Managerial Economics, 7e (Keat)
Chapter 7 The Theory and Estimation of Cost (Appendices 7A, 7B, and 7C)
Multiple-Choice Questions
1) To an economist, total costs include
A) explicit, but not implicit costs.
B) implicit, but not explicit costs.
C) explicit and implicit costs.
D) neither explicit nor implicit costs.
2) Economists consider which of the following costs to be irrelevant to a short-run business
decision?
A) opportunity cost
B) out-of-pocket cost
C) historical cost
D) replacement cost
3) Which of the following is a relevant cost?
A) replacement cost
B) sunk cost
C) historical cost
D) fixed cost
E) All of the above are relevant.
4) Which of the following distinctions helps to explain the difference between relevant and
irrelevant cost?
A) accounting cost vs. direct cost
B) historical cost vs. replacement cost
C) sunk cost vs. fixed cost
D) variable cost vs. incremental cost
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5) Which of the following distinctions does not help to explain the difference between relevant
and irrelevant cost?
A) historical vs. replacement cost
B) sunk vs. incremental cost
C) variable vs. fixed cost
D) out-of-pocket vs. opportunity cost
E) All help to explain the difference.
6) Costs of production that change with the rate of output are
A) sunk costs.
B) opportunity costs.
C) fixed costs.
D) variable costs.
7) Changes in the short-run total costs result from changes in only
A) variable costs.
B) fixed costs.
C) zero.
D) total fixed costs.
8) Economic profit equals accounting profit minus
A) explicit costs.
B) implicit costs.
C) fixed costs.
D) variable costs.
9) Which of the following is most likely a fixed cost?
A) expenditures for raw materials
B) wages for unskilled labor
C) fuel cost
D) property taxes
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10) Average fixed cost
A) does not change as total output increases or decreases.
B) varies directly with total output.
C) falls continuously as total output expands.
D) rises as the output is expanded.
11) Average fixed cost is
A) AC minus AVC.
B) TC divided by Q.
C) AVC minus MC.
D) TC minus TVC.
12) Which of the following cost relationships is not true?
A) AFC = AC – MC
B) TVC = TC – TFC
C) The change in TVC/the change in Q = MC
D) The change in TC/ the change in Q = MC
13) When a firm increased its output by one unit, its AFC decreased. This is an indication that
A) the law of diminishing returns has taken effect.
B) MC < AFC.
C) AVC < AFC.
D) the firm is spreading out its total fixed cost.
14) The distinction between sunk and incremental costs is most helpful in answering which
question?
A) How many more people should be added to the production process?
B) What is the correct price to charge?
C) Should we begin to build a new factory?
D) Should we continue developing a new software application that we began last year?
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15) Which of the following relationships is correct?
A) When marginal product starts to decrease, marginal cost starts to decrease.
B) When marginal cost starts to increase, average cost starts to increase.
C) When marginal cost starts to increase, average variable cost starts to increase.
D) When marginal product starts to decrease, marginal cost starts to increase.
16) The relationship between MC and AC can best be described as
A) when AC increases, MC starts to increase.
B) when MC increases, AC starts to increase.
C) when MC decreases, AC decreases.
D) when MC exceeds AC, AC increases.
17) The law of diminishing returns begins first to affect a firm’s short-run cost structure when
A) average variable cost begins to increase.
B) marginal cost begins to increase.
C) average cost begins to increase.
D) average fixed cost begins to decrease.
18) When a firm increased its output by one unit, its AC rose from $45 to $50. This implies that
its MC is
A) $5.
B) between $45 and $50.
C) greater than $50.
D) Cannot be determined from the above information
19) When a firm‘s MC curve shifts to the right, it implies that
A) new firms are entering the market.
B) labor productivity is decreasing.
C) labor productivity is increasing.
D) the firm’s overhead costs are decreasing.
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20) MC increases because
A) MC naturally increases as the firm nears capacity.
B) labor is paid overtime wages when volume increases.
C) in the short run, MC always increases.
D) the law of diminishing returns takes effect.
21) The marginal cost will intersect the average variable cost curve
A) when the average variable cost curve is rising.
