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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.
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.
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
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.
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.
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.
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.
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.
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.
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
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
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
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.
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.
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
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.
2) What is a normal profit? Is it part of the firm's opportunity costs, total revenue, or neither?
3) What is the difference between a normal profit and an economic profit?
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.
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?
1) What resources can a firm change in the short run? In the long run?
2) What do economists mean when they say that a firm's plant is fixed?
3) What is the difference between decreasing marginal returns and negative marginal returns?
4) What does the average product of labor equal?
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?
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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.
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.
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?
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.
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.
3) When plotted against the total output, what does the total fixed cost curve look like?
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.
5) How do we calculate average fixed cost and why does average fixed cost fall as output
increases?
