13 Eco6e Ev Edms

CHAPTER 13—The costs of production
TRUE/FALSE
1. Costs are a key determinate of a firm’s production and pricing decisions.
ANS: T PTS: 1 DIF: Easy TOP: Introduction
2. Economists normally assume that the goal of a firm is to maximise revenue.
ANS: F PTS: 1 DIF: Easy TOP: Introduction
3. When economists speak of a firm’s costs, they are usually excluding the opportunity costs.
ANS: F PTS: 1 DIF: Easy TOP: Costs as opportunity

costs
4. Accounting profit and economic profit are two ways to say the same thing.

costs
5. Accountants keep track of the money that flows into and out of firms.
ANS: T PTS: 1 DIF: Easy TOP: Costs as opportunity

costs
6. Implicit costs that do not require a money outlay are typically ignored by economists.

costs
7. Costs that have already been incurred and are non-recoverable should be included in marginal cost
calculations.

costs
8. The cost of capital includes both any interest payments in loans as well as any forgone interest on
savings used to finance the business.
ANS: T PTS: 1 DIF: Easy TOP: The cost of capital as an

opportunity cost
9. The fact that many decisions are fixed in the short run but variable in the long run has an impact on
the firm’s cost curves.
ANS: T PTS: 1 DIF: Easy TOP: The various measures of

cost
10. The short run is defined as the period of time in which all factors of production are fixed.
ANS: F PTS: 1 DIF: Easy TOP: How long is the long
run?
11. When trying to understand the decision making process of different firms, economists assume that
people think at the margin.
ANS: T PTS: 1 DIF: Easy TOP: The production function
12. The shape of the total cost curve is unrelated to the shape of the production function.
ANS: F PTS: 1 DIF: Easy TOP: From the production

function to the total-cost curve
13. If the total cost curve becomes flatter as output increases, then this reveals diminishing marginal
product.
ANS: F PTS: 1 DIF: Easy TOP: The production function
14. Diminishing marginal product exists when the production function becomes flatter as inputs
increase.
ANS: T PTS: 1 DIF: Easy TOP: From the production

15. Several related measures of cost can be derived from a firm’s total cost.
ANS: T PTS: 1 DIF: Easy TOP: The various measures of

cost
16. Even if a firm was to produce nothing, it still incurs some variable costs in the short-run.
ANS: F PTS: 1 DIF: Easy TOP: Fixed and variable costs
17. Variable costs usually change as the firm alters the quantity of output produced.
ANS: T PTS: 1 DIF: Easy TOP: Fixed and variable costs
18. Average variable cost and marginal cost are two ways for economists to say the same thing.
ANS: F PTS: 1 DIF: Easy TOP: Fixed and variable costs
19. The cost of producing an additional unit of a good is not the same as the average cost of the good.
ANS: T PTS: 1 DIF: Easy TOP: Average and marginal

cost
20. Average variable cost is equal to the quantity of output divided by the total variable cost.
ANS: F PTS: 1 DIF: Easy TOP: Average and marginal

cost
21. The average total cost curve is unaffected by diminishing marginal product.
ANS: F PTS: 1 DIF: Moderate TOP: Cost curves and their
shapes
22. The average total cost curve reflects the shape of both the average fixed cost and average variable
cost curves.
ANS: T PTS: 1 DIF: Easy TOP: Cost curves and their

shapes
23. The marginal cost curve can rise even if the average total cost is falling.
ANS: T PTS: 1 DIF: Moderate TOP: The relationship between

short-run and long-run average total cost
24. The marginal cost curve bisects the average total cost curve at the minimum point of the average
total cost curve.
ANS: T PTS: 1 DIF: Easy TOP: The relationship between

marginal cost and average total cost
25. A second or third worker may have a higher marginal product than the first worker in certain
circumstances.
ANS: T PTS: 1 DIF: Moderate TOP: Cost curves and their

shapes
26. The marginal cost curve intersects the average variable cost curve at the minimum of the average
variable cost curve.
ANS: T PTS: 1 DIF: Easy TOP: Cost curves and their

shapes
27. If a firm incurs fixed costs the average variable cost curve will always lie below the average total
cost curve.
ANS: T PTS: 1 DIF: Moderate TOP: Cost curves and their

shapes
28. Suppose that as a firm expands and notices that its long-run average total costs are declining. The
most likely explanation for this is economies of scale.
ANS: T PTS: 1 DIF: Moderate TOP: Economies and

diseconomies of scale
29. In some cases, specialisation allows larger factories to produce goods at a lower average cost than
smaller factories.
ANS: T PTS: 1 DIF: Easy TOP: FYI: Lessons from a pin

factory
30. The use of specialisation to achieve economies of scale is one reason modern societies are as
prosperous as they are.
ANS: T PTS: 1 DIF: Easy TOP: Economies and

31. The firm’s total cost can be used to determine both the firm’s average total cost and its marginal
cost.
ANS: T PTS: 1 DIF: Moderate TOP: Economies and

32. Average total cost reveals how much total cost will change as the firm alters its level of
production.
ANS: F PTS: 1 DIF: Easy TOP: Cost curves and their

shapes
33. The marginal product of a firm’s workers is revealed by the shape of the marginal cost curve.
34. When average total cost rises if a producer either increases or decreases production, then the firm
is said to be operating at efficient scale.
ANS: T PTS: 1 DIF: Easy TOP: U-shaped average total

cost
35. As a firm moves along its long-run average cost curve, it is adjusting the size of its factory to the
quantity of production.
ANS: T PTS: 1 DIF: Easy TOP: U-shaped average total

cost
36. Because of the greater flexibility that firms have in the long run, all short-run cost curves lie on or
above the long-run curve.
ANS: T PTS: 1 DIF: Moderate TOP: The relationship between

37. The time it takes for a firm to reach the long run depends on the firm and the products it makes.
ANS: T PTS: 1 DIF: Easy TOP: The relationship between

38. The adage ‘Jack of all trades, master of none’ helps explain why some firms experience economies
of scale.
ANS: T PTS: 1 DIF: Easy TOP: Economies and

39. Adam Smith’s example of the pin factory demonstrates that economies of scale result from
specialisation.
ANS: T PTS: 1 DIF: Easy TOP: FYI: Lessons from a pin

factory
40. Implicit costs are costs that do not require an outlay of cash by the firm.
costs
41. Cost of capital can also be seen as implicit costs.

costs
42. The relationship between the quantity of inputs and quantity of output is called the production
function.
MULTIPLE CHOICE
1. The law of supply states that:

A. the supply curve slopes downward
B. the demand curve slopes upwards
C. firms are willing to produce a greater quantity of a good when the price of the good is
higher
D. supply creates its own demand
ANS: B PTS: 1 DIF: Easy TOP: Introduction
2. Industrial organisation is the study of how:

A. industries organise for political advantage
B. firms’ decisions regarding prices and quantities depend on the market conditions they face
C. labour unions organise workers in industries
D. profitable firms are in organised industries
ANS: B PTS: 1 DIF: Easy TOP: Introduction
3. The goal of most firms in the economy is to:

A. maximise output
B. maximise profit
C. obtain the highest price for their product
D. minimise costs
ANS: B PTS: 1 DIF: Easy TOP: What are Costs?
4. The amount of money that a firm receives from the sale of its output is called:
A. total revenue
B. total gross profit
C. total net profit
D. net revenue
ANS: A PTS: 1 DIF: Easy TOP: Total revenue, total cost

and profit
5. The amount of money that a firm pays to buy inputs is called:

A. variable cost
B. marginal cost
C. fixed cost
D. total cost
ANS: D PTS: 1 DIF: Easy TOP: Total revenue, total cost

and profit
6. A firm’s profit is equivalent to:

A. its total sales
B. average revenue minus average total cost
C. marginal revenue minus marginal cost
D. total revenue minus total cost
ANS: D PTS: 1 DIF: Easy TOP: Total revenue, total cost

and profit
7. Profit plus total costs equals:

A. total revenue
B. net profit
C. capital profit
D. operational profit
ANS: A PTS: 1 DIF: Easy TOP: Total revenue, total cost

and profit
8. Economists normally assume that a firm would?

