Costs of Production
What is the formula for Total Cost?
TC= FC + VC
Draw a AFC cost curve on the board.
Always falling cost.
What is a characteristic of the inputs in the short run?
Some inputs are fixed. The costs of these inputs are variable.
What is a characteristic of the inputs in the long run?
All inputs are variable. In the long run, ATC at any Q is cost per unit.
What is the equation for Accounting Profit?
Accounting Profit= Total Revenue - Explicit Costs
31. Average total cost and marginal cost express information that is already contained in a firm's total cost.
a. True
b. False
True
What could you describe the rate of the production function's curve as?
It is increasing at a decreasing rate.
35. Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect
a. new firms to enter the market.
b. the market price to rise.
c. its profits to rise.
d. Both b and c are correct.
a. new firms to enter the market
30. There is general agreement among economists that the long-run time period exceeds one year.
a. True
b. False
b. False
18. Total cost can be divided into two types of costs:
a. fixed costs and variable costs.
b. fixed costs and marginal costs.
c. variable costs and marginal costs.
d. average costs and marginal costs.
a. fixed costs and variable costs.
35. Which of the following is the best example of a variable cost?
a. monthly wage payments for hired labor
b. annual property tax payments for a building
c. monthly rent payments for a warehouse
d. annual insurance payments for a warehouse
a. monthly wage payments for hired labor
38. The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is
a. an explicit cost.
b. an accounting cost
c. an implicit cost.
d. forgone accounting profit.
C. An implicit cost
28. A firm will shut down in the short run if revenue is not sufficient to cover its variable costs of production.
a. True
b. False
True
10. When a firm is experiencing economies of scale, long-run
a. average total cost is minimized.
b. average total cost is greater than long-run marginal cost.
c. average total cost is less than long-run marginal cost.
d. marginal cost is minimized.
b. average total cost is greater than long-run marginal cost.
24. Diseconomies of scale occur when a firm’s
a. marginal costs are constant as output increases.
b. long-run average total costs are decreasing as output increases.
c. long-run average total costs are increasing as output increases.
d. marginal costs are equal to average total costs for all levels of output.
c. long-run average total costs are increasing as output increases.
48. Marginal cost tells us the
a. value of all resources used in a production process.
b. marginal increment to profitability when price is constant.
c. amount by which total cost rises when output is increased by one unit.
d. amount by which output rises when labor is increased by one unit
c. amount by which total cost rises when output is increased by one unit.
50. At what level of output will average variable cost equal average total cost?
a. when marginal cost equals average total cost
b. for all levels of output in which average variable cost is falling c. when marginal cost equals average variable cost
d. There is no level of output where this occurs, as long as fixed costs are positive.
d. There is no level of output where this occurs, as long as fixed costs are positive.
39. Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost?
a. The firm will continue to produce to attempt to pay fixed costs.
b. The firm will immediately stop production to minimize its losses.
c. The firm will stop production as soon as it is able to pay its sunk costs.
d. The firm will continue to produce in the short run but will likely exit the market in the long run.
b. The firm will immediately stop production to minimize its losses.
43. When firms in a perfectly competitive market face the same costs, in the long run they must be operating
a. under diseconomies of scale.
b. with small, but positive, levels of profit.
c. at their efficient scale.
d. where price is equal to average fixed cost.
c. at their efficient scale
42. Diseconomies of scale occur when
a. average fixed costs are falling.
b. average fixed costs are constant.
c. long-run average total costs rise as output increases.
d. long-run average total costs fall as output increases.
c. long-run average total costs rise as output increases.
Draw the cost curves on the board.
SI leader will show example on the board.
Suppose a certain competitive firm is producing Q=500 units of output. The marginal cost of the 500th unit is $17, and the average total cost of producing 500 units is $12. The firm sells its output for $20.
13. If the marginal cost of producing the 501st unit would be $19, producing and selling the 501st unit would
a. decrease the firm’s profit by $19.
b. decrease the firm’s profit by $2.
c. increase the firm’s profit by $1.
d. increase the firm’s profit by $3.
c. increase the firm’s profit by $1.
27. A competitive firm currently produces and sells 800 units of output at a price of $10 per unit. The firm’s fixed cost is $4,000 and its variable cost is $8,300. In the short run, should the firm continue to operate?
No, the firm should shut down, since the price of $10 falls short of average variable cost, which is $10.375.
29. In a perfectly competitive market, the process of entry and exit will end when firms face
a. marginal revenue equal to long-run average total cost.
b. total revenue equal to average total cost.
c. average revenue greater than marginal cost.
d. accounting profits equal to zero.
a.marginal revenue equal to long-run average total cost.
50. Which of the following statements is not correct about competitive firms?
a. In a long-run equilibrium, firms must be operating at their efficient scale.
b. In the short run, the number of firms in an industry may be fixed.
c. In the long run, the number of firms can adjust to changing market conditions.
d. In the short run, firms must be operating at a level of output where price equals average variable cost
d. In the short run, firms must be operating at a level of output where price equals average variable cost.