Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Suppose you have just opened a store to sell espresso machines. Both you and a competing store
buy this machine from a manufacturer for $130 each. Your competitor who has a store of the same
size as yours is currently selling about 10 machines a month at a price of $200 per machine. You
expect to sell about 6 machines a month at a price of $220 per machine. If you lower your price, you
expect to make a loss. Which of the following could explain why your competitor is able to sell the
machine at a lower price profitably although the cost of purchasing the machine is the same for the
both of you?
1)
A)
The competing store probably has a lower average variable cost of production.
B)
The competing store probably has a lower average cost because average fixed cost falls as
output increases.
C)
The competing store probably has a lower marginal cost of production.
D)
The competing store’s goal is to maximize revenue and not profit.
2)
Golda Rush quit her job as a buyer for Home Depot to start her own hair dressing salon,
Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was
earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent
interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part–time assistant
for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this
information, what is the amount of her explicit costs?
2)
A)
$45,000
B)
$45,500
C)
$47,000
D)
$87,000
3)
When a firm produces 50,000 units of output, its total cost equals $6.5 million When it increases its
production to 70,000 units of output, its total cost increased to $9.4 million. Within this range, the
marginal cost of an additional unit of output is
3)
A)
$145.
B)
$135.
C)
$41.43.
D)
$134.29.
4)
Economies of scale exist as a firm increases its size in the long run because of all of the following
except
4)
A)
labor and management can specialize even further in their tasks.
B)
as a larger input buyer, the firm can purchase inputs at a lower per unit cost.
C)
the firm can afford more sophisticated technology in production.
D)
as a firm expands its production, its profit margin per unit of output increases.
Table 7–2
Quantity of
lanterns
Fixed Cost
(Dollars)
Variable Cost
(Dollars)
Total Cost
(Dollars)
Average Total Cost
(Dollars)
75 200 170 370 4.93
80 200 230 430 5.36
90 200 7.67
100 200 810
115 200 11.8
117 200 1264 1464 12.5
120 200 1480
Table 7–2 shows cost data for Lotus Lanterns, a producer of whimsical night lights.
5)
Refer to Table 7–2. What is the average total cost of production when the firm produces 120
lanterns?
5)
A)
$1,680
B)
$72
C)
$14
D)
$12.3
6)
If we have information about workers’ marginal products, then total and average product can be
found by
6)
A)
summing the marginal values to find the total and multiplying it times the number of
workers to get the average.
B)
summing the marginal values to find the total and dividing it by the number of workers to get
the average.
C)
multiplying the average marginal product times the number of workers.
D)
dividing marginal cost by the number of workers.
Explanation:
7)
If diminishing returns have already set in for Golden Lark Woodworks, and the marginal product
of the 6th carpenter is 8 chairs, then the marginal product of the 7th carpenter is
7)
A)
more than 8 chairs.
B)
zero.
C)
negative.
D)
less than 8 chairs.
8)
Average variable cost is equal to
8)
A)
VC/Q.
B)
MC x Q.
C)
TC/Q.
D)
TC–FC.
A
9)
If, when a firm doubles all its inputs, its average cost of production decreases, then production
displays
9)
A)
declining fixed costs.
B)
diseconomies of scale.
C)
economies of scale.
D)
diminishing returns.
C
D
Figure 7–1
10)
Refer to Figure 7–1. The marginal product of the 7th worker is
10)
A)
9.43.
B)
2.
C)
–2.
D)
66.
11)
The president of Toyota’s Georgetown plant was quoted as saying, “Demand for high volumes saps
your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and
knowledge we painstakingly built up over the years.” This quote suggests that
11)
A)
Toyota was experiencing an excess demand for its automobiles which it had difficulty
keeping up with.
B)
high demand for Toyota’s cars prevented the company from focusing on its strength: auto
design.
C)
as Toyota expanded its capacity, it experienced diseconomies of scale.
D)
Toyota was focused on “churning” out cars and did not invest sufficiently in training its
workers.
12)
Aproduction function shows
12)
A)
the technology used to produce output.
B)
the incremental output gained by improving the production process.
C)
the total cost of producing a given quantity of output.
D)
the maximum output that can be produced from the inputs employed by a firm.