(i) sell a higher output if this would increase revenue
(ii) sell a lower output and collect less revenue, if this would increase profit
(iii) sell a higher output and incur more costs, if this would increase profit
A. (i) and (ii)
B. (i) and (iii)
C. (ii) and (iii)
D. none of the above
ANS: C PTS: 1 DIF: Moderate TOP: Total revenue, total cost

and profit
9. Total revenue equals:

A. total output multiplied by the unit cost of output
B. total output multiplied by profit
C. total output multiplied by the unit price of output
D. total output divided by profit
ANS: C PTS: 1 DIF: Easy TOP: Total revenue, total cost

and profit
10. Those things that must be forgone to acquire a good are called:
A. competitors
B. substitutes
C. opportunity costs
D. explicit costs
ANS: C PTS: 1 DIF: Easy TOP: Costs as opportunity

costs
11. Suppose a firm produced 200 units of output but sold only 150 of the units it produced. The
average cost of production for each unit of output produced was $80. Each of the 150 units were
sold for a price of $50. The total revenue of this firm would be:
A. $12,000
B. $10,000
C. $7,500
D. -$8 500
ANS: C PTS: 1 DIF: Moderate TOP: Total revenue, total cost

and profit
12. Opportunity costs are comprised of:

A. explicit costs
B. implicit costs
C. forgone income
D. all of the above
ANS: D PTS: 1 DIF: Easy TOP: Costs as opportunity

costs
13. Which of the following would be categorised as an opportunity cost?

(i) wages of workers
(ii) fixed costs already incurred
(iii) forgone investment opportunities
A. (i) and (iii)
B. (iii) only
C. (ii) and (iii)
D. (i), (ii) and (iii)
ANS: A PTS: 1 DIF: Moderate TOP: Costs as opportunity

costs
14. An economist measures profit as:

A. total revenue minus opportunity costs
B. total revenue minus explicit costs
C. total revenue minus fixed costs and explicit costs
D. total revenue minus fixed costs and wages
ANS: A PTS: 1 DIF: Easy TOP: Costs as opportunity

costs
15. Which of the following is an implicit cost?

(i) a business owner forgoing an opportunity to earn a large salary working for a Wall Street
brokerage firm
(ii) interest on debt
(iii) uncollected revenue
A. (i) only
B. (i) and (ii)
C. (ii) and (iii)
ANS: A PTS: 1 DIF: Moderate TOP: Costs as opportunity

costs
16. Julia runs a home construction business and owns a variety of construction equipment. She
normally uses her equipment to build and sell homes herself, however when times are tough she
rents out the equipment to other builders. Which of the following should Julia not include when
looking at the costs of building a new home:
A. the rental income from leasing her construction equipment
B. any wages she has to pay to her employees
C. the purchase price of her construction equipment
D. the salary she could earn working for another construction company
ANS: C PTS: 1 DIF: Moderate TOP: Costs as opportunity

costs
17. Economists are primarily interested in:

A. the marginal cost of production in a firm
B. the accounting profits generated by a firm
C. how firms make production and pricing decisions
D. the value of a firm as manifest in stock price
ANS: C PTS: 1 DIF: Easy TOP: Total revenue, total cost

and profit
18. To an economist, the field of industrial organisation answers which of the following questions?
A. How does the difference in the number of firms affect prices and efficiency of market
outcomes?
B. Why are consumers subject to the law of demand?
C. Why do firms experience falling marginal product of labour?
D. Why do firms consider production costs when determining product supply?
ANS: A PTS: 1 DIF: Easy TOP: Introduction
19. If a business is profitable from an accountant’s point of view, then:

A. it is always profitable from an economist’s point of view
B. it is never profitable from an economist’s point of view
C. economic profit will be higher than accounting profit
D. we cannot say without more information
ANS: D PTS: 1 DIF: Moderate TOP: What are costs?
20. Mosti, a materials engineer, has discovered a groundbreaking new way to make recycled plastic
stronger. He is looking to exploit this discovery by starting up his own business at a cost of $500
000. Unfortunately Mosti has only $200 000 in savings and must borrow the other $300 000. If the
interest rate is 10%, then what, according to an economist, is the opportunity cost of starting up the
business?
A. $500,000 per annum
B. $50,000 per annum
C. $30,000 per annum
D. $20,000 per annum
ANS: B PTS: 1 DIF: Moderate TOP: Economic profit versus

accounting profit
21. Mike just finished designing a new coffee cup for his manufacturing business and is considering if
the new cup will be profitable to manufacture. When calculating total costs involved in
manufacturing this new coffee cup, which of the following should not be considered?
A. employee wages
B. foregone rental income on the manufacturing equipment used
C. the cost of designing the new coffee cup
D. the cost of cardboard used to make the cups
ANS: C PTS: 1 DIF: Easy TOP: What are costs?
22. An important implicit cost of almost every business is the:

A. cost of accounting services
B. cost of compliance with government regulation
C. opportunity cost of financial capital that has been invested in the business
D. cost of debt

costs
23. Which of the following is an implicit cost of owning a business?

(i) forgone savings account interest when personal money is invested in the business
(ii) interest expense on existing business loans
(iii) foregone rental income when using an owner-occupied office
A. (i) only
B. (ii) only
C. (ii) and (iii)
D. (i) and (iii)
ANS: D PTS: 1 DIF: Difficult TOP: Costs as opportunity

costs
24. The amount of money that an orchardist could have earned if he had planted orange trees rather
than apple trees is termed:
A. explicit cost
B. accounting cost
C. implicit cost
D. total sales

costs
25. Economic profit is equal to:

A. total revenue minus the opportunity cost of producing goods and services
B. total revenue minus the accounting cost of producing goods and services
C. total revenue minus the explicit cost of producing goods and services
D. average revenue minus the average cost of producing the last unit of a good or service
ANS: A PTS: 1 DIF: Easy TOP: Economic profit versus

accounting profit
26. Accounting profit is equal to:

A. total revenue minus the explicit cost of producing goods and services
B. total revenue minus the opportunity cost of producing goods and services
C. average revenue minus the average cost of producing the last unit of a good or service
D. marginal revenue minus marginal cost
ANS: A PTS: 1 DIF: Easy TOP: Economic profit versus

accounting profit
27. Which of the following is equivalent to economic profit?