B) where average variable cost curve equals price.
C) at the minimum point of the average variable cost curve.
D) The two will never intersect.
22) Which of the following cost functions will exhibit both decreasing and increasing marginal
costs?
A) a cubic cost function
B) a quadratic cost function
C) a linear cost function
D) All of the above
23) Which of the following statements best represents a difference between short-run and long-
run cost?
A) Less than one year is considered the short run; more than one year the long run.
B) There are no fixed costs in the long run.
C) In the short-run labor must always be considered the variable input and capital the fixed input.
D) All of the above are true.
24) When a firm increased its output by one unit, its AC decreased. This implies that
A) MC < AC.
B) MC = AC.
C) MC < AFC.
D) the law of diminishing returns has not yet taken effect.
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25) The main factor that explains the difference between accounting cost and economic cost is
A) opportunity cost.
B) fixed cost.
C) variable cost.
D) All of the above help to explain the difference.
26) When a firm experiences increasing returns to scale
A) its AFC will decrease.
B) its AFC will increase.
C) its AC will increase.
D) its AC will decrease.
27) If a firm’s rent increases, it will affect its cost structure in which of the following ways?
A) AVC will increase.
B) MC will increase.
C) TFC will increase.
D) All of the above will increase.
28) Which of the following relationships implies that a firm’s short-run cost function is linear?
A) MC = AC
B) MC = AVC
C) AC = AFC + AVC
D) MC > AC
29) The learning curve
A) is really no different from a marginal cost curve.
B) calculates average cost at a particular point in time.
C) shows the decrease in unit cost as more of the same product is produced over time.
D) None of the above
30) The learning curve indicates that
A) economies of scale are taking effect.
B) repetition of various production tasks cause unit costs to decrease.
C) workers must learn new skills in order to improve.
D) it takes time to learn a new skill.
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31) Which level indicates the point of maximum economic efficiency?
A) lowest point on AC curve
B) lowest point on AVC curve
C) lowest point on MC curve
D) None of the above
32) Which of the following actions has the best potential for experiencing economies of scope?
A) producing a product that has appeal to a wider segment of the market
B) producing computers and software
C) producing spaghetti and soft drinks
D) producing cars and trucks
33) If total cost equals $2,000 and quantity produced is 100 units, then
A) fixed cost is $200 and average variable cost is $18.
B) fixed cost is $600 and average variable cost is $14.
C) fixed cost is $500 and marginal cost is $15.
D) Either A or B can be correct.
34) A short-run total cost function, TC = 100 + 32Q – 4Q2 + 0.4Q3, indicates the existence of
A) a linear total cost curve.
B) a constant average variable cost curve.
C) a U-shaped average variable cost curve.
D) a constant marginal cost curve.
35) The results of many empirical studies of short-run cost functions have shown that total costs
conform to
A) a quadratic total cost function.
B) a power cost function.
C) a linear cost function.
D) a cubic cost function.
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36) Among the problems encountered when time series analysis is used to estimate cost functions
is
A) that technological changes may have occurred.
B) that accounting changes may have occurred during the period analyzed.
C) that some costs are recorded on the books of account at a time other than when they are
incurred.
D) All of the above
37) The method of estimating long-run costs in which knowledgeable professionals familiar with
production facilities and processes calculate optimal combination of inputs to produce given
quantities and then estimate costs is known as
A) engineering cost estimating.
B) the survivorship method.
C) regression analysis.
D) None of the above
38) When the survivorship method of cost estimating is used, an increase, over time, in the
proportion of industry product produced by medium size firms indicates the existence of
A) continuing economies of scale.
B) continuing diseconomies of scale.
C) a U-shaped long-run average cost curve.
D) large technological changes.
39) The major advantage of using cross-sectional analysis for long-run costs studies includes
A) the inclusion in the sample of different plants of different sizes.
B) the avoidance of having to adjust for inflationary trends.
C) the avoidance of having to account for interregional cost differences.
D) All of the above
E) A and B above
40) In the long run
A) fixed costs tend to be greater than variable costs.
B) variable costs tend to be greater than fixed costs.
C) all costs are fixed costs.
D) all costs are variable costs.
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