1: Definition
Section: Checkpoint 13.2
Author: PH
AACSB: Reflective thinking
90
Copyright © 2011 Pearson Education, Inc.
5) "If the marginal product of labor curve slopes downward, then the average product of labor
curve necessarily must slope downward." Explain whether the previous statement is correct or
incorrect?
Skill: Level 2: Using definitions
Section: Checkpoint 13.2
Author: JC
AACSB: Communication
91
Copyright © 2011 Pearson Education, Inc.
6) The above table has the total product schedule for Jesse's Lawn Service.
a. In the figure, label the axes and then graph the total product curve.
b. Find the average product for the different amounts of employment.
92
Copyright © 2011 Pearson Education, Inc.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: SB
AACSB: Analytical reasoning
93
Copyright © 2011 Pearson Education, Inc.
7) Ajax Manufacturing has a fixed scale of plant with the levels of total product given in the
table for different levels of labor. Complete the table by calculating the average product and
marginal product.
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: TS
AACSB: Analytical reasoning
94
Copyright © 2011 Pearson Education, Inc.
8) The above table shows the total product schedule for Hair Today, a hair styling salon.
a. What is the first worker's marginal product? The second worker? The third worker? The
fourth worker? The fifth worker?
b. Over what range of workers is there increasing marginal returns? Over what range is there
decreasing marginal returns?
Skill: Level 3: Using models
Section: Checkpoint 13.2
Author: WM
AACSB: Analytical reasoning
13.9 Essay: Short-Run Cost
1) Jake is a corn farmer in Nebraska. He rents his land on a long-term lease for $250,000 a year.
He pays his farm hands $128,000 a year. Is his rent a fixed cost or a variable cost? Are the wages
he pays his workers a fixed cost or a variable cost? Briefly explain your answers.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: JC
AACSB: Communication
95
Copyright © 2011 Pearson Education, Inc.
2) "In the short run, even when output is zero, the firm still has some variable costs it must pay."
Is the statement correct or incorrect? Briefly explain your answer.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: TS
AACSB: Communication
3) When plotted against the total output, what does the total fixed cost curve look like?
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: JC
AACSB: Analytical reasoning
4) Downsizing is the practice of laying off workers in an attempt to decrease average total cost.
Can laying off workers decrease average total cost? Is it possible for the firm to downsize and
have its average total cost increase? Explain your answer.
Skill: Level 4: Applying models
Section: Checkpoint 13.3
Author: JC
AACSB: Communication
5) How do we calculate average fixed cost and why does average fixed cost fall as output
increases?
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: SA
AACSB: Reflective thinking
96
Copyright © 2011 Pearson Education, Inc.
6) The average total cost curve is U-shaped. At the quantity of output where average total cost is
at its minimum, is the marginal cost curve above the average total cost curve, below the average
total cost curve, or intersecting the average total cost curve?
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: SA
AACSB: Communication
7) Which average cost curves are U-shaped?
Skill: Level 1: Definition
Section: Checkpoint 13.3
Author: SA
AACSB: Reflective thinking
8) What is the relationship between the marginal product of labor and the marginal cost?
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: JC
AACSB: Communication
97
Copyright © 2011 Pearson Education, Inc.
9) Explain how new technologies, which increase productivity, affect the average variable cost,
average total cost, and marginal cost curves.
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: PH
AACSB: Communication
10) When the Rent-A-Limo Company negotiates its new labor contract it finds that the wages it
must pay drivers have increased. How does this wage hike affect the Rent-A-Limo Company's
average fixed cost, average variable cost, average total cost, and marginal cost?
Skill: Level 2: Using definitions
Section: Checkpoint 13.3
Author: PH
AACSB: Communication
98
Copyright © 2011 Pearson Education, Inc.
11) The table above has the total product schedule for an imaginary good called a widget. Each
unit of labor costs $25 and the total cost of capital is $100.
a. Use this information to complete the table. In the table, TFC is the total fixed cost, TVC is the
total variable cost, TC is the total cost, AFC is the average fixed cost, AVC is the average
variable cost, ATC is the average total cost, and MC is the marginal cost.
b. Suppose that labor becomes twice as expensive (so that one unit of labor now costs $50) but
nothing else changes. Complete the above table with the new cost schedules. If you plotted the
cost curves, how would the increased wage rate affect the cost curves?
99
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b. The completed table is above. All the costs are in dollars. There would be no change in the
total fixed and average fixed cost curves because the fixed cost did not change. The total cost,
total variable cost, average total cost, average variable cost, and marginal cost curves would all
shift upward.
Topic: Short-run costs
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SB
AACSB: Analytical reasoning
12) This month, the local widget factory produced 100 widgets. The total variable cost of
production was $500 and the average total cost of production was $8.
a. What is the total cost?
b. What is the total fixed cost?
c. What is the average fixed cost?
d. What is the average variable cost?
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SB
AACSB: Analytical reasoning
100
Copyright © 2011 Pearson Education, Inc.
13) Acme produces rocket shoes for use by slow coyotes. Acme's total cost schedule is given in
the table below. Acme's total fixed cost is $12. Complete the table. (In the table, TFC is the total
fixed cost, TVC is the total variable cost, AFC is the average fixed cost, AVC is the average
variable cost, and ATC is the average total cost.)
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: TS
AACSB: Analytical reasoning
101
Copyright © 2011 Pearson Education, Inc.