(i) total revenue less explicit costs and less implicit costs
(ii) total revenue less opportunity costs
(iii) accounting profit
A. (i) only
B. (i) and (ii)
C. (ii) and (iii)
ANS: B PTS: 1 DIF: Moderate TOP: Economic profit versus

accounting profit
28. Accounting profit is equal to which of the following?

(i) economic profit + implicit costs
(ii) total revenue – implicit costs
(iii) total revenue – opportunity costs
A. (iii) only
B. (i) and (ii)
C. (i) only
ANS: C PTS: 1 DIF: Easy TOP: Economic profit versus

accounting profit
29. From a firm’s costs perspective, the long run is:

A. the period of time for all factors to become variable
B. the period of time needed to adjust the amount of labour input
C. the period of time needed to adjust the amount of capital used
D. greater than one year
ANS: A PTS: 1 DIF: Easy TOP: How long is the long

run?
30. During the summer Jeremy, a small business owner, can hire extra staff to help him repair boats.
On his own Jeremy can repair 10 boats a day, adding a second staff member sees 15 boats a day
repaired, and adding a third sees 18 boats a day repaired. The marginal product of the third worker
is:
A. 18 boats/day
B. 15 boats/day
C. 5 boats/day
D. 3 boats/day
ANS: D PTS: 1 DIF: Easy TOP: The production function
31. Which of the following describes the marginal product of labour?

A. the increase in labour necessary to generate a one-unit increase in output
B. the increase in output obtained from a one-unit increase in labour
C. the additional profit created with a one-unit increase in labour
D. the additional cost created with a one-unit increase in labour
ANS: B PTS: 1 DIF: Easy TOP: The production function

32. The marginal product of labour can be defined as (where Δ denotes ‘change’):
A. Δoutput/Δlabour
B. Δlabour/Δoutput
C. Δprofit/Δlabour
D. Δlabour/Δtotal cost
ANS: A PTS: 1 DIF: Easy TOP: The production function
33. Diminishing marginal product of labour is NOT likely to be observed when:

A. experienced workers in labour teams help train new staff
B. there is high demand for workers in the industry
C. more workers allows people to specialise in one task
D. new workers have to use the oldest technology in a plant
ANS: C PTS: 1 DIF: Moderate TOP: From the production

34. Diminishing marginal product of labour means:

A. the addition of an extra worker will reduce total output
B. each new worker will output more than previous workers
C. removing a worker will increase total output
D. removing a worker will increase the marginal product of the remaining workers
ANS: D PTS: 1 DIF: Moderate TOP: The production function
NARRBEGIN: 13-1
Graph 13-1
This graph depicts a production function for a firm that produces cookies. Use the
graph to answer the following question(s).
NARREND
35. Refer to Graph 13-1. As the number of workers increases:

A. total output increases, but at a decreasing rate
B. marginal product increases but at a decreasing rate
C. marginal product increases
D. total output decreases
ANS: A PTS: 1 DIF: Moderate TOP: From the production

function to the total-cost curve NAR: 13-1
36. Refer to Graph 13-1. With regard to cookie production, the figure implies:
A. decreasing cost of cookie production
B. diminishing marginal product of workers
C. increasing marginal product of workers
D. diminishing marginal cost of cookie production
ANS: B PTS: 1 DIF: Moderate TOP: From the production

37. Refer to Graph 13-1. The slope of the total product curve reveals information about the:
A. average product of workers
B. fixed product of workers
C. total product of workers
D. marginal product of workers
ANS: D PTS: 1 DIF: Moderate TOP: From the production

38. Lettuce Eat, a vegetarian cafe, exhibits diminishing returns to labour. If the cost of each meal is
constant and labour is the only other input, then the total cost-curve will:
A. become flatter as meal production increases
B. become steeper as meal production increases
C. will stay constant as meal production increases
D. we cannot tell without more information
ANS: B PTS: 1 DIF: Moderate TOP: From the production function to

the total-cost curve
39. Jeremy, a small business owner, earns $50 an hour repairing boats. One afternoon he takes five
hours off work to build a gazebo in his garden, spending $200 on materials. If the addition of a
gazebo increases his home’s value by $400, then his accounting profit will be:
A. - $50
B. $0
C. $200
D. $400
ANS: C PTS: 1 DIF: Easy TOP: What are costs?
40. Jeremy, a small business owner, earns can $50 an hour repairing boats. One afternoon he takes 5
hours off work to build a gazebo in his garden, spending $200 on materials. If the addition of a
gazebo increases his home’s value by $400, then his economic profit will be:
A. - $50
B. $0
C. $200
D. $400
ANS: A PTS: 1 DIF: Easy TOP: What are costs?

41. Dave is majoring in computer information development at University of Environmental
Sustainability. While he has been attending university, Dave has started a computer consulting
business to help local residents set up a local skill-sharing network. Dave charges $25 per hour for
his consulting services. Dave also works five hours a week for the Arts Faculty to maintain its
departmental web page. The Arts Faculty pays Dave $20 per hour. From this information we can
conclude that:
A. Dave should increase the number of hours he works for the Arts Faculty to make his
income from it comparable to his consulting business income
B. Dave is obviously not maximising his wellbeing if he continues to work for the Arts
Faculty
C. if Dave chooses one hour at the beach with his friends rather than spending one more hour
with a consulting client, the forgone income of $20 is considered a cost of the choice to go
to the beach
D. if Dave chooses one hour at the beach with his friends rather than spending one more hour
with a consulting client, the forgone income of $25 is considered a cost of the choice to go
to the beach

costs
NARRBEGIN: 13-2
Graph 13-2
This graph depicts a total cost function for a firm that produces cookies. Use the graph to answer
the following question(s).
NARREND
42. Refer to Graph 13-2. Which of the statements below is most consistent with the shape of the total
cost curve?
A. producing additional cookies is equally costly, regardless of how many cookies are
already being produced
B. producing additional cookies becomes increasingly costly only when the number of
cookies already being produced is large
C. producing an additional cookie is always more costly than producing the previous cookie
D. total production of cookies decreases with additional units of input
ANS: C PTS: 1 DIF: Moderate TOP: From the production

43. Refer to Graph 13-2. Identify the true statements from the list below.
(i) the marginal cost of cookie production is increasing
(ii) cookie production exhibits diminishing marginal product
(iii) the slope of the production function increases as quantity of inputs increase
A. (i) only
B. (ii) and (iii)
C. (i) and (iii)
ANS: D PTS: 1 DIF: Difficult TOP: The production function

NAR: 13-2
44. Refer to Graph 13-2. The changing slope of the total cost curve reflects:
A. decreasing average cost
B. increasing marginal product
C. decreasing marginal product
D. increasing fixed cost
ANS: C PTS: 1 DIF: Moderate TOP: The production function

NAR: 13-2
45. Refer to Graph 13-2. Which of the statements below best captures information about the
underlying production function?
A. output increases at a decreasing rate with additional units of input
B. output increases at an increasing rate with additional units of input
C. output decreases at a decreasing rate with additional units of input
D. output decreases at an increasing rate with additional units of input
ANS: A PTS: 1 DIF: Moderate TOP: From the production

