Chapter 8

Microeconomics: Principles, Applications, & Tools, 7e (O'Sullivan) – Testbank 1
Chapter 8 Production Technology and Cost
8.1 Economic Cost and Economic Profit
1) In the short run, ________ factors of production are fixed, while in the long run, ________ of
them are.
A) some; none
B) all; none
C) no; at least some
D) all; at least some
Answer: A
Diff: 1
Topic: Economic Cost and Economic Profit
Skill: Conceptual
AACSB: Reflective Thinking
2) Which of the following is a short-run adjustment?

A) Three new firms enter the computer chip industry.
B) A firm hires six new workers.
C) The number of farms in Kansas increases by 10%.
D) A firm opens two new plants.
Answer: B
Diff: 2
Skill: Conceptual
3) Which of the following is a long-run adjustment?

A) A firm lays off two workers.
B) Two firms exit the asbestos removal industry.
C) A manufacturer increases its purchase of raw materials.
D) A farmer buys twice her usual amount of herbicide.
Answer: B
Diff: 2
Skill: Conceptual
1
Copyright © 2012 Pearson Education, Inc.
4) Which of the following is a long-run adjustment?
A) A firm hires two new workers.
B) The number of professional baseball teams increases by two.
C) GM buys more steel for its auto plants in Michigan.
D) A farmer buys twice her usual amount of fertilizer.
Answer: B
Diff: 2
Skill: Conceptual
5) In the short run:

A) firms have the ability to enter or exit the industry.
B) firms are able to alter some, but not all, of their factors of production.
C) firms are unable to adjust their output choices.
D) None of the above are correct.
Answer: B
Diff: 1
Skill: Conceptual
6) In the long run:

A) firms have the ability to enter or exit the industry.
B) firms are able to alter some, but not all, of their resources.
C) firms are unable to adjust their output choices.
Answer: A
Diff: 1
Skill: Conceptual
7) In the long run:

A) all factors of production are fixed.
B) all factors of production are variable.
C) some factors of production are variable, while at least one factor of production is fixed.
Answer: B
Diff: 1
Skill: Conceptual
2
8) In the short run:
A) all factors of production are fixed.
B) all factors of production are variable.
C) some factors of production are variable, while at least one factor of production is fixed.
Answer: C
Diff: 1
Skill: Conceptual
9) ________ are costs that do not require a monetary payment.

A) Implicit costs
B) Explicit costs
C) Accounting costs
D) All opportunity costs
Answer: A
Diff: 1
Skill: Definition
10) ________ are costs that require a monetary payment.

A) Implicit costs
B) Explicit costs
C) Accounting costs
D) B and C are correct.
Answer: D
Diff: 1
Skill: Definition
11) Which of the following are included in calculating economic costs?

A) implicit costs
B) explicit costs
C) accounting costs
D) All of the above are correct.
Answer: D
Diff: 1
Skill: Conceptual
3
12) Accountants include ________ costs as part of a firm's costs, while economists include
________ costs.
A) explicit; no explicit
B) implicit; no implicit
C) explicit and implicit; implicit
D) explicit; explicit and implicit
Answer: D
Diff: 1
Skill: Conceptual
13) Which of the following statements is incorrect?

A) A firm's total economic cost is at least as large as the firm's total accounting cost.
B) A firm's total economic cost includes both explicit cost and implicit cost of the firm.
C) A firm's implicit cost is the opportunity cost of non-purchased inputs.
D) A firm's total accounting cost is at least as large as the firm's implicit cost.
Answer: D
Diff: 2
Skill: Conceptual
14) Joe runs a restaurant. He pays his employees $200,000 per year. His ingredients cost him
$50,000 per year. Prior to running his restaurant, Joe was a lawyer earning $150,000 per year.
What would economists say is Joe's cost of running the restaurant?
A) $150,000
B) $200,000
C) $250,000
D) $400,000
Answer: D
Diff: 2
Skill: Analytical
AACSB: Analytic Skills
4
15) You are a student at a university. You pay $8,000 per year in tuition, $5,000 per year in living
expenses, and $1,000 per year for books. Were you not in school, you could earn $15,000 per
year and you would not live with your parents. What is your economic cost of a year in college?
A) $9,000
B) $15,000
C) $24,000
D) $29,000
Answer: C
Diff: 2
Skill: Analytical
16) Jane is a student at a university. She pays $10,000 per year in tuition, $4,000 per year in
living expenses, and $800 per year for books. Were she not in school, she could earn $20,000 per
year working as a bookkeeper and she would not live with her parents. What is her economic
cost of a year in college?
A) $10,000
B) $13,000
C) $30,800
D) $34,800
Answer: C
Diff: 2
Skill: Analytical
17) Which of the following is an example of something that economists would consider a cost
but accountants would not?
A) the cost of materials and supplies purchased by a firm
B) the salary that the firm actually pays to the firm's owner
C) the interest income foregone by the firm's owner because the owner invested funds into the
firm
D) the cost of advertising
Answer: C
Diff: 2
Skill: Conceptual
5
18) Which of the following is an example of something that economists would consider a cost
but accountants would not?
A) the wages paid to employees of a firm
B) the wages that the owner of a firm could have earned in some alternative job
C) rent paid to a business' landlord
D) the cost of leather used in the production of footballs
Answer: B
Diff: 2
Skill: Conceptual
19) An example of an implicit cost is:

A) the wages paid to workers.
B) the interest on business loans.
C) the imputed rent on a store owned by the firm.
D) the materials used to produce the product.
Answer: C
Diff: 2
Skill: Conceptual
20) Economic cost differs from accounting cost because accountants do not consider implicit
costs.
Answer: TRUE
Diff: 1
Skill: Conceptual
21) Economic profit is total revenue less economic costs.

Answer: TRUE
Diff: 1
Skill: Definition
22) Since all costs positive, then economic profits would always be smaller than accounting
profits.
Answer: TRUE
Diff: 1
Skill: Conceptual
6
23) Economic cost is always less than accounting cost.
Answer: FALSE
Diff: 2
Skill: Conceptual
24) Implicit cost is the opportunity cost of the inputs that do not require monetary payment.
Answer: TRUE
Diff: 1
Skill: Definition
25) The interest on a business loan is an implicit cost.

Answer: FALSE
Diff: 1
Skill: Conceptual
26) What are the differences between economic cost and accounting costs?
Answer: Accounting cost are explicit cost, while economic cost includes both explicit and
implicit cost.
Diff: 2
Skill: Conceptual
27) What is economic profit?

Answer: Total revenue - economic cost.
Diff: 2
Skill: Definition
28) What are the explicit and implicit cost?