14) Rufus runs a skunk-skinning service in West Virginia. He employs skinners at a wage rate of
$240 a week for each one. He leases the shack where his workers work for $200 per week. The
rent is fixed for the next two years. Last week his 10 employees managed to skin a total of 300
skunks.
a. What is the average product of labor for Rufus's company?
b. What is Rufus' total variable cost per week?
c. What is the average variable cost for Rufus's company?
d. If Rufus adds his brother Jethro to his staff, at a wage rate of $240 a week, and his company
can now skin 310 skunks per week, what is Rufus's new average variable cost?
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: JC
AACSB: Analytical reasoning
102
Copyright © 2011 Pearson Education, Inc.
15) The above table gives the total cost schedule for oil changes at the local Jiffy Lube.
a. What is Jiffy Lube's total fixed cost?
b. What is the total variable cost of 2 oil changes?
c. What is the average variable cost of 4 oil changes?
d. What is the average fixed cost of 2 oil changes?
e. What is the marginal cost of the 3rd oil change?
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SA
AACSB: Analytical reasoning
103
Copyright © 2011 Pearson Education, Inc.
16) Suppose the local newspaper hires students to fold and bag newspapers for delivery and pays
them $20 per shift. Five students can fold and bag 300 newspapers per shift. The fourth student
added 50 newspapers to total output. The cost of the capital the firm uses is fixed at $50 per shift.
a. Is the newspaper operating in the long run or short run? Why?
b. What is the average product of 5 students?
c. Calculate the total fixed, total variable, and total costs of folding and bagging 300
newspapers.
d. Calculate the average fixed, average variable, and average total costs of folding and bagging
300 newspapers.
e. What is the marginal cost of one of the 50 newspapers folded and bagged by the fourth
student?
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: SB
AACSB: Analytical reasoning
104
Copyright © 2011 Pearson Education, Inc.
17) Draw an average total cost curve, an average variable cost, and a marginal cost curve all on
the same graph. Make sure to correctly label the axes. What relationship must exist between the
marginal cost curve and the average total cost and average variable cost curves?
Skill: Level 3: Using models
Section: Checkpoint 13.3
Author: CD
AACSB: Analytical reasoning
13.10 Essay: Long-Run Cost
1) In the long run all costs are variable costs. Why?
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: SA
AACSB: Communication
105
Copyright © 2011 Pearson Education, Inc.
2) Which curve shows the lowest average total cost at which it is possible to produce each output
when the firm has time to change both its labor force and plant size?
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: PH
AACSB: Reflective thinking
3) What is the long-run average cost curve? What are the three ranges of output and in what
order do they occur? Briefly define each of the three ranges.
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: CD
AACSB: Communication
106
Copyright © 2011 Pearson Education, Inc.
4) Are the short-run average total cost curve and the long-run average cost both U-shaped for the
same reasons? If so, carefully explain these reasons. If not, explain why each curve is U-shaped.
Skill: Level 4: Applying models
Section: Checkpoint 13.4
Author: SB
AACSB: Communication
5) What are economies of scale? What is the main source of economies of scale?
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: MR
AACSB: Communication
107
Copyright © 2011 Pearson Education, Inc.
6) Explain the difference between increasing marginal returns and economies of scale.
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: CD
AACSB: Communication
7) What are diseconomies of scale and why might they occur?
Skill: Level 1: Definition
Section: Checkpoint 13.4
Author: SA
AACSB: Communication
8) A firm increases both its plant and its labor force by the same percentage and its average total
costs remain unchanged. Is the firm experiencing increasing returns to scale, constant returns to
scale, or decreasing returns to scale?
Skill: Level 2: Using definitions
Section: Checkpoint 13.4
Author: WM
AACSB: Reflective thinking
108
Copyright © 2011 Pearson Education, Inc.
9) Jones Production started business with a small scale plant. Fortunately for Smith, the owner of
Jones Production, the business grew rapidly. It doubled its plant scale and its labor force every
year for the next six years. The table below gives the total costs and the associated total products
for each year.
a. Complete the table by finding the average cost for each scale.
b. Over what range of total product (output) did Jones Production experience economies of
scale, constant returns to scale, and diseconomies of scale?
Skill: Level 3: Using models
Section: Checkpoint 13.4
Author: TS
AACSB: Analytical reasoning
109
Copyright © 2011 Pearson Education, Inc.
10) Ayanna grows herbs. Last year she grew 2,000 pounds of herbs in a year while using 250
square feet of land and 1 worker. This year she doubled her land to 500 square feet, doubled her
workers to 2, and grew 4,500 pounds of herbs. She sells her rare, organic herbs for $50 a pound.
She pays her a worker $25,000 a year and rents her land for $100 per square foot for a year.
These are her only costs.
a. What was Ayanna's total cost last year and this year?
b. What was Ayanna's average total cost last year and this year?
c. Did Ayanna experience economies or diseconomies of scale?
Skill: Level 3: Using models
Section: Checkpoint 13.4
Author: WM
AACSB: Analytical reasoning
110
Copyright © 2011 Pearson Education, Inc.
11) The above figure represents the average total cost curves of a wheat farmer.
a. Which average total cost curve has the lowest average total cost of producing 30,000 bushels
of wheat?
b. Over what range of output is the farmer experiencing economies of scale?
c. Over what range of output is the farmer experiencing diseconomies of scale?
d. Which average total cost curve has the lowest possible average cost of production?
e. Which average total cost curve represents the largest plant?
Skill: Level 3: Using models
Section: Checkpoint 13.4
Author: SB
AACSB: Analytical reasoning
