Question 1

Kelly, who grows geraniums to sell, is currently producing a level of output at which her marginal cost equals her average variable cost. Which of the following best describes Kelly's average variable cost at this level of output?

Accepted Answer

A)  It is greater than the average total cost. 
B)  It is neither at its maximum nor its minimum. 
C)  It is at a maximum. 
D)  It is at a minimum.

Question 2

Which of the following does NOT describe average fixed cost?

Accepted Answer

A)  It is a per unit measure of fixed cost. 
B)  It can be graphed as a horizontal line, with dollars on the vertical axis and quantity on the horizontal axis. 
C)  It decreases as output increases. 
D)  It can be calculated by dividing total fixed cost by the level of output produced.

Question 3

When marginal product is increasing, which of the following statements regarding cost is accurate?

Accepted Answer

A)  Marginal cost is decreasing. 
B)  Marginal cost is increasing. 
C)  Average total cost is increasing. 
D)  Average variable cost is increasing.

Question 4

What do economists normally assume to be the goal of a firm?

Accepted Answer

A)  to maximize sales revenue 
B)  to sell as many units of output as possible 
C)  to maximize profits 
D)  to sell products at the highest prices possible

Question 5

A firm is producing 200 units of output at a total cost of $1000. The firm's average variable cost equals $4 per unit. What does the total fixed cost equal?

Accepted Answer

A)  $2 
B)  $200 
C)  $800 
D)  $1000

Question 6

What is average fixed cost?

Accepted Answer

A)  the price of a fixed factor of production 
B)  the total cost divided by the number of units produced over a given period 
C)  the fixed cost divided by the number of units of a fixed input employed over a given period 
D)  the total fixed cost divided by the number of units produced over a given period

Question 7

FIGURE 7-3
 
-Refer to Figure 7-3. Which is the marginal cost curve?

Accepted Answer

A)  the curve labelled A 
B)  the curve labelled B 
C)  the curve labelled C 
D)  the curve labelled D

Question 8

Which of the following does NOT describe the long-run production period?

Accepted Answer

A)  It is a time when all inputs are variable. 
B)  It is characterized by fixed capital. 
C)  It is likely longer for a steel manufacturer than for a retailer who sells watches off a cart at the local mall. 
D)  It varies in length according to how capital goods are specialized.

Question 9

Which of the following most accurately describes what must be occurring if marginal cost is increasing?

Accepted Answer

A)  Average total cost must be decreasing. 
B)  Marginal product must be decreasing. 
C)  Average variable cost must be increasing. 
D)  Average variable cost must be decreasing.

Question 10

This figure shows the long-run average total cost curve for a firm that produces basketballs, along with four short-run average total cost curves. Each of the short-run average total cost curves corresponds to a different plant size. SRATC₁ corresponds to Plant size 1, SRATC₂ corresponds to Plant size 2, and so forth.
FIGURE 7-6
 
-Refer to Figure 7-6. Which plant size is optimal for the firm to produce qB units of output each week?

Accepted Answer

A)  Plant 2 
B)  Plant 3 
C)  Plant 4 
D)  Plant 5

Question 11

Which of the following is an example of an explicit cost of production?

Accepted Answer

A)  the forgone rent that could have been earned if land owned by a firm was not used as its parking lot 
B)  the cost of the flour for the baker and the forgone labour earnings for an entrepreneur 
C)  the cost of forgone labour earnings for an entrepreneur 
D)  the cost of flour for a baker

Question 12

Which of the following best describes production in the short run?

Accepted Answer

A)  It can be increased using either labour or capital. 
B)  It is subject to the law of diminishing marginal product. 
C)  It may exhibit increasing, decreasing, or constant returns to scale. 
D)  It is subject to the law of demand.

Question 13

TABLE 7-1
 
-Refer to Table 7-1. With which additional picker does the total product of labour diminish?

Accepted Answer

A)  the fourth 
B)  the fifth 
C)  the seventh 
D)  the ninth

Question 14

What is the term for the change in total cost that results from the production of one additional unit of output?

Accepted Answer

A)  marginal cost 
B)  marginal revenue 
C)  average total cost 
D)  average variable cost

Question 15

According to economists, which of the following statements best describes the opportunity cost of a good?

Accepted Answer

A)  It is identical to the good's accounting cost. 
B)  It is determined strictly by the explicit costs of producing the good. 
C)  It is determined strictly by the implicit costs of producing the good. 
D)  It is the value of the best alternative use of resources sacrificed to produce or acquire it.

Question 16

Which of the following most accurately describes the long-run period?

Accepted Answer

A)  The long run is of sufficient length to allow a firm to transform economic losses into economic profits. 
B)  In the long run, the firm is able to expand output by utilizing additional workers and raw materials, but not physical capital. 
C)  The long run is a period of time in which a firm is unable to vary some of its factors of production. 
D)  The long run is of sufficient length to allow a firm to alter its plant capacity and all other factors of production.

Question 17

Which of the following is NOT an explicit cost for the owner of a local pizza parlour?

Accepted Answer

A)  pizza ovens 
B)  other uses for the land that the parlour sits on 
C)  flour 
D)  cleaning products

Question 18

A firm's total fixed cost equals $2500. What would the firm's average fixed cost be at 10 units of output?

Accepted Answer

A)  $2.50 
B)  $250 
C)  $2500 
D)  $25 000

Question 19

Why does the short-run average total cost curve eventually turns upward to form a U-shape?

Accepted Answer

A)  because of diminishing marginal productivity 
B)  because of diminishing marginal cost 
C)  because of increasing average fixed cost 
D)  because all factors can be varied in the long run

Question 20

Which of the following statements regarding the cost curves illustrates the situation when a firm experiences increasing returns to scale at all levels of output?

Accepted Answer

A)  The slope of its production function is negative. 
B)  The slope of its long-run total cost curve is negative. 
C)  The slope of its short-run average cost curve is always negative. 
D)  The slope of its long-run average total cost curve is always negative.

Exam 7: Production and Costs