Answer: Explicit cost is its actual monetary payments for inputs while implicit cost is the
opportunity cost of the inputs that do not require a monetary payment.
Diff: 2
Skill: Definition
7
29) Can a firm's accounting profit be smaller than the economic profit? Assume that all costs are
positive.
Answer: No. If all costs, implicit and explicit) are positive, then the accounting profit will
almost always be larger than economic profit because economic profit equals accounting profit
minus implicit costs. Accounting profit equals economic profit if the firm incurs no implicit cost.
Diff: 2
Skill: Conceptual
30) Explain the difference between the short run and the long run.
Answer: The short run is the period of time over which at least one factor of production is fixed.
In the long run, firms are flexible to adjust all factors of production, and to enter or exit the
industry.
Diff: 1
Skill: Conceptual
31) Explain the relationship between average fixed cost and marginal cost.
Answer: By definition, the total fixed cost does not vary with the output level. On the other
hand, the marginal cost is the change in total cost as an additional output is produced. With a
fixed production facility, any change in total production cost comes from a change in total
variable cost because total fixed cost does not change. Thus there is no relationship between the
average fixed cost and the marginal cost.
Diff: 2
Skill: Conceptual
32) Explain the difference between fixed costs in the short run and in the long run.
Answer: In the short run, at least one factor of production is fixed, so the firm must pay for this
factor of production, and that cost is the firm's fixed cost. In the long run, there are no fixed
factors of production, and consequently, there are no fixed costs.
Diff: 2
Skill: Definition
8
8.2 A Firm with a Fixed Production Facility: Short-Run Costs
1) Diminishing marginal returns implies that:

A) marginal costs are decreasing.
B) marginal costs are increasing.
C) marginal costs are constant.
D) marginal costs may be increasing or decreasing.
Answer: B
Diff: 1
Topic: Production and Marginal Product
Skill: Conceptual
2) Diminishing marginal returns implies that:

A) marginal product is decreasing.
B) marginal product is increasing.
C) marginal product is constant.
D) marginal product may be increasing or decreasing.
Answer: A
Diff: 1
Skill: Conceptual
3) A firm experiences diminishing marginal returns because:

A) all factors of production are variable.
B) people "learn by doing."
C) all factors of production are fixed.
D) at least one factor of production is fixed.
Answer: D
Diff: 1
Skill: Conceptual
4) In the short run, at least one factor of production is fixed. This implies that beyond some level
of output a firm will:
A) "learn by doing."
B) experience diminishing marginal returns.
C) experience increasing marginal returns.
D) have a U-shaped long-run average cost curve.
Answer: B
Diff: 2
Skill: Conceptual
9
5) Which of the following is NOT true when the firm experiences diminishing marginal product?
A) The total product is decreasing.
B) The marginal product of the previous worker is higher than the current worker.
C) The firm is operating in the short run.
D) The firm's total cost is increasing.
Answer: A
Diff: 2
Skill: Conceptual
6) Diminishing marginal returns implies that firms:

A) require fewer and fewer workers to produce each additional unit of output.
B) require more and more workers to produce each additional unit of output.
C) get decreasing amounts of revenue for each unit of output they produce.
D) get increasing amounts of revenue for each unit of output they produce.
Answer: B
Diff: 1
Skill: Conceptual
7) When at least one factor of production is fixed, firms require more and more workers to
produce each additional unit of output. This describes:
A) increasing marginal returns.
B) diminishing marginal returns.
C) learning by doing.
D) short-run adjustments.
Answer: B
Diff: 1
Skill: Conceptual
10
Units of
Number of workers
output
0 0
1 10
2 30
3 44
4 55
Table 8.1
8) Refer to Table 8.1, which gives a firm's production function. Assume that all non-labor inputs
are fixed. Diminishing marginal returns set in with the addition of the:
A) third worker.
B) fourth worker.
C) fifth worker.
D) sixth worker.
Answer: A
Diff: 2
Skill: Analytical
are fixed. The marginal product of the fourth worker is:
A) 12 units.
B) 11 units.
C) 5 units.
D) 0 units.
Answer: B
Diff: 2
Skill: Analytical
are fixed. Marginal product is maximized when the firm hires:
A) 2 workers.
B) 3 workers.
C) 4 workers.
D) 5 workers.
Answer: A
Diff: 2
Skill: Analytical
11
Number of Units of
workers output
0 0
1 25
2 55
3 95
4 125
5 150
Table 8.2
are fixed. Diminishing returns set in with the addition of the:
A) third worker.
B) fourth worker.
C) fifth worker.
D) sixth worker.
Answer: B
Diff: 2
Skill: Analytical
are fixed. The marginal product is maximized when the firm hires:
A) 2 workers.
B) 3 workers.
C) 4 workers.
D) 5 workers.
Answer: B
Diff: 2
Skill: Analytical
are fixed. The marginal product of the fifth worker is:
A) 0 units.
B) 10 units.
C) 25 units.
D) 30 units.
Answer: C
Diff: 1
Skill: Analytical
12
are fixed. The marginal product of the fourth worker is:
A) 0 units.
B) 10 units.
C) 25 units.
D) 30 units.
Answer: D
Diff: 1
Skill: Analytical
15) Marginal product in the short run:

A) increases at all levels of production.
B) diminishes at all levels of production.
C) may initially increase, then eventually decrease.
D) may initially decrease, then eventually increase.
Answer: C
Diff: 2
Skill: Conceptual
16) Marginal product is defined as the change in ________ resulting from a one-unit increase in
________.
A) total product; input
B) total product; output
C) output; total product
D) total cost; output
Answer: A
Diff: 1
Skill: Definition
17) In the short run, the firm's total cost equals:

A) the total fixed costs + the total variable costs.
B) the average fixed costs +average variable costs.
C) the average fixed cost + the marginal cost.
D) the total variable costs only.
Answer: A
Diff: 1
Topic: Short-Run Total Cost
Skill: Conceptual
13
18) ________ is a cost that independent of the quantity produced by the firm and is incurred by
the firm in the short run.
A) Fixed cost
B) Economic cost
C) Variable cost
D) Average total cost
Answer: A
Diff: 1
Skill: Definition
19) ________ is a cost that changes with the quantity produced by the firm and is incurred by the
firm in the short run.
A) Fixed cost
B) Economic cost
C) Variable cost
D) Average total cost
Answer: C
Diff: 1
Skill: Definition
14
20) One can tell that Figure 8.4 shows short run costs because:
A) the slope of total costs and variable costs are the same.
B) costs are rising.
C) total costs are positive when output is zero implying fixed costs.
D) all of the above.
Answer: C
Diff: 2
Topic: Short-Run Total Cost, graphing
Skill: Conceptual
21) In Figure 8.4, the difference between total costs and variable cost is:
A) average total cost.
B) fixed cost.
C) total costs are positive when output is zero implying fixed costs.
D) all of the above.
Answer: B
Diff: 2
Topic: Short-Run Total Cost, graphing
Skill: Conceptual
15
22) Average variable cost is defined as:
A) total variable cost divided by quantity.
B) quantity divided by total variable cost.
C) the change in total variable cost divided by the change in quantity.
D) the change in quantity divided by the change in total variable cost.
Answer: A
Diff: 1
Topic: Short-Run Average Costs
Skill: Definition
23) Average fixed cost is defined as:

D) total fixed cost divided by quantity.
Answer: D
Diff: 1
Skill: Definition
24) Average total cost is defined as:

D) total cost divided by quantity.
Answer: D
Diff: 1
Skill: Definition
25) Average total cost equals:

A) total fixed cost plus total variable cost.
B) average fixed cost minus average variable cost.
C) average fixed cost plus average variable cost.
D) total cost minus average cost.
Answer: C
Diff: 1
Skill: Conceptual
16
26) Average variable cost equals:
A) total fixed cost plus total variable cost.
B) average total cost minus average fixed cost.
C) average total cost plus average fixed cost.
D) total cost minus average cost.
Answer: B
Diff: 1
Skill: Conceptual
27) Mark's Baseballs produces baseballs. Mark's Baseballs has total fixed costs of $500. Mark's
average variable cost is $20, and his average total cost is $25. Mark is currently producing:
A) 5 baseballs.
B) 25 baseballs.
C) 100 baseballs.
D) a number of baseballs that cannot be determined from the information provided.
Answer: C
Diff: 3
Skill: Analytical
17
28) Refer to Figure 8.1, which shows a family of average cost curves. The average total cost
curve is represented by:
A) Curve 1.
B) Curve 2.
C) Curve 3.
D) the vertical sum of curve 1 and curve 2.
Answer: A
Diff: 2
Topic: Short-Run Average Costs, graphing
Skill: Analytical
29) Refer to Figure 8.1, which shows a family of average cost curves. The average variable cost
A) Curve 1.
B) Curve 2.
C) Curve 3.
Answer: B
Diff: 2
Skill: Analytical
18
30) Refer to Figure 8.1, which shows a family of average cost curves. The average fixed cost
A) Curve 1.
B) Curve 2.
C) Curve 3.
Answer: C
Diff: 2
Skill: Analytical
31) Refer to Figure 8.1, which shows a family of average cost curves. The average total cost at a
given level of output is represented by:
A) the vertical distance between curve 1 and Curve 2 at a given level of output.
B) the vertical sum of Curve 1 and Curve 2 at a given level of output.
C) the vertical sum of Curve 2 and Curve 3 at a given level of output.
D) the vertical distance between Curve 2 and Curve 3 at a given level of output.
Answer: C
Diff: 2
Skill: Analytical
32) Refer to Figure 8.1, which shows a family of average cost curves. The average variable cost
at a given level of output is represented by:
A) the vertical distance between Curve 1 and Curve 3 at a given level of output.
B) the vertical distance between Curve 1 and Curve 2 at a given level of output.
D) the vertical sum of Curve 1 and Curve 2 at a given level of output.
Answer: A
Diff: 2
Skill: Analytical
33) Refer to Figure 8.1, which shows a family of average cost curves. The average fixed cost at a
given level of output is represented by:
A) the vertical distance between Curve 1 and Curve 2 at a given level of output.
B) the vertical distance between Curve 1 and Curve 3 at a given level of output.
D) the vertical sum of Curve 1 and Curve 3 at a given level of output.
Answer: A
Diff: 2
Skill: Analytical
19
34) Refer to Figure 8.1, which shows a family of average cost curves. Why does the vertical
distance between Curve 1 and Curve 2 decrease as output increases from Q1 to Q2?
A) Because average variable cost first decreases, then increases as output increases from Q1 to
Q2.
B) Because average fixed cost decreases as output increases from Q1 to Q2.
C) Because average total cost first decreases, then increases as output increases from Q1 to Q2.
D) Because average variable cost increases faster than average fixed cost as output level
approaches Q2.
Answer: B
Diff: 3
Skill: Analytical
35) Which of the following is true?

A) ATC = AVC - AFC.
B) TVC/Q = TC/Q + TFC/Q
C) ΔTC/ΔQ = ΔAVC/ΔQ
D) ΔTVC/ΔQ = MC
Answer: D
Diff: 2
Topic: Short-Run Marginal Cost
Skill: Conceptual
36) In the short run, the marginal cost of the first unit of output is $20, the marginal cost of
producing the second unit of output is $16, and the marginal cost of producing the third unit of
output is $12. The firm's total variable cost of producing three units of output is:
A) $12.
B) $16.
C) $20.
D) $48.
Answer: D
Diff: 2
Skill: Analytical
20
37) In the short run, the marginal cost of producing the first unit of output is $50, the marginal
cost of the second unit of output is $20, and the marginal cost of producing the third unit of
output is $16. The firm's total cost of producing three units of output is:
A) $16.
B) $48.
C) $86.
D) Cannot be determined from the information provided
Answer: D
Diff: 2
Skill: Analytical
38) In the short run, the marginal cost of the first unit of output is $20, the average variable cost
of producing three units of output is $16, and the marginal cost of producing the second unit of
output is $16. What is the marginal cost of producing the third unit of output?
A) $12
B) $16
C) $20
D) $48
Answer: A
Diff: 2
Skill: Analytical
39) In the short run, the marginal cost of the first unit of output is $40, the average variable cost
of producing three units of output is $32, and the marginal cost of producing the second unit of
output is $32. What is the marginal cost of producing the third unit of output?
A) $24
B) $32
C) $40
D) $96
Answer: A
Diff: 2
Skill: Analytical
21
40) If a firm's total fixed costs are $30, the firm's marginal cost of producing the first unit of
output is $30, and the average total cost of producing two units of output is $42, the marginal
cost of the second unit of output is:
A) $84.
B) $54.
C) $42.
D) $24.
Answer: D
Diff: 2
Skill: Analytical
Number of Cakes VC MC AVC FC TC ATC

0 50
1 30
2 50
3 25
4 155
Table 8.3
41) Table 8.3 presents the cost schedule for Candy's Cakes. If Candy produces zero cake,
Candy's total costs are:
A) $0.
B) $50.
C) $100.
D) $150
Answer: B
Diff: 2
Skill: Analytical
42) Table 8.3 presents the cost schedule for Candy's Cakes. If Candy produces one cake, Candy's
total variable costs are:
A) $0.
B) $30.
C) $50.
D) $80.
Answer: B
Diff: 2
Skill: Analytical
22
43) Table 8.3 presents the cost schedule for Candy's Cakes. If Candy produces two cakes,
Candy's marginal cost is:
A) $0.
B) $20.
C) $25.
D) $50.
Answer: B
Diff: 3
Skill: Analytical
44) Table 8.3 presents the cost schedule for Candy's Cakes. If Candy produces three cakes,
Candy's marginal costs are:
A) $0.
B) $25.
C) $41.67.
D) $75.
Answer: B
Diff: 3
Skill: Analytical
Number of Figs VC MC AVC FC TC ATC

0 100
1 90 90
2 135
3 80
4 400
Table 8.4
45) Table 8.4 presents the cost schedule for David's Figs. If David produces zero fig, David's
total costs are:
A) $0.
B) $90.
C) $100.
D) $130.
Answer: C
Diff: 1
Skill: Analytical
23
46) Table 8.4 presents the cost schedule for David's Figs. If David produces two figs, David's
average variable costs are:
A) $80.
B) $85.
C) $90.
D) $170.
Answer: B
Diff: 2
Skill: Analytical
47) Table 8.4 presents the cost schedule for David's Figs. If David produces three figs, David's
total variable costs are:
A) $0.
B) $41.67.
C) $80.
D) $240.
Answer: D
Diff: 2
Skill: Analytical
48) Table 8.4 presents the cost schedule for David's Figs. If David produces four figs, David's
average total costs are:
A) $60.
B) $75.
C) $100.
D) $400.
Answer: C
Diff: 1
Skill: Analytical
49) Table 8.4 presents the cost schedule for David's Figs. If David produces two figs, David's
marginal costs are:
A) $80.
B) $90.
C) $100.
D) $170.
Answer: A
Diff: 3
Skill: Analytical
24
50) When a firm is experiencing diminishing returns:
A) average cost is always increasing.
B) average cost is always decreasing.
C) marginal costs are always less than average costs.
D) none of the above
Answer: D
Diff: 2
Skill: Conceptual
51) When a firm is experiencing diminishing marginal returns:

A) average cost is increasing.
B) average cost is decreasing.
C) marginal costs are increasing.
D) marginal costs are decreasing.
Answer: C
Diff: 2
Skill: Conceptual
52) When marginal costs are increasing:

A) a firm is experiencing diminishing returns.
B) average cost is always increasing.
C) average cost is always decreasing.
D) marginal costs are always greater than average costs.
Answer: A
Diff: 2
Skill: Conceptual
53) Marginal cost is defined as:

A) total variable cost resulting from a one-unit increase in quantity.
B) quantity resulting from a one-unit increase in total variable cost.
C) the change in total variable cost resulting from a one-unit increase in the change in quantity.
D) the change in quantity resulting from a one-unit increase in the change in total variable cost.
Answer: C
Diff: 1
Skill: Definition
25
54) The change in total variable cost resulting from a one-unit increase in the change in quantity
is:
A) average variable cost.
B) marginal cost.
C) average total cost.
D) opportunity cost.
Answer: B
Diff: 1
Skill: Definition
55) Figure 8.2 presents a firm's marginal, average total, average fixed, and average variable cost
curves. The firm faces fixed costs of:
A) $20.
B) $110.
C) $130.
D) $4000.
Answer: D
Diff: 2
Topic: Short-Run Marginal Cost, graphing
Skill: Analytical
26
curves. The firm minimizes average total costs by producing ________ units.
A) 50
B) 100
C) 150
D) 200
Answer: C
Diff: 2
Skill: Analytical
curves. The firm minimizes average variable costs by producing ________ units.
A) 50
B) 100
C) 150
D) 200
Answer: B
Diff: 2
Skill: Analytical
27
58) Figure 8.3 shows a firm's marginal cost, average total cost, and average variable cost curves.
At Q=50, the total cost is:
A) $2,100.
B) $2,800.
C) $4,500.
D) $6,300.
Answer: C
Diff: 2
Skill: Analytical
At Q=50, the total variable cost is:
A) $1,200.
B) $1,500.
C) $2,100.
D) $2,800.
Answer: B
Diff: 2
Skill: Analytical
28
At Q=50, the average fixed cost is:
A) $30.
B) $40.
C) $50.
D) $60.
Answer: D
Diff: 2
Skill: Analytical
At Q=100, the total cost is:
A) $2,800.
B) $4,500.
C) $7,000.
D) $6,300.
Answer: C
Diff: 2
Skill: Analytical
At Q=100, the total variable cost is:
A) $2,800.
B) $4,000.
C) $4,500.
D) $6,300.
Answer: B
Diff: 1
Skill: Analytical
At Q=100, the average fixed cost is:
A) $30.
B) $40.
C) $50.
D) $60.
Answer: A
Diff: 2
Skill: Analytical
29
The firm's total fixed cost is:
A) $2,800.
B) $3,000.
C) $4,500.
D) $7,000.
Answer: B
Diff: 2
Skill: Analytical
The average total cost curve is downward-sloping as output increases from Q=50 to Q=100
because:
A) increasing average variable cost outweighs decreasing average fixed cost.
B) decreasing average fixed cost outweighs increasing average variable cost.
C) diminishing returns are not severe enough to outweigh decreasing average fixed cost.
D) marginal cost is increasing.
Answer: B
Diff: 2
Skill: Analytical
For an output level greater than Q=100, the average total cost curve is upward-sloping because:
A) decreasing average fixed cost outweighs increasing average variable cost.
B) diminishing returns are not severe enough to outweigh decreasing average fixed cost.
C) increasing average variable cost outweighs decreasing average fixed cost.
D) marginal cost is increasing.
Answer: C
Diff: 2
Skill: Analytical
30
Output Total Cost
0 15
1 25
2 33
3 40
4 48
5 58
6 70
Table 8.5
67) Refer to Table 8.5. The total fixed cost of producing two units is:
A) $0.
B) $8.
C) $11.
D) $15.
Answer: D
Diff: 1
Skill: Analytical
68) Refer to Table 8.5. The marginal cost of the third unit of output is:
A) $0.
B) $7.
C) $8.
D) $40.
Answer: B
Diff: 1
Skill: Analytical
69) Refer to Table 8.5. The average variable cost of producing five units of output is:
A) $0.
B) $8.60.
C) $10.
D) $11.60.
Answer: B
Diff: 2
Skill: Analytical
31
70) Refer to Table 8.5. The total variable cost of producing five units of output is:
A) $8.60.
B) $43.
C) $48.
D) $58.
Answer: B
Diff: 2
Skill: Analytical
71) Refer to Table 8.5. The firm experiences diminishing returns beginning with the ________
unit.
A) first
B) second
C) third
D) fourth
Answer: D
Diff: 3
Skill: Analytical
72) Average fixed costs in the short run:

A) increase as the quantity produced increases.
B) decrease as the quantity produced increases.
C) first decrease, then increase eventually as the quantity produced increases.
D) first increase, then decrease eventually as the quantity produced increases.
Answer: B
Diff: 2
Topic: The Relationship between Marginal Cost and Average Cost
Skill: Conceptual
73) When does a firm's average variable cost exceed the average total cost?
A) never
B) when the average variable cost is at its minimum
C) when the average fixed cost is at its minimum
D) when the average total cost equals the average fixed cost
Answer: A
Diff: 2
Skill: Conceptual
32
74) The short-run average total cost curve is U-shaped because average fixed costs ________
and average variable costs ________ eventually as quantity produced increases.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: C
Diff: 2
Skill: Conceptual
75) The marginal cost curve intersects the short-run average total cost curve where:
A) marginal cost is minimized in the short run.
B) average variable costs are minimized in the short run.
C) average total costs are minimized in the short run.
D) average variable costs are maximized in the short run.
Answer: C
Diff: 2
Skill: Conceptual
76) Average total costs are minimized when:

A) marginal costs begin to increase.
B) marginal costs begin to decrease.
C) marginal cost is greater than average total cost.
D) marginal cost equals average total cost.
Answer: D
Diff: 2
Skill: Conceptual
77) Average variable costs are minimized when:

A) marginal costs begin to increase.
B) marginal costs begin to decrease.
C) marginal cost is greater than average total cost.
D) marginal cost equals average variable cost.
Answer: D
Diff: 2
Skill: Conceptual
33
78) If the marginal cost of producing the next unit of output exceeds the average total cost, then:
A) the average total cost curve is increasing.
B) the marginal cost curve is at its minimum.
C) the average total cost curve is decreasing.
D) the average total cost curve is at its minimum.
Answer: A
Diff: 2
Skill: Conceptual
79) If the marginal cost of producing the next unit of output is less than the average total cost,
then:
A) the average total cost curve is increasing.
B) the marginal cost curve is at its minimum.
C) the average total cost curve is decreasing.
D) the average total cost curve is at its minimum.
Answer: C
Diff: 2
Skill: Conceptual
80) Suppose you know that at the current level of production average total cost equals marginal
cost, then you know that it is also true that:
A) fixed costs are zero.
B) average fixed costs are increasing.
C) average total cost will decrease if production is increased.
D) average total cost is minimized at the current level of output.
Answer: D
Diff: 2
Skill: Conceptual
81) The effect of diminishing marginal returns outweighing the effect of spreading out the fixed
costs is illustrated by the ________ average cost curve ________.
A) long-run; decreasing
B) long-run; increasing
C) short-run; decreasing
D) short-run; increasing
Answer: D
Diff: 2
Skill: Conceptual
34
82) The effect of spreading out the fixed costs outweighing the effect of diminishing returns is
illustrated by the ________ average cost curve ________.
A) long-run; decreasing
B) long-run; increasing
C) short-run; decreasing
D) short-run; increasing
Answer: C
Diff: 2
Skill: Conceptual
83) You observe that at your current production of lunch boxes, the average total cost of
producing lunch boxes is $5 and the marginal cost of producing lunch boxes is $2. What should
always happen if you increase lunch box production?
A) Marginal cost will rise.
B) Marginal cost will fall.
C) Average total cost will rise.
D) Average total cost will fall.
Answer: D
Diff: 2
Skill: Analytical
84) You observe that at your current production of rutabaga, the average total cost of producing
rutabaga is $1 and the marginal cost of producing rutabaga is $2. What should always happen if
you increase rutabaga production?
A) Marginal cost will fall.
B) Average total cost will rise.
C) Average total cost will fall.
D) Both A and B are correct.
Answer: B
Diff: 3
Skill: Analytical
35
85) Suppose that your firm's marginal cost of producing a pencil is 5 cents and the average cost
of producing a pencil is 3 cents. If your firm is interested in minimizing average total costs, what
should your firm do?
A) Increase production.
B) Decrease production.
C) Maintain production at the current level.
D) Look for ways to increase fixed costs.
Answer: B
Diff: 2
Skill: Analytical
86) Suppose that your firm's marginal cost of producing a pencil is 5 cents and the average cost
of producing a pencil is 7 cents. If your firm is interested in minimizing average total costs, what
should your firm do?
A) Increase production.
B) Decrease production.
C) Maintain production at the current level.
D) Look for ways to increase fixed costs.
Answer: A
Diff: 2
Skill: Analytical
87) Total cost of production is the sum of total variable cost and total fixed cost. If the total fixed
cost alone increases,
A) the average total cost curve shifts downward at all output levels.
B) the marginal cost curve shifts upward at all output levels.
C) the vertical distance between the average total cost curve and average variable cost curve
increases at all output levels.
D) the average variable cost curve shifts upward at all output levels.
Answer: C
Diff: 2
Skill: Analytical
36
88) Total cost of production is the sum of total variable cost and total fixed cost. If the total fixed
cost alone decreases,
A) the average total cost curve shifts upward at all output levels.
B) the marginal cost curve shifts downward at all output levels.
C) the vertical distance between the average total cost curve and the average variable cost curve
decreases at all output levels.
D) the average variable cost curve shifts downward at all output levels.
Answer: C
Diff: 2
Skill: Analytical
89) Other things being equal, if a firm's marginal cost curve shifts upward at all output levels,
A) the average total cost curve remains unchanged at all output levels.
B) the average variable cost curve remains unchanged at all output levels.
C) the average fixed cost curve remains unchanged at all output levels.
D) all of the above
Answer: C
Diff: 2
Skill: Analytical
90) Other things being equal, if the average fixed cost curve shifts upward at all output levels,
A) the marginal cost curve shifts upward at all output levels.
B) the average variable cost curve shifts upward at all output levels.
C) the average total cost curve remains unchanged at all output levels.
D) the vertical distance between the average total cost curve and the average variable cost curve
increases at all output levels.
Answer: D
Diff: 2
Skill: Analytical
91) Diminishing marginal returns occur only in the long run.

Answer: FALSE
Diff: 1
Skill: Conceptual
37
92) Diminishing marginal returns occur in the short run.
Answer: TRUE
Diff: 1
Skill: Conceptual
93) Diminishing marginal returns always sets in with the hiring of the first worker.
Answer: FALSE
Diff: 2
Skill: Conceptual
94) The marginal product of an input is equal to the change in total product resulting from a one-
unit increase in the quantity of that input.
Answer: TRUE
Diff: 1
Skill: Definition
95) Fixed costs do not vary as output changes.

Answer: TRUE
Diff: 1
Skill: Conceptual
96) Fixed costs are the same in the short run as they are in the long run.
Answer: FALSE
Diff: 1
Skill: Conceptual
97) There are no fixed costs in the long run.

Answer: TRUE
Diff: 1
Skill: Conceptual
98) The increase in total cost resulting from producing one more unit of output is the marginal
cost.
Answer: TRUE
Diff: 1
Skill: Definition
38
99) If average cost is falling, marginal cost must also be falling.
Answer: FALSE
Diff: 2
Skill: Conceptual
100) If marginal cost is increasing, average variable cost must also be increasing.
Answer: FALSE
Diff: 2
Skill: Conceptual
101) If marginal cost is above average cost, average cost must be rising.
Answer: TRUE
Diff: 2
Skill: Conceptual
102) If average cost is above marginal cost, average cost must be falling.
Answer: TRUE
Diff: 2
Skill: Conceptual
103) If marginal cost is below average cost, marginal cost must be rising.
Answer: FALSE
Diff: 2
Skill: Conceptual
104) Diminishing marginal returns imply that marginal cost is falling.

Answer: FALSE
Diff: 2
Skill: Conceptual
105) Diminishing marginal returns imply that marginal cost is rising.

Answer: TRUE
Diff: 2
Skill: Conceptual
39
106) The marginal cost curve always intersects the average total cost curve at the minimum of
average total cost.
Answer: TRUE
Diff: 1
Skill: Conceptual
107) If the marginal cost is increasing over a given output range, the average total cost must
increase.
Answer: FALSE
Diff: 2
Skill: Conceptual
108) If the average total cost is increasing over a given output range, the average total cost must
be smaller than the marginal cost.
Answer: TRUE
Diff: 2
Skill: Analytical
109) Assuming that labor is the only variable input with a fixed production facility, explain the
relationship between the marginal product of labor and the marginal production cost.
Answer: The marginal product of labor is the change in output from one additional worker.
Suppose the marginal product of labor decreases as more workers are added to the production. It
implies that output will increase at a decreasing rate because additional contribution to the output
from an additional worker becomes smaller. In other words, an additional output becomes more
costly as more output is produced. Thus diminishing marginal returns lead to an increase in
marginal cost.
Diff: 2
Skill: Conceptual
110) Explain why the marginal cost curve intersects average total cost at the point of minimum
average total cost.
Answer: Suppose that marginal cost is below average total cost. This will have the effect of
dragging down the average (think about what happens to your 3.5 grade point average if you get
a D in economics!). Now suppose that the marginal cost is above the average total cost. This will
lead to the average total cost increasing. So average total cost is at a minimum when the marginal
cost exactly equals the average total cost.
Diff: 2
Skill: Conceptual
40
111) Draw a graph showing a short-run average variable cost curve, a short-run average total cost
curve, and a short-run marginal cost curve. Briefly explain the shape of each curve and how they
relate to each other.
Answer:
As shown in the graph, the short-run average variable cost curve and the short-run average total
cost curve have U shapes, and the short-run marginal cost curve intersects the other two at their
minimum points.
Diff: 2
Topic: The Relationship between Marginal Cost and Average Cost, graphing
Skill: Conceptual
8.3 Production and Costs in the Long Run
1) The long-run average cost of production is defined as:

A) total cost divided by the quantity of output the firm chooses when at least one factor is fixed.
B) total cost divided by the quantity of output the firm chooses when it can choose a production
facility of any size.
C) the quantity produced by a firm that can choose any size production facility.
D) the quantity produced by a firm when at least one factor is fixed.
Answer: B
Diff: 1
Topic: Expansion and Replication
Skill: Definition
2) In the long-run, diminishing returns would:

A) not exist because no input is held constant.
B) not exist because all inputs are held constant.
C) still exist at a lesser degree because inputs are allowed to vary.
D) exist at a greater degree, because all inputs are allowed to vary.
Answer: A
Diff: 1
Skill: Conceptual
41
3) When the firm increases output and the costs rise proportionately, then the long-run average
cost curve is ________ and the firm is experiencing ________.
A) horizontal; constant returns to scale
B) downward sloping; constant returns to scale
C) upward sloping; diseconomies of scale
D) downward sloping; economies of scale
Answer: A
Diff: 2
Skill: Conceptual
4) The long-run marginal cost (LMC) is the increase in the cost incurred by the firm when
producing one additional output, holding:
A) neither the workforce nor the production facility constant.
B) the workforce and the production facility constant.
C) the workforce constant.
D) the production facility constant.
Answer: A
Diff: 1
Skill: Definition
5) Total cost divided by the quantity of output the firm chooses when it can choose a production
facility of any size describes:
A) the short-run average cost of production.
B) the long-run average cost of production.
C) the short-run marginal cost of production.
D) the long-run marginal cost of production.
Answer: B
Diff: 1
Skill: Definition
6) Suppose a firm experiences lower average costs whenever output increases in the long run.
Then we would expect the firm to have:
A) a U-shaped long-run average cost curve.
B) an L-shaped long-run average cost curve.
C) a long-run average cost curve that always decreases.
D) a minimum efficient scale relatively close to the origin.
Answer: C
Diff: 2
Skill: Conceptual
42
7) Suppose McDonald's puts up five new stores in San Francisco using exactly the same floor
plan, capital equipment and number of workers, then the long run average cost curve of
McDonald's would be ________ and the company experiences ________.
B) horizontal; economies of scale
C) upward sloping; economies of scale.
D) horizontal; diseconomies of scale.
Answer: A
Diff: 2
Skill: Conceptual
8) Suppose that in 2010 ABC Corp. produced 500 million units of a good at an average cost of
$2, and in 2011 ABC Corp. expanded its plant capacity and produced 600 million units at an
average cost of also $2. In this range, one can conclude that ABC Corp. is experiencing:
A) economies of scale.
B) diseconomies of scale.
C) neither economies of scale or diseconomies of scale.
D) diminishing marginal product.
Answer: C
Diff: 2
Skill: Analytical
9) Most empirical studies show that firms' long-run average cost curves:
A) are L-shaped.
B) are downward-sloping.
C) are upward-sloping.
D) are flat.
Answer: A
Diff: 1
Skill: Fact
10) An input is indivisible if:

A) it cannot be increased to produce a larger quantity of output.
B) it cannot be used as a substitute for other inputs in the production process.
C) it is sufficiently inexpensive to purchase that firms will want to buy as much as they can.
D) it cannot be scaled down to produce a smaller quantity of output.
Answer: D
Diff: 1
Topic: Reducing Output with Indivisible Inputs
Skill: Definition
43
11) Which of the following is true if a firm has indivisible inputs?
A) The long-run average cost curve is downward sloping at lower levels of output.
B) The long-run fixed cost curve is downward sloping at lower levels of output.
C) The long-run total cost curve is downward sloping at lower levels of output.
D) The long-run marginal cost curve is downward sloping at lower levels of output.
Answer: A
Diff: 2
Skill: Conceptual
12) Which of the following is an example of an indivisible input?

A) the amount of labor a firm hires
B) flour used to produce bread
C) wood used to produce paper
D) train tracks between two cities
Answer: D
Diff: 2
Skill: Conceptual
13) Increased specialization in large firms might lead to:

A) upward-sloping marginal cost curves.
B) horizontal marginal cost curves.
C) downward-sloping long-run average cost curves.
D) upward-sloping long-run average cost curves.
Answer: C
Diff: 2
Topic: Scaling Down and Labor Specialization
Skill: Conceptual
14) When the firm increases output and the costs rise disproportionately slower, then the long-
run average cost curve is ________ and the firm is experiencing ________.
Answer: D
Diff: 2
Topic: Economies of Scale
Skill: Conceptual
44
15) The minimum efficient scale is:
A) the quantity after which it makes no sense for a firm to produce.
B) the minimum quantity where a firm would be able to produce profitably.
C) the output level beyond which the firm will not experience scale economies.
D) the output level beyond which the firm will experience scale economies.
Answer: C
Diff: 1
Skill: Definition
16) If the firm has already reached the minimum efficient scale, then:
A) any additional output will not result in a lower long run average cost.
B) any additional output will result in a lower long run average cost.
C) additional output will result in a lower long run marginal cost.
D) the firm is profit maximizing in the long run.
Answer: A
Diff: 2
Skill: Conceptual
17) Under which conditions might economies of scale result?

A) hampered coordination brought about by bureaucracy
B) increasing costs of inputs
C) increasing output prices
D) workers having to spend less time switching back and forth between tasks.
Answer: D
Diff: 2
Skill: Conceptual
18) Lower input prices in large firms might lead to:

A) upward-sloping marginal cost curves.
B) upward-sloping short-run average cost curves.
C) upward-sloping long-run average cost curves.
D) downward-sloping long-run average cost curves.
Answer: D
Diff: 2
Skill: Conceptual
45
19) Suppose that in 2010 ABC Corp. produced 500 million units of a good at an average cost of
$2, and in 2011 ABC Corp. expanded its plant capacity and produced 600 million units at an
average cost of $1.80. In this range, one can conclude that ABC Corp. is experiencing:
D) diminishing marginal product.
Answer: A
Diff: 2
Skill: Analytical
20) Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, they are
able to buy inputs in bulk, resulting in lower input prices. It is likely that continued growth will
result in:
B) Gigantic Company achieving the minimum efficient scale of production.
C) diseconomies of scale.
D) increasing marginal returns.
Answer: A
Diff: 2
Skill: Conceptual
21) A firm scaled up its operation by increasing all inputs by 100%. If the firm experienced
150% increase in the output, the firm's long-run average cost exhibits:
A) economies of scale at the current output level.
B) diseconomies of scale at the current output level.
C) a constant long-run average cost at the current output level.
D) diminishing marginal returns at the current output level.
Answer: A
Diff: 2
Skill: Analytical
46
22) A firm scaled down its operation by reducing all inputs by 50% and experienced a more-
than-50% decrease in output. If all input prices remain unchanged, the firm's long-run average
cost exhibits:
Answer: A
Diff: 3
Skill: Analytical
23) When the firm increases output and the costs rise disproportionately faster, then the long-run
average cost curve is ________ and the firm is experiencing ________.
Answer: C
Diff: 2
Topic: Diseconomies of Scale
Skill: Conceptual
24) Under which conditions might diseconomies of scale result?

A) improved coordination brought about by bureaucracy
B) decreasing costs of inputs
D) increased bureaucracy
Answer: D
Diff: 2
Skill: Conceptual

A) improved coordination brought about by bureaucracy
B) increasing price of inputs
D) usage of a large amount of indivisible inputs by the firm
Answer: B
Diff: 2
Skill: Conceptual
47
B) decreasing costs of inputs
D) usage of a large amount of indivisible inputs by the firm
Answer: A
Diff: 2
Skill: Conceptual
27) Coordination problems in large firms might lead to:

A) horizontal marginal cost curves.
B) downward-sloping marginal cost curves.
C) upward-sloping short-run average cost curves.
Answer: D
Diff: 2
Skill: Conceptual
28) Higher input prices in large firms might lead to:

A) horizontal marginal cost curves.
B) downward-sloping marginal cost curves.
C) downward-sloping long-run average cost curves.
Answer: D
Diff: 2
Skill: Conceptual
29) Suppose that in 2010 MBI Corp. produced 100 million units of a good at an average cost of
$6, and in 2011 MBI Corp. expanded its plant capacity and produced 200 million units at an
average cost of $6.20. In this range, one can conclude that MBI Corp. is experiencing:
D) increasing marginal product.
Answer: B
Diff: 2
Skill: Analytical
48
B) increasing costs of inputs
C) the firm uses a large amount of indivisible inputs
D) both A and B
Answer: D
Diff: 2
Skill: Conceptual
31) Suppose that Gigantic Company is increasing in size. As Gigantic Company grows,
coordination of work teams is becoming more difficult because of increased bureaucracy. It is
likely that continued growth will result in:
B) Gigantic Company achieving the minimum efficient scale of production.
Answer: C
Diff: 2
Skill: Conceptual
32) Suppose that Gigantic Company is increasing in size. As Gigantic Company grows, demand
for inputs causes input prices to rise. It is likely that continued growth will result in:
B) reduced fixed costs.
Answer: C
Diff: 2
Skill: Conceptual
33) A firm doubled all its inputs and experienced a 50% increase in output. If all input prices
remain unchanged, the firm's long-run average cost exhibits:
Answer: B
Diff: 3
Skill: Analytical
49
34) A firm scaled down its operation by reducing all inputs by 50% and experienced a less-than-
50% decrease in output. If all input prices remain unchanged, the firm's long-run average cost
exhibits:
Answer: B
Diff: 3
Skill: Analytical
35) If the firm is producing in the long run, then the firm's average total cost curve:
A) equals the average variable cost curve.
B) is less than the average variable cost curve.
C) exceeds the average variable cost curve.
D) equals zero.
Answer: A
Diff: 1
Topic: Actual Long-Run Average-Cost Curves
Skill: Conceptual
36) When the long-run average total cost curve is horizontal, a firm has economies of scale.
Answer: FALSE
Diff: 1
Skill: Conceptual
37) The long-run marginal cost is the additional cost incurred by the firm when producing one
more unit of output, holding the amount of capital constant.
Answer: FALSE
Diff: 1
Skill: Definition
38) A large blast furnace is an example of an indivisible input that cannot be scaled down to
reduce output.
Answer: TRUE
Diff: 2
Skill: Conceptual
50
39) If a firm has reached the minimum efficient scale, any additional output produced by the firm
will result in a lower average cost in the long run.
Answer: FALSE
Diff: 2
Skill: Conceptual
40) A firm reaches the minimum efficient scale in the short run.
Answer: FALSE
Diff: 1
Skill: Conceptual
41) The minimum efficient scale is the output at which the long-run average cost curve becomes
horizontal.
Answer: FALSE
Diff: 2
Skill: Conceptual
42) If the long-run average total cost curve is rising as output increases, then the firm faces
diseconomies of scale.
Answer: TRUE
Diff: 1
Skill: Conceptual
43) A U-shaped long-run average cost curve implies that a firm faces only diseconomies of scale.
Answer: FALSE
Diff: 1
Topic: Actual Long-Run Average-Cost Curves
Skill: Conceptual
44) Can a firm experience diminishing returns in the long run?

Answer: No. A firm will never experience diminishing returns in the long run because in the
long run all inputs are allowed to vary. Diminishing returns occur when the marginal product
decreases because a variable input is increased while at least one other variable is held constant.
Diff: 2
Skill: Conceptual
51
45) What are indivisible inputs and what are their implications for economies of scale?
Answer: An indivisible input is something like a mold that cannot be scaled down to produce
less output. Indivisible input are one source of economies of scale as costs per unit drop when an
indivisible input is used to produce a larger output.
Diff: 2
Skill: Conceptual
46) Why are some long-run average cost curves steeper on the downward side than others?
Answer: The slope of the downward-sloping portion of the long-run average cost is a measure of
the degree to which the firm experiences economies of scale. If the firm expends a large amount
of its costs on indivisible inputs, the firm will spread this indivisible input's cost out over more
and more units as output increases, implying significant economies of scale. Firms that require
many individual tasks that can be learned easily will also have substantial increasing returns due
to specialization.
Diff: 2
Skill: Conceptual
47) Draw a graph showing the long-run average cost curve for a firm that experiences economies
of scale.
Answer:
As shown in the graph, the long-run average cost curve for a firm that experiences economies of
scale is "L" shaped.
Diff: 2
Topic: Economies of Scale, graphing
Skill: Conceptual
52
48) Explain why some firms may suffer diseconomies of scale.
Answer: Diseconomies of scale exist when average costs increase with firm size. This can
happen for several reasons. First, it is possible that input prices are increasing. If this is the case,
then the average amount spent on inputs increases as the scale of production increases. Also,
there may be coordination problems associated with an increasing number of layers of
bureaucracy. If more layers of management lead to increased inefficiency, then the firm may
experience diseconomies of scale.
Diff: 2
Skill: Conceptual
8.4 Applications of Production Cost
Recall the Application about the production cost of mobile phones to answer the following
question(s).
1) Recall the Application. In the Application, the listed costs include integrated circuits,
display/touchscreen, camera, and battery. Each of these costs is
A) an implicit cost.
B) an explicit cost.
C) a sunk cost.
D) a fixed cost.
Answer: B
Diff: 2
Topic: Application 1, The Production Cost of Mobile Phones
Skill: Conceptual
2) Recall the Application. In the Application, the listed costs include integrated circuits,
display/touchscreen, camera, and battery. Which of these costs is a fixed cost?
A) integrated circuits
B) display/touchscreen
C) camera
D) None of the above, because all costs listed are variable.
Answer: D
Diff: 2
Skill: Conceptual
53
3) Recall the Application. Due to the ________ in the costs of components, the average cost of
producing a mobile phone has ________ in recent years.
A) decline; fallen
B) decline; risen
C) increase; fallen
D) increase; risen
Answer: A
Diff: 1
Skill: Fact
Recall the Application about the manufacture of fake killer whales used to scare sea lions
off the Washington coast to answer the following question(s).
4) Recall the Application. If a fake killer whale to be used to scare sea lions away from steelhead
and other threatened and commercially valuable species cost $11,000 for the mold and $5,000
for materials for each fake killer whale made, then the average or unit cost of producing five fake
killer whales would be:
A) $5,000.
B) $7,200.
C) $11,000.
D) $16,000.
Answer: B
Diff: 2
Topic: Application 2, Indivisible Inputs and the Cost of Fake Killer Whales
Skill: Analytical
5) Recall the Application. If a fake killer whale to be used to scare sea lions away from steelhead
and other threatened and commercially valuable species cost $11,000 for the mold and $5,000
for materials for each fake killer whale made, then the producer would face:
A) increasing returns to scale.
B) decreasing returns to scale.
C) increasing average total costs.
D) decreasing demand.
Answer: A
Diff: 2
Skill: Conceptual
54
Recall the Application about scale economies in the production of electricity from wind to
answer the following question(s).
6) Recall the Application. Since a large or a small wind turbine have similar installation,
operating and maintenance costs, but a large turbine has four times the generating capacity but
costs less than three times as much as a small turbine, the average cost of generating electricity
with wind is
A) constant at each output.
B) increasing as output increases.
C) decreasing as output increases.
D) at first decreasing and then increasing as output rises.
Answer: C
Diff: 2
Topic: Application 3, Scale Economies in Wind Power
Skill: Conceptual
7) Recall the Application. Since a large or a small wind turbine have the same installation,
costs less than three times as much as a small turbine, the wind power industry faces:
A) constant economies of scale.
B) economies of scale.
D) a hump shaped cost curve.
Answer: B
Diff: 2
Skill: Conceptual
Recall the Application about the average cost of producing a music video to answer the
following question(s).
8) Recall the Application. If the first copy cost is $223,000 and the marginal cost is $0, how
much total cost would the firm incur if it produces 1 million copies?
A) zero
B) $223,000
C) $1 million
D) $1 million + $223,000
Answer: B
Diff: 1
Topic: Application 4, The Average Cost of a Music Video
Skill: Analytical
55
9) Recall the Application. If the first copy cost is $223,000 and the marginal cost is $0, then how
many copies should the firm sell in order to break even if the price was $10 each?
A) zero
B) 2,230
C) 22,300
D) 223,000
Answer: C
Diff: 1
Skill: Analytical
10) Recall the Application. If the first copy cost is $223,000 and the marginal cost is $0, then as
the firm produces an infinite quantity of the video, the average total cost of producing the video
will approach:
A) zero.
B) $1.00.
C) $2,230.
D) $1 million.
Answer: A
Diff: 1
Skill: Analytical
Recall the Application about the reduction in costs of generating solar power to answer the
11) Recall the Application. A tax levied on coal-fired plants that is based on the amount of
carbon released in the atmosphere is considered by the firm as a:
A) variable cost.
B) fixed cost.
C) source of revenue
D) sunk cost.
Answer: A
Diff: 1
Topic: Application 5, The Falling Cost of Solar Power
Skill: Conceptual
56
12) Recall the Application. If the fuel used in the generation of solar energy is sunlight, then the
marginal cost of producing one more watt of electricity is:
A) zero.
B) greater than $1.00
C) higher than the average fixed cost.
D) immeasurably high.
Answer: A
Diff: 1
Skill: Conceptual
13) Recall the Application. Suppose that the fuel used is the only input used in the generation of
solar energy is sunlight and has a zero cost. The average total cost of producing electricity is:
A) zero.
B) equal to the marginal cost.
C) equal to the average fixed cost.
D) immeasurably high.
Answer: C
Diff: 1
Skill: Conceptual
57
Additional Application
THE AVERAGE COST OF PRODUCING AIRPLANES
Suppose you want to design and manufacture a new airplane, one with a performance level
comparable to the Boeing 737. To get a rough idea of how much it would cost to design the new
aircraft and then produce a particular quantity of airplanes, you could use the Airframe Cost
Model developed by U.S. National Aeronautics and Space Administration (NASA). Figure 8.8
shows the average cost of production for up to 100 airplanes. The fixed cost includes the cost of
designing the aircraft and the cost of capital used in the production process, including the
machine tools used to fabricate the components of the aircraft. Together these fixed costs add up
to about $2.45 billion. The variable cost includes the costs of the materials and labor used to
produce the components and then assemble the aircraft. The NASA cost model suggests that the
average variable cost decreases as the number of airplanes increases because of labor
specialization. The average-cost curve in Figure 8.8 is negatively sloped because as the quantity
of aircraft increases, the fixed cost is spread over more units and labor specialization pulls down
the average variable cost. The average cost decreases from $435 million for a quantity of 10
aircraft, to $257 for 20 aircraft, and so on down to $86 million for 100 aircraft.
The average-cost curve is negatively sloped, implying that there are no diminishing returns in the
production of airplanes. This occurs because the cost model assumes that as output increases,
production occurs over a longer period of time. Diminishing returns normally occur if an
increase in output requires an increase in the number of workers in a given production facility. In
the normal case, each worker becomes less productive because each worker gets a smaller share
of the production facility–plant and equipment such as machine tools. But if doubling output
means that we operate a given production facility twice as long, diminishing returns won't occur:
Each worker still gets the same share of the facility, but simply uses the facility for twice as
much time.
SOURCE: National Aeronautics and Space Administration, “Cost Estimating Web Site,”
available online at cost.jsc.nasa.gov/airframe.html, accessed 06/27/2006.
58
14) Recall the Application on "The Average Cost of Producing Airplanes." The costs of
designing the aircraft and the machine tools used to fabricate the components for the aircraft are:
A) implicit costs.
B) variable costs.
C) fixed costs.
D) nominal costs.
Answer: C
Diff: 2
Topic: Additional Application
Skill: Conceptual
15) Recall the Application on "The Average Cost of Producing Airplanes." The costs of labor and
materials used to produce the components and then assemble the aircraft are:
A) implicit costs.
B) variable costs.
C) fixed costs.
D) nominal costs.
Answer: B
Diff: 2
Topic: Additional Application
Skill: Conceptual
Recall the Application about the production cost of mobile phones to answer the following
question(s).
16) Recall the Application. The rechargeable battery is the largest cost associated with producing
mobile phones.
Answer: FALSE
Diff: 2
Skill: Definition
17) Recall the Application. The mold used to produce the fake killer whales is an indivisible
input.
Answer: TRUE
Diff: 2
Skill: Conceptual
59
18) Recall the Application. Since a large or small wind turbine have the same installation,
costs less than three times as much as a small turbine, the wind power industry faces decreasing
returns to scale.
Answer: FALSE
Diff: 2
Skill: Conceptual
Recall the Application about the average cost of producing a music video to answer the
19) Recall the Application. Information goods such as a music video have an L-shaped average
cost curve.
Answer: TRUE
Diff: 2
Skill: Conceptual
20) Recall the Application. What is the indivisible input and what are its implications for
economies or diseconomies of scale?
Answer: The mold used to produce each fake killer whale is the indivisible input and it implies
the firm will at least for some increases in output face economies of scale.
Diff: 2
Skill: Conceptual
21) Recall the Application. Why does wind power have economies of scale?
Answer: because a large wind turbine generates four times as much power but costs less than
three times as much as a small wind turbine indicating as production goes up long run unit costs
fall
Diff: 2
Skill: Conceptual
60
Recall the Application about the reduction in costs of generating solar power to answer the
22) Recall the Application. Does the article suggest that the falling prices in solar power
generation come from economies of scale?
Answer: No. The source of the falling cost of solar power generation as described by the article
is technological innovation.
Diff: 2
Skill: Conceptual
AACSB: Multicultural and Diversity
61

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Microeconomics: Principles, Applications, & Tools, 7e (O'Sullivan) – Testbank 1

Chapter 8 Production Technology and Cost

8.1 Economic Cost and Economic Profit

2) Which of the following is a short-run adjustment?

3) Which of the following is a long-run adjustment?

5) In the short run:

6) In the long run:

7) In the long run:

9) ________ are costs that do not require a monetary payment.

10) ________ are costs that require a monetary payment.

11) Which of the following are included in calculating economic costs?

13) Which of the following statements is incorrect?

19) An example of an implicit cost is:

21) Economic profit is total revenue less economic costs.

25) The interest on a business loan is an implicit cost.

27) What is economic profit?

28) What are the explicit and implicit cost?

1) Diminishing marginal returns implies that:

2) Diminishing marginal returns implies that:

3) A firm experiences diminishing marginal returns because:

6) Diminishing marginal returns implies that firms:

15) Marginal product in the short run:

17) In the short run, the firm's total cost equals:

23) Average fixed cost is defined as:

24) Average total cost is defined as:

25) Average total cost equals:

35) Which of the following is true?

Number of Cakes VC MC AVC FC TC ATC

Number of Figs VC MC AVC FC TC ATC

51) When a firm is experiencing diminishing marginal returns:

52) When marginal costs are increasing:

53) Marginal cost is defined as:

72) Average fixed costs in the short run:

76) Average total costs are minimized when:

77) Average variable costs are minimized when:

91) Diminishing marginal returns occur only in the long run.

95) Fixed costs do not vary as output changes.

97) There are no fixed costs in the long run.

104) Diminishing marginal returns imply that marginal cost is falling.

105) Diminishing marginal returns imply that marginal cost is rising.

8.3 Production and Costs in the Long Run

1) The long-run average cost of production is defined as:

2) In the long-run, diminishing returns would:

10) An input is indivisible if:

12) Which of the following is an example of an indivisible input?

13) Increased specialization in large firms might lead to:

17) Under which conditions might economies of scale result?

18) Lower input prices in large firms might lead to:

24) Under which conditions might diseconomies of scale result?

25) Under which conditions might diseconomies of scale result?

27) Coordination problems in large firms might lead to:

28) Higher input prices in large firms might lead to:

44) Can a firm experience diminishing returns in the long run?

8.4 Applications of Production Cost

THE AVERAGE COST OF PRODUCING AIRPLANES

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