46. Which of the following costs do not vary with the amount of output a firm produces?
A. marginal costs and average fixed costs
B. total fixed costs
C. average fixed costs
D. total fixed costs and average fixed costs
ANS: B PTS: 1 DIF: Easy TOP: Fixed and variable costs
47. A sawmill processes logs into timber. Identify the costs below that are an example of a fixed cost.
(i) rent paid on the factory
(ii) maintenance of the trucks used for transport of logs
(iii) wages of the workers
A. (i) only
B. (i) and (ii)
C. (ii) and (iii)
ANS: A PTS: 1 DIF: Moderate TOP: Fixed and variable costs
48. Fixed costs can be defined as costs that:

A. are incurred only when production is large enough
B. are unaffected by production
C. vary inversely with production
D. vary at a fixed rate with production
49. John is a self-employed bricklayer. Examples of his variable costs include:

A. the cost of materials for each job
B. the cost of owning a work vehicle
C. the cost of hiring a graphic designer to design his business card
D. all of the above
ANS: A PTS: 1 DIF: Easy TOP: Fixed and variable costs
50. If a firm mothballs a factory so that its output is zero, which of the following costs will also be
zero?
A. variable cost
B. total cost
C. average cost
D. all of the above
51. One assumption that distinguishes short-run cost analysis from long-run cost analysis for a
profit-maximising firm is that, in the short run:
A. output is not variable
B. the size of the factory is fixed
C. the number of workers used to produce the firm’s product is fixed
D. there are no fixed costs
ANS: B PTS: 1 DIF: Moderate TOP: The relationship between

52. Average total cost is:

A. the cost to produce a typical unit of the firm’s output
B. fixed cost divided by the total quantity produced
C. fixed cost plus marginal cost, divided by the quantity produced
D. variable cost divided by the total quantity produced
ANS: A PTS: 1 DIF: Easy TOP: Average and marginal

cost
53. Average total cost is equal to:

A. average variable cost plus marginal cost
B. total cost less total output
C. average fixed cost plus average variable cost
D. average variable cost divided by total output
ANS: C PTS: 1 DIF: Easy TOP: Average and marginal

cost
54. As the quantity produced increases:

A. average fixed cost decreases
B. fixed cost increases
C. variable cost always decreases
D. none of the above are true
ANS: A PTS: 1 DIF: Moderate TOP: Average and marginal

cost
55. Suppose a firm increases output by one unit. Which of the following statements is true?
A. total cost will increase by an amount equal to average variable cost
B. total cost will increase by an amount equal to the marginal cost
C. variable cost will increase by an amount equal to marginal cost
D. average fixed cost will stay constant
ANS: B PTS: 1 DIF: Moderate TOP: Average and marginal

cost
56. Which of these will always be the highest?

A. average variable cost
B. average fixed cost
C. marginal cost
D. average total cost
ANS: D PTS: 1 DIF: Easy TOP: Average and marginal

cost
57. Average total cost equals:

A. change in total costs / change in quantity produced
B. (fixed costs + variable costs) / change in quantity produced
C. change in total costs / quantity produced
D. (fixed costs + variable costs) / quantity produced
ANS: D PTS: 1 DIF: Easy TOP: Average and marginal

cost
58. A firm’s variable costs divided by the quantity produced is the:

A. marginal product
B. marginal cost
C. average variable cost
D. marginal fixed cost

cost
59. Marginal cost equals which of the following?

(i) the average fixed cost of the current unit
(ii) the change in total costs divided by change in quantity produced
(iii) the change in variable costs divided by change in quantity produced
A. (i) and (ii)
B. (ii) and (iii)
C. (ii) only

cost
60. Average fixed cost will:

a) always decline when production increases
b) will be constant for all production levels
c) will increase as production increases
d) we cannot say without more information
ANS: A PTS: 1 DIF: Easy TOP: cost curves and their

shapes
61. Marginal cost equals:

A. total cost divided by total quantity
B. the slope of the total cost curve
C. total output divided by the change in total cost
ANS: B PTS: 1 DIF: Easy TOP: Average and marginal

cost
62. Average total cost tells us the:

A. cost of the last unit of output if total cost does not include a fixed cost component
B. cost of a typical unit of output if total cost is divided evenly over all the units produced
C. variable cost of a firm that is producing at least one unit of output
D. total cost of the first unit of output if total cost is divided evenly over all the units
produced

cost
63. Marginal cost tells us the:

A. amount total cost rises when price rises by one unit
B. amount fixed cost rises when price rises by one unit
C. amount total cost rises when output rises by one unit
D. amount fixed cost rises when output rises by one unit

cost
NARRBEGIN: 13-3
Graph 13-3
NARREND
64. Refer to Graph 13-3. Which of the marginal cost curves shown reflects the existence of
diminishing marginal product?
A. A
B. B
C. C
D. D
ANS: A PTS: 1 DIF: Moderate TOP: The production function

NAR: 13-3
65. Refer to Graph 13-3. If marginal cost is rising, then:

A. marginal product must be rising
B. marginal product must be falling
C. average variable cost must be falling
D. average fixed cost must be rising
ANS: B PTS: 1 DIF: Moderate TOP: The production function

NAR: 13-3
66. Diminishing marginal product suggests that the marginal:

A. product of an extra worker is less than the previous worker’s marginal product
B. cost of an extra worker is less than the previous worker’s marginal cost
C. product of an extra worker is greater than the previous worker’s marginal product
D. cost of an extra worker is unchanged
ANS: A PTS: 1 DIF: Easy TOP: The production function
67. Diminishing marginal product suggests that:

A. marginal cost is downward-sloping
B. additional units of output are more expensive
C. the firm is at full capacity
D. all of the above are true
ANS: B PTS: 1 DIF: Easy TOP: The production function

68. The average total cost curve will be downward sloping whenever:
a) average fixed cost is greater than average variable cost
b) marginal cost is smaller than average total cost
c) marginal costs are decreasing
d) average variable cost is increasing
ANS: B PTS: 1 DIF: Moderate TOP: Cost curves and their

shapes
69. Diminishing marginal product causes the average variable cost curve to:
A. rise
B. fall
C. rise until it equals the total cost curve
D. level out
ANS: A PTS: 1 DIF: Moderate TOP: The production function
70. At low output levels a firm’s average total cost tends to be high because:
A. marginal costs are increasing
B. variable costs are spread over only a few units of output
C. average fixed cost is large
D. there is a shortage of experienced workers
ANS: C PTS: 1 DIF: Moderate TOP: Average and marginal

cost
71. Average total cost necessarily rises due to which of the following?
(i) rising marginal cost
(ii) increasing marginal product
(iii) decreasing marginal cost
A. (i) only
B. (i) and (ii)
C. (ii) only
ANS: D PTS: 1 DIF: Moderate TOP: Average and marginal

cost
72. The efficient scale of the firm is the quantity of output that:
A. maximises marginal product
B. maximises average fixed cost
C. minimises average total cost
D. minimises average variable cost
ANS: C PTS: 1 DIF: Easy TOP: U-shaped average total

cost
73. The marginal cost curve will intersect:

A. average variable cost at its minimum
B. average fixed cost at its minimum
C. average total cost at its minimum
D. both the average variable cost and the average total costs at their minimums
ANS: D PTS: 1 DIF: Moderate TOP: The relationship between
74. Which of the following statements are true? When marginal cost exceeds average total cost:
(i) average total cost must be rising
(ii) average variable cost must be rising
(iii) average fixed cost must be rising
A. (i) only
B. (i) and (ii)
C. (ii) and (iii)
ANS: B PTS: 1 DIF: Difficult TOP: The relationship between

75. The average total cost curve is increasing when marginal cost is:
A. increasing
B. decreasing
C. less than average total cost
D. greater than average total cost

76. Marginal cost is equal to average total cost when:

A. marginal cost is at its minimum
B. average total cost is at its minimum
C. average variable cost is falling
D. average fixed cost is rising

77. The marginal cost curve crosses the average total cost curve at:
A. the efficient scale
B. economies of scale
C. diseconomies of scale
D. maximum ATC
ANS: A PTS: 1 DIF: Moderate TOP: The relationship between

78. The efficient scale of a firm is achieved when:

A. average variable cost is minimised
B. fixed costs are spread over the most units
C. marginal costs are at a minimum
D. average total costs are minimised

79. At all levels of production beyond the point where the marginal cost curve crosses the average
variable cost curve, average variable cost:
A. falls
B. rises
C. remains unaffected
D. all of the above are possible; it depends on the shape of the marginal cost curve

80. Diminishing marginal product occurs:
A. immediately after the first worker is hired

B. after the marginal cost curve crosses the average total cost curve.
C. at different times for different firms
D. when average variable cost begins to fall
ANS: C PTS: 1 DIF: Moderate TOP: The production function
NARRBEGIN: 13-4
Graph 13-4
NARREND
81. Refer to Graph 13-4. Which of the following can be inferred from the figure shown?
(i) marginal costs vary for different levels of output
(ii) diminishing marginal product does not occur directly after the first worker
(iii) marginal product of the second worker exceeds that of the first
A. (i) and (ii)
B. (ii) and (iii)
C. (i) and (iii)
ANS: D PTS: 1 DIF: Difficult TOP: The various measures of
cost NAR: 13-4
NARRBEGIN: 13-5
Graph 13-5
The set of curves above reflect information about the cost structure of a firm. Use this graph to
answer the following question(s).
NARREND
82. Refer to Graph 13-5. Which of the curves is most likely to represent average fixed cost?
A. A
B. B
C. C
D. D
ANS: D PTS: 1 DIF: Moderate TOP: Cost curves and their

shapes NAR: 13-5
83. Refer to Graph 13-5. Which of the curves is most likely to represent average total cost?
A. A
B. B
C. C
D. D

shapes NAR: 13-5
84. Refer to Graph 13-5. Which of the curves is most likely to represent marginal cost?
A. A
B. B
C. C
D. D
ANS: A PTS: 1 DIF: Moderate TOP: Cost curves and their
shapes NAR: 13-5
85. Refer to Graph 13-5. Which of the curves is most likely to represent average variable cost?
A. A
B. B
C. C
D. D
ANS: C PTS: 1 DIF: Moderate TOP: Cost curves and their

shapes NAR: 13-5
86. Refer to Graph 13-5. This particular firm is necessarily experiencing increasing marginal product
when curve:
A. A is falling
B. B is falling
C. C is falling
D. D is falling
ANS: A PTS: 1 DIF: Moderate TOP: Cost curves and their

shapes NAR: 13-5
87. Refer to Graph 13-5. Curve A is necessarily U-shaped because of:

A. diminishing marginal product
B. increasing marginal product
C. the fact that decreasing marginal product follows increasing marginal product
D. the fact that increasing marginal product follows decreasing marginal product
ANS: C PTS: 1 DIF: Moderate TOP: U-shaped average total

cost NAR: 13-5
88. Refer to Graph 13-5. This particular firm is necessarily experiencing diminishing marginal product
when which of the following is occurring?
(i) line A is rising
(ii) line B is rising
(iii) line C is rising
A. (i) only
B. (iii) only
C. (i) and (ii)
ANS: D PTS: 1 DIF: Difficult TOP: Cost curves and their

shapes NAR: 13-5
89. When a factory is operating in the short run:

A. total cost and variable cost are usually the same
B. average fixed cost rises as output increases
C. it cannot adjust the quantity of fixed inputs
D. it cannot alter variable costs
ANS: C PTS: 1 DIF: Moderate TOP: The relationship between

90. In the long run:

A. variable inputs are rarely used
B. variable inputs change to fixed inputs
C. some inputs, such as plant and machinery, remain fixed
D. all inputs are considered to be variable
ANS: D PTS: 1 DIF: Easy TOP: The relationship between

NARRBEGIN: 13-6
Graph 13-6
This graph depicts average total cost functions for a firm that produces automobiles. Use the graph
to answer the following question(s).
NARREND
91. Refer to Graph 13-6. Which of the curves is most likely to characterise the short-run average total
cost curve of the biggest factory?
A. ATCA
B. ATCB
C. ATCC
D. ATCD
ANS: C PTS: 1 DIF: Moderate TOP: The relationship between

short-run and long-run average total cost NAR: 13-6
92. Refer to Graph 13-6. Which curve represents the long-run average total cost?
A. ATCA
B. ATCB
C. ATCC
D. ATCD

93. Refer to Graph 13-6. In the long run, the firm can operate on which of the following average total
cost curves?
A. ATCA
B. ATCB
C. ATCC
D. any of the above

94. Refer to Graph 13-6. If the firm is currently operating on ATCB, what options does it have if it
wants to change its level of automobile production over the next couple of weeks?
A. The firm has no options. It cannot change output level in the short run.
B. it can operate at any level of output between points M and N
C. it can operate at any level of output, as long as it stays on ATCD
D. it can operate at any level of output as long as it stays on ATCB
ANS: D PTS: 1 DIF: Difficult TOP: The relationship between

95. Refer to Graph 13-6. This firm experiences constant returns to scale at which output levels?
A. output levels above N
B. output levels between M and N
C. output levels below M
D. all of the above levels if the firm is operating in the long run

96. Refer to Graph 13-6. At levels of output below point M, the firm experiences:
A. economies of scale
B. accounting profit
C. economic profit
D. diseconomies of scale
ANS: A PTS: 1 DIF: Moderate TOP: Economies and

diseconomies of scale NAR: 13-6
97. The long-run average total cost curve is:

A. flatter than the short-run average total cost curve
B. not U-shaped
C. always decreasing as output increases
D. always increasing as output increases
ANS: A PTS: 1 DIF: Easy TOP: Economies and

98. The long-run average total cost curve is:

A. steeper than the short-run average total cost curve as the firm incurs more fixed costs in
the long run
B. never steeper than short-run average total cost curves, as the firm can always choose the
same input combinations as the short-run
C. steeper or flatter than the short-run average cost curve, but it depends on the long-run
marginal cost curve
D. we cannot say without more detailed information on the firm’s costs
ANS: B PTS: 1 DIF: Difficult TOP: the relationship between

short-run and long-run average total costs
99. Economies of scale occur when:

A. long-run average total costs rise as output increases
B. average fixed costs are falling
C. long-run average total costs fall as output increases
D. average fixed costs are constant
ANS: C PTS: 1 DIF: Easy TOP: Economies and

100. Diseconomies of scale occur when:

A. long-run average total costs rise as output increases
B. long-run average total costs fall as output increases
C. average fixed costs are falling
D. average fixed costs are constant

101. Constant returns to scale occur when:

A. long-run average total costs are constant as output increases
B. marginal product of labour is falling
C. the firm’s long-run average cost curve is falling as output increases
D. the firm’s long-run average cost curve is rising as output increases
ANS: A PTS: 1 DIF: Moderate TOP: Economies and

102. Specialisation among workers occurs when:

A. each worker is allowed to perfect one particular task
B. each worker is responsible for a number of different tasks
C. quality management allows workers to switch from one task to another
D. all of the above are true

103. A U-shaped long-run average total cost curve can be explained by firms increasing their size to do
which of the following?
(i) take advantage of greater specialisation
(ii) avoid coordination problems
(iii) avoid fixed costs
A. (i) and (ii)
B. (ii) and (iii)
C. (i) only
ANS: C PTS: 1 DIF: Moderate TOP: Economies and

104. If a firm wants to capitalise on economies of scale, it may be able to do so by:
A. giving its employees a limited task that they can master
B. employing a larger number of workers
C. producing a larger quantity of output
D. doing all of the above
ANS: D PTS: 1 DIF: Moderate TOP: Economies and

105. In reference to setting the production level, a firm’s cost curves:

A. dictate what decisions the firm will make
B. have no bearing on what decisions the firm will make
C. by themselves do not tell us what decisions the firm will make
D. none of the above are true
ANS: C PTS: 1 DIF: Moderate TOP: Conclusion
106. Economies of scale arise when:

A. workers are able to specialise in a particular task
B. an economy is self-sufficient in production
C. individuals in a society are self-sufficient
D. fixed costs are large relative to variable costs

NARRBEGIN: Table 13-1
Table 13-1
Measures of Cost for Splashy Cardboard Kayak Factory.
Quantity Fixed Variable Total

of kayaks costs ($) costs ($) costs ($)
0 15
1 4
2 6 21
3 9 24
4 13 28
5 18 33
6 15 25 40
NARREND
107. Refer to Table 13-1. The average fixed cost of producing five kayaks is:
A. $15
B. $3
C. $5

NAR: Table 13-1
108. Refer to Table 13-1. The average variable cost of producing two kayaks is:
A. $2
B. $11.50
C. $3
D. $4

NAR: Table 13-1
109. Refer to Table 13-1. The average total cost of producing four kayaks is:
A. $28
B. $3.25
C. $7
D. it can’t be determined from the above information
ANS: C PTS: 1 DIF: Moderate TOP: Fixed and variable costs

NAR: Table 13-1
110. Refer to Table 13-1. What is the variable cost of producing zero kayaks?
A. $0
B. $2
C. $20
D. it can’t be determined from the information above

NAR: Table 13-1
111. Refer to Table 13-1. The marginal cost of producing the sixth kayak is:
A. $15
B. $7
C. $25
D. it can’t be determined from the information given
ANS: B PTS: 1 DIF: Moderate TOP: Fixed and variable costs

NAR: Table 13-1
112. Refer to Table 13-1. What is the variable cost of producing five kayaks?
A. $18
B. $17
C. $12

NAR: Table 13-1
113. Refer to Table 13-1. What is the marginal cost of producing the first kayak?
A. it can’t be determined from the information given
B. $0
C. $15
D. $4
ANS: D PTS: 1 DIF: Moderate TOP: Fixed and variable costs

NAR: Table 13-1
Table 13-2
Adrienne’s Premium Boxing Service subcontracts with a chocolate manufacturer to box premium
chocolates for their mail order catalogue business. Adrienne rents a small room for $150 a week in
the downtown business district that serves as her factory. She can hire workers for $275 a week.
Costs are in dollars per week.
NARREND
114. Refer to Table 13-2. What is the marginal product of the fourth worker?
A. 40
B. 110
C. 260
D. 275
ANS: B PTS: 1 DIF: Difficult TOP: The production function

NAR: Table 13-2
115. Refer to Table 13-2. What is the total cost associated with making 890 boxes of premium
chocolates per week?
A. $975
B. $1100
C. $1250
D. $1375
ANS: C PTS: 1 DIF: Difficult TOP: The production function

NAR: Table 13-2
116. Refer to Table 13-2. During the week of 25 April, Adrienne doesn’t box any chocolates. What are
her costs during the week?
A. $0
B. $75
C. $150
D. $425
ANS: C PTS: 1 DIF: Difficult TOP: Fixed and variable costs

NAR: Table 13-2
117. Refer to Table 13-2. One week, Adrienne exactly breaks even. If her revenue for the week is $1525,
how many boxes of chocolate did she produce?
A. five
B. 60
C. 950
D. 1375

NAR: Table 13-2
118. Refer to Table 13-2. Adrienne has received an order for 3000 boxes of chocolates for next week. If
she expects that the trend in the marginal product of labour will continue in the same direction, it is
most likely that her best decision will be to:
A. hire about 12 new workers and hope she can satisfy the order
B. commit to meeting the order and then take three weeks to complete the job
C. not commit to meeting the order until she can move to a larger room and hire more
workers to box the chocolates
D. close her business until she is able to hire more productive workers

NAR: Table 13-2
Table 13-3
Consider the following firm which makes high-performance racing bicycles. All costs are given in
dollars. Output is shown on a monthly basis. The firm’s fixed costs include a rent of $800 and a
lease cost of $400 per month.
NARREND
119. Refer to Table 13-3. What is the marginal cost of producing the tenth bicycle in a given month?
A. $300
B. $304
C. $321
D. $340
ANS: D PTS: 1 DIF: Difficult TOP: Average and marginal

cost NAR: Table 13-3
120. Refer to Table 13-3. What is the average variable cost for the month if six bicycles are produced?
A. $200
B. $265
C. $465
D. $1590
ANS: B PTS: 1 DIF: Difficult TOP: Average and marginal

121. Refer to Table 13-3. What is the average fixed cost for the month if 10 bicycles are produced?
A. $120
B. $284.40
C. $404.40
D. $1200
ANS: A PTS: 1 DIF: Difficult TOP: Average and marginal

122. Refer to Table 13-3. How many bicycles are produced when marginal cost is $321?
A. four
B. seven
C. nine
D. 10
ANS: C PTS: 1 DIF: Difficult TOP: Average and marginal

123. Refer to Table 13-3. One month the firm worked overtime to produce 16 bicycles. What was the
average fixed cost for that month?
A. 340
B. 75
C. 120

124. Refer to Table 13-3. At what level of output will average variable cost equal average total cost?
A. when marginal cost equals average variable cost
B. when marginal cost equals average total cost
C. there is no level of output where this occurs, as long as fixed costs are positive
D. this holds true for all levels of output in which average variable cost is falling

