The Costs of Production 3323
2. In his book, An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith
described a visit he made to a
a. car factory.
b. pin factory.
c. washing machine factory.
d. farm.
3. In his book, An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith
credits economies of scale to
a. competition.
b. opportunity costs.
c. specialization.
d. incentives.
3324 The Costs of Production
4. In setting the production level, a firm’s cost curves
a. by themselves do not tell us what decisions the firm will make.
b. dictate what decisions the firm will make.
c. have no bearing on what decisions the firm will make.
d. None of the above is correct.
True/False and Short Answer
1. The economic field of industrial organization examines how firms’ decisions about prices and
quantities depend on the market conditions they face.
a. True
b. False
2. The field of industrial organization addresses how the number of firms affects prices in a market
and the efficiency of the market outcome.
a. True
b. False
The Costs of Production 3325
3. A firm’s total profit equals its marginal revenue minus its marginal cost.
a. True
b. False
4. Profit equals total revenue minus total cost.
a. True
b. False
5. The difference between economic profit and accounting profit is that economic profit is calculated
based on both implicit and explicit costs whereas accounting profit is calculated based on explicit
costs only.
a. True
b. False
3326 The Costs of Production
6. Accounting profit is greater than or equal to economic profit.
a. True
b. False
7. Economic profit is greater than or equal to accounting profit.
a. True
b. False
8. Although economists and accountants treat many costs differently, they both treat the cost of
capital the same.
a. True
b. False
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9. Accountants keep track of the money that flows into and out of firms.
a. True
b. False
10. When economists speak of a firm’s costs, they are usually excluding the opportunity costs.
a. True
b. False
11. Economists and accountants both include forgone income as a cost to a small business owner.
a. True
b. False
3328 The Costs of Production
12. Anna borrows $5,000 from a bank and withdraws $1,000 from her personal savings to start a
coffee shop. The interest rate is 5 percent for both the bank loan and her personal savings. Her
opportunity cost of capital is $250.
a. True
b. False
13. Economists and accountants usually disagree on the inclusion of implicit costs into the cost
analysis of a firm.
a. True
b. False
14. Implicit costs are costs that do not require an outlay of money by the firm.
a. True
b. False
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15. Accountants often ignore implicit costs.
a. True
b. False
16. The opportunity cost of capital is an implicit cost almost every business incurs.
a. True
b. False
17. An example of an explicit cost would be the wages that a business owner pays her employees.
a. True
b. False
3330 The Costs of Production
18. An example of an explicit cost for the owner of a tattoo parlor would be the wages that she could
earn if she worked as a graphic artist for an advertising agency.
a. True
b. False
19. Diminishing marginal productivity implies decreasing total product.
a. True
b. False
20. Diminishing marginal product exists when the total cost curve becomes horizontal as outputs
increases.
a. True
b. False
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21. Diminishing marginal product exists when the production function becomes flatter as inputs
increase.
a. True
b. False
22. A second or third worker may have a higher marginal product than the first worker in certain
circumstances.
a. True
b. False
23. The typical total-cost curve is U-shaped.
a. True
b. False
3332 The Costs of Production
24. The average-fixed-cost curve is constant.
a. True
b. False
25. In the short run, if a firm produces nothing, total costs are zero.
a. True
b. False
26. If a firm produces nothing, it still incurs its fixed costs.
a. True
b. False
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27. For a typical firm, fixed costs increase in direct proportion to the increases in output.
a. True
b. False
28. The shape of the total-cost curve is unrelated to the shape of the production function.
a. True
b. False
29. The shape of the total-cost curve is inversely related to the shape of the production function.
a. True
b. False
3334 The Costs of Production
30. The graph of the production function plots total cost versus quantity of output.
a. True
b. False
31. Suppose that a worker can produce 100 units of output in 7 hours. In the 8th hour, he can produce
12 units of output. The worker can produce 112 units of output in 8 hours.
a. True
b. False
32. Marginal costs are costs that do not vary with the quantity of output produced.
a. True
b. False
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33. Several related measures of cost can be derived from a firm’s total cost.
a. True
b. False
34. Variable costs usually change as the firm alters the quantity of output produced.
a. True
b. False
35. Variable costs equal fixed costs when nothing is produced.
a. True
b. False
3336 The Costs of Production
36. The cost of producing an additional unit of a good is not the same as the average cost of the good.
a. True
b. False
37. Average variable cost is equal to total variable cost divided by quantity of output.
a. True
b. False
38. The average–total-cost curve is unaffected by diminishing marginal product.
a. True
b. False
The Costs of Production 3337
39. The average-total-cost curve reflects the shape of both the average-fixed-cost and average-
variable-cost curves.
a. True
b. False
40. If the marginal-cost curve is rising, then so is the average-total-cost curve.
a. True
b. False
41. The marginal-cost curve intersects the average-total-cost curve at the minimum point of the
average-total-cost curve.
a. True
b. False
3338 The Costs of Production
42. The marginal-cost curve intersects the average-total-cost curve at the minimum point of the
marginal-cost curve.
a. True
b. False
43. The marginal-cost curve intersects the average-total-cost curve at the output level where average
fixed costs are zero.
a. True
b. False
44. Assume Jack received all As in his classes last semester. If Jack gets all Bs in his classes this
semester, his GPA may or may not fall.
a. True
b. False
The Costs of Production 3339
45. Average total cost and marginal cost express information that is already contained in a firm’s total
cost.
a. True
b. False
46. Average total cost reveals how much total cost will change as the firm alters its level of
production.
a. True
b. False
47. If the marginal cost of producing the tenth unit of output is $3, and if the average total cost of
producing the tenth unit of output is $2, then at ten units of output, average total cost is rising.
a. True
b. False
3340 The Costs of Production
48. If the marginal cost of producing the tenth unit of output is $2.50, and if the average total cost of
producing the tenth unit of output is $3, then at ten units of output, average total cost is rising.
a. True
b. False
49. If the marginal cost of producing the fifth unit of output is higher than the marginal cost of
producing the fourth unit of output, then at five units of output, average total cost must be rising.
a. True
b. False
50. The shape of the marginal cost curve tells a producer something about the marginal product of her
workers.
a. True
b. False
The Costs of Production 3341
51. The marginal-cost curve intersects the average-fixed-cost curve at the minimum of marginal cost.
a. True
b. False
52. When average total cost is above marginal cost, average total cost is rising.
a. True
b. False
53. When average total cost rises if a producer either increases or decreases production, then the firm
is said to be operating at efficient scale.
a. True
b. False
3342 The Costs of Production
54. In the long run, a factory is usually considered a fixed input.
a. True
b. False
55. Fixed costs are those costs that remain fixed no matter how long the time horizon is.
a. True
b. False
56. The fact that many inputs are fixed in the short run but variable in the long run has little impact on
the firm’s cost curves.
a. True
b. False