Figure 7–1
13)
Refer to Figure 7–1. The marginal product of the 3rd worker is
13)
A)
11.
B)
15.
C)
57.
D)
19.
14)
Academic book publishers hire editors, designers, and production and marketing managers who
help prepare books for publication. Because these employees work on several books
simultaneously, the number of people the company hires will not go up and down with the
quantity of books the company publishes during any particular year. The salaries and benefits of
people in these job categories will be included in
14)
A)
fixed cost and total cost but not variable cost.
B)
marginal cost and total cost but not fixed cost.
C)
fixed cost and marginal cost but not variable cost.
D)
fixed cost but not variable cost and total cost.
15)
Long run average cost curves are U–shaped because
15)
A)
of economies and diseconomies of scale.
B)
of the law of demand.
C)
of the law of supply.
D)
of the law of diminishing returns.
16)
If the marginal cost curve is below the average variable cost curve, then
16)
A)
average variable cost is decreasing.
B)
marginal cost must be decreasing.
C)
average variable cost is increasing.
D)
average variable cost could either be increasing or decreasing.
17)
Refer to Figure 7–4. A firm is currently producing Qa units of output with a plant size represented
by ATC2. Which of the following statements is true?
17)
A)
The firm is minimizing its long–run average total cost of production.
B)
The firm has operated with a plant size that is too small to minimize its long–run average
total cost. It can correct this error by expanding to a plant size represented by ATC3.
C)
The firm is experiencing diseconomies of scale.
D)
The firm should have chosen to produce with a plant size represented by ATC3 because it
would have lowered its average total cost of production. It would be too costly to change its
plant size now.
A
A
18)
Last month Red Stone Creamery employed 5 workers. When it added a 6th worker this month, its
output fell. Which of the following statements is true?
18)
A)
The marginal product of the sixth worker must be negative.
B)
The total product becomes negative.
C)
The average product of the sixth worker is negative.
D)
The sixth worker is not as skilled as the fifth worker.
19)
Which of the following are implicit costs for a typical firm?
19)
A)
utility costs
B)
business licensing fees
C)
the cost of labor hired by the firm
D)
the opportunity costs of capital owned and used by the firm
D
20)
In the short run one reason why the marginal product of labor might increase initially as more
workers are hired is that
20)
A)
specialization allows a worker to focus on one task, thereby increasing her proficiency at that
task.
B)
beyond some point, a firm has hired too many workers.
C)
the first workers hired get to use the best equipment.
D)
the best workers are hired first and later hires are not as skillful.
A
21)
The law of diminishing marginal returns states
21)
A)
that in the presence of a fixed factor, at some point average product of labor starts to fall as
more and more variable inputs are added.
B)
that at some point, adding more of a variable input to a given amount of a fixed input, will
cause the marginal product of the variable input to decline.
C)
that at some point, adding more of a fixed input to a given amount of variable inputs will
cause the marginal product of the variable input to decline.
D)
average total cost of production initially decreases but after some point starts to rise at a
decreasing rate as output increases.
B
A
Table 7–2
Quantity of
lanterns
Fixed Cost
(Dollars)
Variable Cost
(Dollars)
Total Cost
(Dollars)
Average Total Cost
(Dollars)
75 200 170 370 4.93
80 200 230 430 5.36
90 200 7.67
100 200 810
115 200 11.8
117 200 1264 1464 12.5
120 200 1480
Table 7–2 shows cost data for Lotus Lanterns, a producer of whimsical night lights.
22)
Refer to Table 7–2. What is the average variable cost per unit of production when the firm
produces 90 lanterns?
22)
A)
$490
B)
$33.67
C)
$7.67
D)
$5.45
23)
Marginal cost is the
23)
A)
the change in a firm’s fixed cost from producing one more unit of a good or service.
B)
additional cost of producing an additional unit of output.
C)
change in the price of inputs if a firm buys more inputs to produce an additional unit of
output.
D)
change in average cost when an additional unit of output is produced.
24)
Which of the following would be categorized as an opportunity cost?
a. not being able to spend your $10,000 savings if you sink the money in your business
b. the cost of purchasing supplies for your house–cleaning business
c. the cost of purchasing auto insurance for your dry–cleaning delivery business
24)
A)
a only
B)
a and c only
C)
b and c only
D)
all of the above
25)
Ford Motor Company started producing the Model A at plants scattered around the U.S.