Amy owns a photo developing shop. She also does contract photography. If she takes on a contract,
she cannot develop photos in that time and her customers use another firm. Suppose Amy rejects a
contract to photograph a wedding. This would have been a five hour job and Amy charges $500
per hour. She spent those five hours developing photos. Her chemicals and paper cost $1250. She
earned $3500 in sales.
125. According to the information provided, what is the total opportunity cost that Amy incurred to
spend her time developing photographs?
A. $1250
B. $2500
C. $3500
D. $3750

costs
126. According to the information provided, Amy’s accountant would most likely figure the total cost
of her photograph developing to be:
A. $1250
B. $2500
C. $3500
D. $3750
ANS: A PTS: 1 DIF: Difficult TOP: Costs as opportunity

costs
127. According to the information provided, Amy’s accounting profit equals:

A. –$250
B. $1000
C. $2250
D. $3500

costs
128. According to the information provided, Amy’s economic profit is:

A. –$250
B. $1000
C. $2250
D. $3500
ANS: A PTS: 1 DIF: Difficult TOP: Costs as opportunity

costs
Farmer Jack is a watermelon farmer. If Jack plants no seeds on his farm, he gets no harvest. If he
plants one bag of seeds, he gets 30 watermelons. If he plants two bags of seeds, he gets 50
watermelons. If he plants three bags of seeds he gets 60 watermelons. A bag of seeds costs $100
and seeds are his only costs.
129. According to the information provided, which of the following statements is(are) true?
(i) farmer Jack experiences decreasing marginal product
(ii) farmer Jack’s total cost curve is linear
(iii) farmer Jack’s production function is nonlinear
A. (i) only
B. (i) and (ii)
C. (ii) only
D. (i) and (iii)
ANS: D PTS: 1 DIF: Difficult TOP: The production function

130. According to the information provided, which of the following statements is(are) true of Jack’s
marginal cost?
(i) his marginal cost curve is U-shaped
(ii) his marginal cost increases with increased watermelon output
(iii) his marginal cost reflects diminishing marginal product
A. (i) and (ii)
B. (ii) and (iii)
C. (i) and (iii)

cost
131. According to the information provided, Jack’s production function will:

A. increase at an increasing rate
B. increase at a decreasing rate
C. decrease at a decreasing rate
D. decrease at an increasing rate
ANS: B PTS: 1 DIF: Difficult TOP: The production function
132. Harry’s Hotdogs is a small street vendor business owned by Harry Huggins. Harry is trying to get a
better understanding of his costs by categorising them as fixed or variable. Which of the following
costs are most likely to be considered fixed costs?
A. hotdog buns
B. mustard
C. the cost of bookkeeping services
D. wages paid to workers that sell hotdogs
ANS: C PTS: 1 DIF: Moderate TOP: Average and marginal

cost
133. Harry Hoarder runs a small street vendor service which contracts to produce and sell moulded
plastic souvenirs (key chains, commemorative plastic coins, plastic animals, etc.) at small theatre
shows. As owner of the firm, Harry must decide how much of each product to produce. The key
element of this decision is:
A. the fixed cost of production
B. the cost of his selling booth
C. how costs will vary as he changes the level of production
D. the cost of book keeping services
ANS: C PTS: 1 DIF: Moderate TOP: Fixed and variable costs
134. Harry’s Hotdogs is a small street vendor business owned by Harry Huggins. If Harry makes 10
hotdogs in his first hour of business and incurs a total cost of $16.50, his average total cost per
hotdog is:
A. $1.65
B. $6.50
C. this is impossible to determine without specific information on fixed cost
D. this is impossible to determine without specific information on variable cost
ANS: A PTS: 1 DIF: Moderate TOP: Average and marginal

cost
135. Suppose an apple orchardist increases the number of fruit pickers hired for a season. The number
of apple trees remains the same. As a result the orchardist’s:
A. variable costs will fall
B. variable costs will rise
C. total costs will fall
D. fixed costs and total costs will rise

shapes
136. Thirsty Thelma owns and operates a small lemonade stand. When Thelma is producing a small
quantity of lemonade, she has few workers and her equipment is not being fully utilised. Because
she can easily put her idle resources to use:
A. the marginal cost of an extra worker is large
B. the marginal product of an extra worker is small
C. the marginal cost of one more glass of lemonade is small
D. her lemonade stand is likely to be crowded with workers

cost
137. If a firm is operating at an efficient scale, average total cost must:

A. rise as output is increased
B. fall as output is increase
C. be at its maximum
D. none of the above will be true
ANS: A PTS: 1 DIF: Moderate TOP: The relationship between

138. One of the most important properties of cost curves is that:

A. the average fixed cost must eventually rise
B. the average total cost curve first rises, then falls with increased output
C. for most producers, the average total cost curve must never cross the marginal cost curve
D. the marginal cost eventually rises with the quantity of output

SHORT ANSWER
1. What are opportunity costs? How do explicit and implicit costs relate to opportunity costs?
ANS:
The opportunity cost of an item refers to all those things that must be forgone to acquire that item.
Both explicit and implicit costs are included as opportunity costs.
PTS: 1 DIF: Easy TOP: Costs as opportunity costs
2. A key difference between accountants and economists is their different treatment of the cost of
capital. Does this cause an accountant’s estimate of total costs to be higher or lower than an
economist’s estimate? Explain.
ANS:
An accountant would not include the forgone interest income that the money could have earned
elsewhere if it had not been invested in the business. Therefore an accountant’s estimate of total
cost will be less than an economist’s.
PTS: 1 DIF: Easy TOP: Costs as opportunity costs
3. The production function depicts a relationship between which two variables? Draw a production
function that exhibits diminishing marginal product.
ANS:
The production function depicts a relationship between output and a given input. The graph should
show output increasing but at a decreasing rate as inputs increase.
PTS: 1 DIF: Easy TOP: The production function
4. How would a production function that exhibits decreasing marginal product affect the shape of the
total cost curve? Explain or draw a graph.
ANS:
The total cost curve will increase at an increasing rate. In other words, the total cost curve gets
steeper as the amount produced rises.
PTS: 1 DIF: Easy TOP: From the production function to the total-cost
curve
5. Consider the following graph of a firm in the short-run.
Identify the average fixed cost curve, the marginal cost curve, the average variable cost curve and
the average total cost curve.
ANS:
The average fixed cost curve is D
The marginal cost curve is A
The average variable cost curve is C
The average total cost curve is B.
PTS: 1 DIF: Moderate TOP: Cost curves and their shapes
6. Bob Edwards owns Bob’s Bagels. He hires an economist who assesses the shape of the bagel
shop’s average total cost (ATC) curve as a function of the number of bagels produced. The results
indicate a U-shaped average total cost curve. Bob’s economist explains that the ATC curve is
U-shaped for two reasons, the first being the existence of diminishing marginal product, which
causes it to rise. What would the second reason be? Assume that the marginal cost curve is linear.
(Hint: The second reason relates to average fixed cost.)
ANS:
Average fixed cost always declines as output rises because fixed cost is getting spread over a larger
number of units, thus causing the average total cost curve to fall.
PTS: 1 DIF: Difficult TOP: Cost curves and their shapes
7. If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the
average total cost curve is rising, what is necessarily true of the marginal cost curve?
ANS:
When the average total cost curve is falling, it is necessarily above the marginal cost curve. If the
average total cost curve is rising, it is necessarily below the marginal cost curve.
PTS: 1 DIF: Moderate TOP: The relationship between marginal cost and
average total cost
8. Fill in the following table’s missing values.

