McGraw-Hill Ryerson

Chapter 9. The Organization and Costs of Production


1. Suppose that a firm produces 100,000 units a year and sells them all for $5 each. The explicit costs of production are $350,000 and the implicit costs of production are $100,000. The firm has an accounting profit of
A. $200,000 and economic profit of $25,000
B. $150,000 and economic profit of $50,000
C. $125,000 and economic profit of $75,000
D. $100,000 and economic profit of $50,000



2. Economic profit for a firm is defined as the total revenues of the firm minus its
A. accounting profit
B. explicit costs of production
C. implicit costs of production
D. opportunity cost of all inputs



3. Which would best describe the short run for a firm as defined by economists?
A. The plant capacity for a firm is variable.
B. The plant capacity for a firm is fixed.
C. There are diseconomies of scale.
D. There are economies of scale.



4. The change in total product divided by the change in resource input defines
A. total cost
B. average cost
C. average product
D. marginal product



5. The law of diminishing returns is most useful for explaining the
A. shape of the short-run marginal cost curve
B. shape of the long-run average cost curve
C. decline in average fixed costs as output increases
D. decline in total fixed costs as output increases



6.
Assume that the only variable resource used to produce output is
labour.
R-1 22a

The marginal product of the fourth unit of labour is

A. 2 units of output
B. 3 units of output
C. 4 units of output
D. 15 units of output



7.
Assume that the only variable resource used to produce output is
labour.
R-1 22a

When the firm hires four units of labour the average product of labour is

A. 3 units of output
B. 3.75 units of output
C. 4.25 units of output
D. 15 units of output



8. Because the marginal product of a variable resource initially increases and later decreases as a firm increases its output,
A. average variable cost decreases at first and then increases
B. average fixed cost declines as the output of the firm expands
C. variable cost at first increases by increasing amounts and then increases by decreasing amounts
D. marginal cost at first increases and then decreases



9. Because the marginal product of a resource at first increases and then decreases as the output of the firm increases,
A. average fixed cost declines as the output of the firm increases
B. average variable cost at first increases and then decreases
C. variable cost at first increases by increasing amounts and then increases by decreasing amounts
D. total cost at first increases by decreasing amounts and then increases by increasing amounts



10.
The fixed cost of the firm is $500, and the
firm's total variable cost is indicated in the table.

R-2 22b

The average variable cost of the firm when 4 units of output are produced is

A. $175
B. $200
C. $300
D. $700



11.
The fixed cost of the firm is $500, and the
firm's total variable cost is indicated in the table.

R-2 22b

The average total cost of the firm when 4 units of output are being produced is

A. $175
B. $200
C. $300
D. $700



12.
The fixed cost of the firm is $500, and the
firm's total variable cost is indicated in the table.

R-2 22b

The marginal cost of the sixth unit of output is

A. $200
B. $300
C. $700
D. $800



13. Marginal cost and average variable cost are equal at the output at which
A. marginal cost is a minimum
B. marginal product is a maximum
C. average product is a maximum
D. average variable cost is a maximum



14. Average variable cost may be either increasing or decreasing when
A. marginal cost is decreasing
B. marginal product is increasing
C. average fixed cost is decreasing
D. average total cost is increasing



15. Why does the short-run marginal-cost curve eventually increase for the typical firm?
A. diseconomies of scale
B. minimum efficient scale
C. the law of diminishing returns
D. economic profit eventually decreases



16. If the price of labour or some other variable resource increased, the
A. AVC curve would shift downward
B. AFC curve would shift upward
C. AFC curve would shift downward
D. MC curve would shift upward



17.
R-3 22c

In the figure, curves 1, 3, and 4, respectively, represent

A. average variable cost, marginal cost, and average total cost
B. average total cost, average variable cost, and marginal cost
C. average fixed cost, average total cost, and marginal cost
D. marginal cost, average total cost, and average variable cost



18.
R-3 22c

At output level Q, the average fixed cost is measured by vertical distance represented by

A. DE
B. DF
C. DQ
D. EF



19.
R-3 22c

As output increases beyond the level represented by Q,

A. marginal product is rising
B. marginal product is falling
C. total fixed costs are rising
D. total costs are falling



20.
R-3 22c

If the firm is producing at output level Q, then the total variable costs of production are represented by area

A. 0 QFC
B. 0 QEB
C. 0 QDC
D. CFEB



21. At an output of 10,000 units per year, a firm's total variable costs are $50,000 and its average fixed costs are $2. The total costs per year for the firm are
A. $50,000
B. $60,000
C. $70,000
D. $80,000



22. A firm has total fixed costs of $4,000 a year. The average variable cost is $3.00 for 2000 units of output. At this level of output, its average total costs are
A. $2.50
B. $3.00
C. $4.50
D. $5.00



23. If you know that total fixed cost is $100, total variable cost is $300, and total product is 4 units, then
A. marginal cost is $50
B. average fixed cost is $45
C. average total cost is $125
D. average variable cost is $75



24. If the short-run average variable costs of production for a firm are falling, then this indicates that
A. average variable costs are above average fixed costs
B. marginal costs are below average variable costs
C. average fixed costs are constant
D. total costs are falling



25. Which of the following is most likely to be a long-run adjustment for a firm which manufactures jet fighter planes on an assembly line basis?
A. an increase in the amount of steel the firm buys
B. a reduction in the number of shifts of workers from three to two
C. a changeover from the production of one type of jet fighter to the production of a later-model jet fighter
D. a changeover from the production of jet fighters to the production of sports cars.



26.
Three short-run cost schedules are given for three plants of
different sizes which a firm might build in the long run.

R-4 22d

What is the long-run average cost of producing 40 units of output?

A. $7
B. $8
C. $9
D. $10



27.
Three short-run cost schedules are given for three plants of
different sizes which a firm might build in the long run.

R-4 22d

At what output is long-run average cost a minimum?

A. 20
B. 30
C. 40
D. 50



28. Which of the following is not a factor which results in economies of scale?
A. more efficient utilization of the firm's plant
B. increased specialization in the use of labour
C. greater specialization in the management of the firm
D. utilization of more efficient equipment



29. The long-run average costs of producing a particular product are one of the factors that determine
A. the competition among the firms producing the product
B. the number of firms in the industry producing the product
C. the size of each of the firms in the industry producing the product
D. all of the above



30. A firm is encountering constant returns to scale when it increases all of its inputs by 20% and its output increases by
A. 10%
B. 15%
C. 20%
D. 25%




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