25)
A)
to locate its production centers closer to its customers.
B)
to save on transportation costs.
C)
because diseconomies of scale at its initial River Rouge plant resulted in high production
costs.
D)
because it was not able to attract skilled workers in Michigan (where its first plant was
located).
26)
If 11 workers can produce a total of 54 units of a product and a 12th worker has a marginal product
of 6 units, then the average product of 12 workers is
26)
A)
60 units.
B)
5 units.
C)
54 units.
D)
48 units.
27)
If production displays increasing returns, then
27)
A)
total product reaches a maximum sooner than if production displayed decreasing returns.
B)
the firm must be adding new capital to keep boosting productivity.
C)
each new worker hired adds more to output than previous hires.
D)
total product rises by a constant amount throughout.
28)
Average total cost is equal to
28)
A)
marginal cost plus variable cost.
B)
total cost divided by the quantity of output produced.
C)
total cost divided by the number of workers.
D)
average fixed cost minus average variable cost.
29)
If production displays diseconomies of scale, the long–run average cost curve is
29)
A)
above the long–run marginal cost curve.
B)
above the short–run average total cost curve.
C)
upward–sloping.
D)
downward–sloping.
30)
Jayanthi moves her yoga studio from her home to a space she rents in Oakland, California. Holding
everything else constant, as a result of this move,
30)
A)
her economic cost rises.
B)
her implicit cost falls and her explicit cost rises.
C)
her explicit cost falls and her implicit cost rises.
D)
her opportunity cost rises.
31)
The law of diminishing returns
31)
A)
causes the difference between average total cost and average variable cost to get smaller as
output increases.
B)
causes average total costs to rise at a decreasing rate as output increases.
C)
explains why the average total cost and marginal cost curves are U–shaped in the short run.
D)
explains why the average total cost, average fixed cost and the marginal cost curves are
U–shaped in the short run.
Table 7–1
Number of
workers
Mushrooms per
day (pounds)
112
230
345
450
554
656
Table 7–1 shows the technology of production at the Matsuko’s Mushroom Farm for the month of May 2007.
32)
Refer to Table 7–1. Diminishing returns set in when the ________ worker is hired.
32)
A)
2nd
B)
3rd
C)
4th
D)
None of the above; the production function displays increasing marginal returns.
33)
The difference between technology and technological change is that
33)
A)
technology involves the use of capital equipment while technological change requires the use
of brain power.
B)
technology is product–centered; that is, developing new products with limited resources
while technological change is process–centered in that it focuses on developing new
production techniques.
C)
technology is carried out by firms producing physical goods but technological change is an
intellectual exercise into seeking ways to improve production.
D)
technology refers to the processes used by a firm to transform inputs into output while
technological change is a change in a firm’s ability to produce a given level of output with a
given quantity of inputs.
D
34)
Implicit costs can be defined as
34)
A)
total cost minus fixed costs.
B)
the deferred cost of production.
C)
accounting profit minus explicit cost.
D)
the non–monetary opportunity costs of using the firm’s own resources.
D
B
35)
Which of the following is an implicit cost of production?
35)
A)
the interest you pay your mother for the money she loaned you to start your business
B)
the salary you pay yourself for running your business
C)
the utility bills paid to water, electricity and natural gas companies
D)
the loss in the value of capital equipment due to wear and tear
36)
In the short run the marginal product of labor increases at first but will eventually fall because
36)
A)
as more workers are hired, they are not as skilled as the first ones hired.
B)
at some point the opportunities for division of labor and specialization when more workers
are hired will diminish.
C)
additional workers will not have as much experience as those who have been with the firm
for a long time and therefore are not as productive.
D)
managerial inefficiency sets in when a firm gets too large.
B
37)
If a firm is not able to expand its plant capacity immediately, it is
37)
A)
bankrupt.
B)
operating in the short run.
C)
losing money.
D)
operating in the long run.
B
38)
Which of the following is the best example of a short–run adjustment?
38)
A)
Smith University completed negotiations to acquire a large piece of land to build its new
library.
B)
A local bakery purchases another commercial oven as part of its capacity expansion.
C)
Your local Wal–Mart hires two more associates.
D)
Toyota builds a new assembly plant in Texas.
C
D
39)
Adam spent $10,000 on new equipment for his small business, “Adam’s Fitness Studio.”
Membership at his fitness center is very low and at this rate, Adam needs an additional $12,000 per
year to keep his studio open. Which of the following is true?
39)
A)
The $10,000 Adam spent on equipment is the total cost of starting the business and the
$12,000 he’ll need to continue operations is a marginal cost.
B)
The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000 he’ll need to
continue operations is a variable cost.
C)
The fixed cost of running the studio is $22,000.
D)
The variable cost of running the studio is $22,000.
40)
If 11 workers can produce 53 units of output while 12 workers can produce 56 units of output, what
is the marginal product of the 12th worker?
40)
A)
36
B)
0.16
C)
4.67
D)
3
41)
If the total cost of producing 20 units of output is $1,000 and average variable cost is $35, what is
the firm’s average fixed cost at that level of output?
41)
A)
$65
B)
$50
C)
$15
D)
It is impossible to determine without additional information.
42)
The economic cost of production differs from accounting cost in that
42)
A)
economic cost adds the opportunity cost of a firm using its own resources while accounting
cost does not.
B)
accounting cost includes expenditures for hired resources while economic cost does not.
C)
economic cost includes expenditures for hired resources while accounting cost does not.
D)
accounting costs are always larger than economic cost.
43)
A decrease in the price of inputs used to produce flat–panel televisions causes
43)
A)
a movement downwards along a given average cost curve only.
B)
the average cost curve and the marginal cost curve to shift downwards.
C)
the marginal cost curve to shift downwards but not the average cost curve.
D)
the average cost curve to shift downwards but not the marginal cost curve.
44)
In a diagram showing the average total cost and average variable cost curves, the minimum of
point the average total cost curve is
44)
A)
at the same level of output as the maximum of the total product curve.
B)
at the same level of output as the minimum point of the average variable cost curve.
C)
below the level of output at the minimum point of the average variable cost curve.
D)
at a larger level of output than the minimum point of the average variable cost curve.
D
45)
The long–run average cost curve shows
45)
A)
the lowest average cost of producing every level of output in the long run.
B)
the plant size or scale that the firm should build.
C)
the average cost of producing where diminishing returns are not present.
D)
where the most profitable level of output occurs.
A
46)
The average total cost of production
46)
A)
equals the explicit cost of production.
B)
is the extra cost required to produce one more unit.
C)
equals total cost of production multiplied by the level of output.
D)
equals total cost of production divided by the level of output.
D
B
47)
Golda Rush quit her job as a buyer for Home Depot to start her own hair dressing salon,
Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was
earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent
interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part–time assistant
for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this
information, what is the amount of her implicit costs?
47)
A)
$80,000
B)
$70,000
C)
$42,000
D)
$41,500
48)
If another worker adds 9 units of output to a group of workers who had an average product of 7
units then the average product of labor
48)
A)
will remain the same.
B)
will decrease.
C)
will increase.
D)
cannot be determined from the information given.
49)
Refer to Figure 7–3. The vertical difference between curves F and G measures
49)
A)
sunk cost.
B)
marginal cost.
C)
average fixed cost.
D)
fixed cost.
50)
The president of Toyota’s Georgetown plant was quoted as saying, “Demand for high volumes saps
your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and
knowledge we painstakingly built up over the years.” Based on this quote, what must be true of the
plant’s average cost of production curve?
50)
A)
It is upward–sloping.
B)
It is U–shaped.
C)
It is a ray from the origin.
D)
It is downward–sloping.
51)
Refer to Figure 7–1. The average product of the 4th worker
51)
A)
is 17.
B)
is 11.
C)
is 68.
D)
cannot be determined.
52)
All but one of the following statements concerning minimum efficient scale are true . Which
statement is false?
52)
A)
The short–run average total cost curve’s minimum point is equal to the long–run average cost
curve’s minimum point.
B)
All possible economies of scale have been exhausted.
C)
Any increase in the scale of operation will encounter diseconomies of scale.
D)
An increase in the output level will reduce profit.