Question 1

You purchased an automobile two years ago for $10,000. Its current market price is $5,000, and the expected market value one year from now is $4,500. If the interest rate is 10 percent, how much will it cost you to keep the car for an additional year (over and above operation and maintenance costs)?

Accepted Answer

A)  $500
B)  $1,000
C)  $1,500
D)  $5,000 B

Question 2

One advantage of team production over contracting out is that

Accepted Answer

A)  the cost of negotiating and enforcing contracts is generally lower with team production than with contracting out.
B)  the principal agent problem is eliminated by team production but cannot be addressed in contracting out.
C)  costs are always lower with team production because of the elimination of transactions costs.
D)  efficiency is always greater with team production. A

Question 3

Mr. Hudson notes that if he produces 10 pairs of shoes per day, his average fixed cost (AFC) is $14 and his marginal cost is $8; if he produces 20 pairs of shoes per day, his MC is $15. What is his AFC when output is 20 pairs of shoes per day?

Accepted Answer

A)  $5
B)  $7
C)  $8
D)  $15 B

Question 4

If doubling the quantity of inputs more than doubles the quantity of outputs, the firm is experiencing

Accepted Answer

A)  increasing returns to scale.
B)  decreasing returns to scale.
C)  constant returns to scale.
D)  increasing costs per unit of output.

Question 5

A business owned by a single individual who is fully liable for its debts is called

Accepted Answer

A)  a corporation.
B)  a proprietorship.
C)  a partnership.
D)  an agency.

Question 6

The normal rate of return on equity capital is also known as

Accepted Answer

A)  the explicit cost of capital.
B)  the marginal cost of capital.
C)  economic profit.
D)  the opportunity cost of capital.

Question 7

If most businesses in an industry are earning a 13 percent rate of return on their assets, but your firm is earning 23 percent, your rate of economic profit is

Accepted Answer

A)  zero.
B)  10 percent.
C)  23 percent.
D)  36 percent.

Question 8

Figure 8-10
 
-Using Figure 8-10, calculate the firm's approximate average total cost when it produces 12 units.

Accepted Answer

A)  $5
B)  $10
C)  $15
D)  $20

Question 9

Which of the following would cause a firm's cost curve to shift downward?

Accepted Answer

A)  a decrease in resource prices
B)  an increase in taxes
C)  an increase in demand for the firm's product
D)  a reduction in output

Question 10

A 10-cent-per-box tax on producers of cigars will

Accepted Answer

A)  shift the firm's ATC and MC curves upward by the full amount of the tax.
B)  induce the firm to produce less but will not shift the firm's MC curve.
C)  shift the firm's ATC and MC curves downward by the full amount of the tax.
D)  shift the MC curve upward but will not cause any shift in the ATC curve.

Question 11

What amount must be earned to induce investors to continue to supply the funds necessary to maintain a firm's capital assets?

Accepted Answer

A)  stockholder equity
B)  the opportunity cost of capital
C)  economic profit
D)  accounting profit

Question 12

The long-run average total cost curve

Accepted Answer

A)  is an envelope-shaped curve mapped out by the short-run average total cost curves for alternative plant sizes.
B)  intersects the minimum point of each short-run average total cost curve for alternative plant sizes.
C)  rises throughout its entire range when increasing returns are present.
D)  falls throughout its entire range due to the law of diminishing returns.

Question 13

In the long run, a firm might experience rising per-unit costs due to

Accepted Answer

A)  economies of scale.
B)  diseconomies of scale.
C)  the law of supply.
D)  the law of diminishing marginal returns.

Question 14

A homeowner will be away from her house for six months. The monthly mortgage payment on the house is $1,000. The owner's cost of utilities is $100 if the house is unoccupied but $300 if the owner rents it out. If the owner wishes to minimize her losses from the house while away, she should rent the house for as much as the market will bear, as long as monthly rent is greater than which of the following? (Assume wear and tear to be zero regardless of whether the house is occupied.)

Accepted Answer

A)  $200
B)  $300
C)  $1,100
D)  $1,300

Question 15

Sally leaves her $34,000 secretarial position and invests her savings of $15,000 (on which she was earning 6 percent interest) to start her own agency. After expenses, her net income was $38,900. Her economic profit was

Accepted Answer

A)  $4,900.
B)  $4,000.
C)  $38,900.
D)  zero.
E)  -$10,100

Question 16

If fixed costs are $200,000 and variable costs are $30 per unit over the relevant range of output, when 10,000 units are produced, the average total cost will be

Accepted Answer

A)  $20.
B)  $30.
C)  $50.
D)  $70.

Question 17

Figure 8-2
 
-The average variable cost (AVC) and average total cost (ATC) for a firm are indicated in Figure 8-2. If the marginal cost curve were constructed, at what output would it cross the AVC curve?

Accepted Answer

A)  10
B)  15
C)  20
D)  25

Question 18

Use the table below to answer the following question. 
What is the marginal cost of producing the third unit of output?

Accepted Answer

A)  $20
B)  $44
C)  $70
D)  This cannot be determined from the data.

Question 19

Economies of scale imply that within some range a firm can increase the size of operation and

Accepted Answer

A)  total cost will decrease.
B)  fixed cost will decrease.
C)  average total cost will decrease.
D)  average total cost will increase.
E)  average variable cost will decrease.

Question 20

The long-run average total cost (LRATC) curve

Accepted Answer

A)  indicates the per-unit cost of producing various rates of output with a specific size of plant but variable levels of labor and technology.
B)  indicates the minimum per-unit cost that can be achieved at various output rates when the firm is free to choose among plant sizes.
C)  will be falling when diseconomies of scale are present and rising when economies of scale are present.
D)  is a U-shaped curve.
E)  is both a and d above.

Exam 8: A: Costs and the Supply of Goods