Test Bank Chapter 9
Chapter 9—Applications of Cost Theory
MULTIPLE CHOICE
1. Evidence from empirical studies of long-run cost-output relationships lends support to the:
a.
existence of a non-linear cubic total cost function
b.
hypothesis that marginal costs first decrease, then gradually increase over the normal
operating range of the firm
c.
hypothesis that total costs increase quadratically over the ranges of output examined
d.
hypothesis that total costs increase linearly over some considerable range of output
examined
e.
none of the above
2. The short-run cost function is:
a.
where all inputs to the production process are variable
b.
relevant to decisions in which one or more inputs to the production process are fixed
c.
not relevant to optimal pricing and production output decisions
d.
crucial in making optimal investment decisions in new production facilities
e.
none of the above
3. Theoretically, in a long-run cost function:
a.
all inputs are fixed
b.
all inputs are considered variable
c.
some inputs are always fixed
d.
capital and labor are always combined in fixed proportions
e.
b and d
4. Break-even analysis usually assumes all of the following except:
a. in the short run, there is no distinction between variable and fixed costs.
b. revenue and cost curves are straight-lines throughout the analysis.
c. there appears to be perfect competition since the price is considered to remain the same regardless
of quantity.
d. the straight-line cost curve implies that marginal cost is constant.
e. both c and d
5. What is another term meaning the degree of operating leverage?
a. The measure of the importance of fixed cost.
b. The operating profit elasticity.
c. The measure of business risk.
d. D.O.L.
e. All of the above.
6. In a study of banking by asset size over time, we can find which asset sizes are tending to become
more prominent. The size that is becoming more predominant is presumed to be least cost. This is
called:
a. regression to the mean analysis.
b. breakeven analysis.
c. survivorship analysis.
d. engineering cost analysis.
e. a Willie Sutton analysis.
7. George Webb Restaurant collects on the average $5 per customer at its breakfast & lunch diner. Its
variable cost per customer averages $3, and its annual fixed cost is $40,000. If George Webb wants to
make a profit of $20,000 per year at the diner, it will have to serve__________ customers per year.
a. 10,000 customers
b. 20,000 customers
c. 30,000 customers
d. 40,000 customers
e. 50,000 customers
8. Which of the following is not a limitation of the survivor technique for measuring the optimum size of
firms within an industry?
a.
since the technique does not employ actual cost data in the analysis, there is no way to
assess the magnitude of the cost differentials between firms of varying size and efficiency.
b.
the managerial and entrepreneurial aspects of the production process are not included in
the analysis
c.
because of legal factors, the long-run cost curve derived by this technique may be distorted
and may not measure the cost curve postulated in economic theory
d.
a and b
e.
b and c
9. The primary disadvantage of engineering methods for measuring cost functions is that they deal with
the managerial and entrepreneurial aspects of the production process or plant.
a.
true
b.
false
10. A linear total cost function implies that:
a.
marginal costs are constant as output increases
b.
average total costs are continually decreasing as output increases
c.
a and b
d.
none of the above
11. A ____ total cost function implies that marginal costs ____ as output is increased.
a.
linear; increase linearly
b.
quadratic; increase linearly
c.
cubic; increase linearly
d.
a and b
e.
none of the above
12. A ____ total cost function implies that marginal costs ____ as output is increased.
a.
linear; increase linearly
b.
quadratic; are constant
c.
cubic; increase linearly
d.
linear; are constant
e.
none of the above
13. A ____ total cost function yields a U-shaped average total cost function.
a.
cubic
b.
quadratic
c.
linear
d.
a and b only
e.
a, b, and c
14. In the linear breakeven model, the difference between selling price per unit and variable cost per unit is
referred to as:
a.
variable margin per unit
b.
variable cost ratio
c.
contribution margin per unit
d.
target margin per unit
e.
none of the above
15. Which of the following is not an assumption of the linear breakeven model:
a.
constant selling price per unit
b.
decreasing variable cost per unit
c.
fixed costs are independent of the output level
d.
a single product (or a constant mix of products) is being produced and sold
e.
all costs can be classified as fixed or variable
16. In the linear breakeven model, the breakeven sales volume (in dollars) is equal to fixed costs divided
by:
a.
unit selling price less unit variable cost
b.
contribution margin per unit
c.
one minus the variable cost ratio
d.
a and b only
e.
a, b, and c
Test Bank Chapter 9
17. The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in
____.
a.
percentage; sales; percentage; EBIT
b.
unit; sales; unit; EBIT
c.
percentage; EBIT; percentage; sales
d.
unit; EBIT; unit; sales
e.
none of the above
18. The linear breakeven model excludes ____ from the analysis.
a.
financing costs
b.
taxes
c.
contribution margin
d.
a and b only
e.
a, b, and c
19. In the linear breakeven model, the relevant range of output is that range where the linearity
assumptions of the model are assumed to hold.
a.
true
b.
false
20.In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the
breakeven sales volume (in units) by:
a.
one minus the variable cost ratio
b.
contribution margin per unit
c.
selling price per unit
d.
standard deviation of unit sales
e.
none of the above
21.In the linear breakeven model, a firm incurs operating losses whenever output is less than the breakeven
level.
a.
true
b.
false
PROBLEMS
1. For each of the following cost-output relationships, describe the shape (U-shape, decreasing,
increasing, constant) of the average total cost and marginal cost functions (C = total cost, Q = output):
(a)
(b)
Test Bank Chapter 9
2. Offshore Petroleum’s fixed costs are $2,500,000 and its debt repayment requirements are $1,000,000.
Selling price per barrel of oil is $18 and variable costs per barrel are $10.
(a)
(b)
(c)
(d)
z = (312,500 − 362,500) / 100,000 = −.50