Output Fixed Variable Total Cost Average Average Average Marginal
Cost Cost Fixed Variable Total Cost Cost
Cost Cost
0 14.00 14.00
1 14.00 2.00 16.00 2.00 16.00
2 19.00 7.00 2.50 9.50 3.00
3 23.00
4 14.00 28.00 3.50 7.00 5.00
5 20.00
6 27.00 41.00 2.33 6.83
ANS:
Output Fixed Total Total Cost Average Average Average Marginal
Cost Variable Fixed Variable Total Cost Cost
Cost Cost Cost
0 14.00 14.00
1 14.00 2.00 16.00 14.00 2.00 16.00 2.00
2 14.00 5.00 19.00 7.00 2.50 9.50 3.00
3 14.00 9.00 23.00 4.66 3.00 7.66 4.00
4 14.00 14.00 28.00 3.50 3.50 7.00 5.00
5 14.00 20.00 34.00 2.80 4.00 6.80 6.00
6 14.00 27.00 41.00 2.33 4.50 6.83 7.00
PTS: 1 DIF: Moderate TOP: Average and marginal cost
9. If the long-run average total cost curve is flat, then what does this imply about specialisation?
What will be the firm’s efficient scale?
ANS:
If the long-run average total cost curve is flat then this implies that there are no returns to
specialisation. As a result, the firm can produce efficiently at any output level.
PTS: 1 DIF: Moderate TOP: Economies and diseconomies of scale
10. Define the Law of Diminishing returns:
ANS:
As increasing quantities of a variable input are added to a fixed amount of another input, the
additions to output gained as a result will at some point start to decrease.
PTS: 1 DIF: Moderate TOP: The production function
11. Complete the following formulae:
TVC = costs
TC = total
AVC = costs
AC = costs
TFC = costs
AFC = average
MC = costs
TC = TFC +
AC = + AVC
MC = ∆TC/ = /∆Q
AFC = TFC/
AVC = /Q
AC = TC/Q
ANS:
TVC = total variable costs

TC = total costs
AVC = average variable costs
AC = average costs
TFC = total fixed costs
AFC = average fixed costs
MC = marginal costs
TC = TFC + TVC
AC = AFC + AVC
MC = ∆TC/Q = TVC/∆Q
AFC = TFC/Q
AVC = TVC/Q
AC = TC/Q
PTS: 1 DIF: Moderate TOP: Average and marginal cost

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CHAPTER 13—The costs of production

1. Costs are a key determinate of a firm’s production and pricing decisions.

ANS: T PTS: 1 DIF: Easy TOP: Introduction

2. Economists normally assume that the goal of a firm is to maximise revenue.

ANS: F PTS: 1 DIF: Easy TOP: Introduction

ANS: F PTS: 1 DIF: Easy TOP: Costs as opportunity

ANS: F PTS: 1 DIF: Easy TOP: Costs as opportunity

ANS: T PTS: 1 DIF: Easy TOP: Costs as opportunity

ANS: F PTS: 1 DIF: Easy TOP: Costs as opportunity

ANS: F PTS: 1 DIF: Easy TOP: Costs as opportunity

ANS: T PTS: 1 DIF: Easy TOP: The cost of capital as an

ANS: T PTS: 1 DIF: Easy TOP: The various measures of

ANS: T PTS: 1 DIF: Easy TOP: The production function

ANS: F PTS: 1 DIF: Easy TOP: From the production

ANS: F PTS: 1 DIF: Easy TOP: The production function

ANS: T PTS: 1 DIF: Easy TOP: From the production

ANS: T PTS: 1 DIF: Easy TOP: The various measures of

ANS: F PTS: 1 DIF: Easy TOP: Fixed and variable costs

ANS: T PTS: 1 DIF: Easy TOP: Fixed and variable costs

ANS: F PTS: 1 DIF: Easy TOP: Fixed and variable costs

ANS: T PTS: 1 DIF: Easy TOP: Average and marginal

ANS: F PTS: 1 DIF: Easy TOP: Average and marginal

ANS: T PTS: 1 DIF: Easy TOP: Cost curves and their

ANS: T PTS: 1 DIF: Moderate TOP: The relationship between

ANS: T PTS: 1 DIF: Easy TOP: The relationship between

ANS: T PTS: 1 DIF: Moderate TOP: Cost curves and their

ANS: T PTS: 1 DIF: Easy TOP: Cost curves and their

ANS: T PTS: 1 DIF: Moderate TOP: Cost curves and their

ANS: T PTS: 1 DIF: Moderate TOP: Economies and

ANS: T PTS: 1 DIF: Easy TOP: FYI: Lessons from a pin

ANS: T PTS: 1 DIF: Easy TOP: Economies and

ANS: T PTS: 1 DIF: Moderate TOP: Economies and

ANS: F PTS: 1 DIF: Easy TOP: Cost curves and their

ANS: T PTS: 1 DIF: Easy TOP: The production function

ANS: T PTS: 1 DIF: Easy TOP: U-shaped average total

ANS: T PTS: 1 DIF: Easy TOP: U-shaped average total

ANS: T PTS: 1 DIF: Moderate TOP: The relationship between

ANS: T PTS: 1 DIF: Easy TOP: The relationship between

ANS: T PTS: 1 DIF: Easy TOP: Economies and

ANS: T PTS: 1 DIF: Easy TOP: FYI: Lessons from a pin

41. Cost of capital can also be seen as implicit costs.

ANS: T PTS: 1 DIF: Easy TOP: Costs as opportunity

ANS: T PTS: 1 DIF: Easy TOP: The production function

1. The law of supply states that:

ANS: B PTS: 1 DIF: Easy TOP: Introduction

2. Industrial organisation is the study of how:

ANS: B PTS: 1 DIF: Easy TOP: Introduction

3. The goal of most firms in the economy is to:

ANS: B PTS: 1 DIF: Easy TOP: What are Costs?

ANS: A PTS: 1 DIF: Easy TOP: Total revenue, total cost

5. The amount of money that a firm pays to buy inputs is called:

ANS: D PTS: 1 DIF: Easy TOP: Total revenue, total cost

6. A firm’s profit is equivalent to:

ANS: D PTS: 1 DIF: Easy TOP: Total revenue, total cost

7. Profit plus total costs equals:

ANS: A PTS: 1 DIF: Easy TOP: Total revenue, total cost

8. Economists normally assume that a firm would?

ANS: C PTS: 1 DIF: Moderate TOP: Total revenue, total cost

9. Total revenue equals:

ANS: C PTS: 1 DIF: Easy TOP: Total revenue, total cost

ANS: C PTS: 1 DIF: Easy TOP: Costs as opportunity

ANS: C PTS: 1 DIF: Moderate TOP: Total revenue, total cost

12. Opportunity costs are comprised of: