Economics 251

Chapter 22 The Costs of Production Review Questions

 

 

(1)                 To the economist, total cost includes:

 

(a)                 explicit and implicit costs, including normal profit.

(b)                 neither implicit nor explicit costs.

(c)                 implicit, but not explicit costs.

(d)                 explicit, but not implicit costs.

 

Use the information in Table 1 for the Creamy Crisp Donut Company in answering Questions (2) and (3).

 

Table 1

Entrepreneur's potential earnings as a salaried worker $50,000

Annual lease on building $22,000

Annual revenue from operations $380,000

Wage and salary payments for employees $120,000

Utilities (electricity, natural gas, water, and sewer) $8,000

Entrepreneur's potential economic profit, the next best entrepreneurial activity $80,000

Entrepreneur's foregone interest on personal funds used to finance the business $6,000

(2) In Table 1, Creamy Crisp's accounting profit is:

 

(a)                 $150,000.

(b)                 $380,000.

(c)                 $230,000.

(d)                 $294,000.

 

(3) In Table 1, Creamy Crisp's economic profit is:

 

(a)                 $150,000.

(b)                 $80,000.

(c)                 $230,000.

(d)                 $94,000.

 

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

 

(a)                 A local bakery hires two additional bakers.

(b)                 Six new firms enter the plastics industry.

(c)                 The number of farms in the United States declines by 5 percent.

(d)                 BMW, the German automaker, constructs a new assembly plant in South Carolina.

 

(5) Which of the following is most likely to be a fixed cost?

 

(a)                 Shipping charges on outgoing sales to customers.

(b)                 Property insurance premiums.

(c)                 Wages for production labor.

(d)                 Expenditures on raw materials.

 

(6) Which of the following is most likely to be a variable cost?

 

(a)                 Fuel and electric power for production purposes.

(b)                 Interest payments on business loans to purchase equipment.

(c)                 Rental payments on office and computer equipment.

(d)                 Real estate taxes.

Consider the information in and complete Table 2 in answering Questions (7), (8), and (9).

Table 2

Marginal Product Average Product

Number of Workers Units of Output of Labor of Labor

0 0 _____ _____

1 40 _____ _____

2 90 _____ _____

3 126 _____ _____

4 150 _____ _____

5 165 _____ _____

6 180 _____ _____

 

(7) In Table 2, diminishing marginal returns become evident with the addition of the:

 

(a)                 sixth worker.

(b)                 fourth worker.

(c)                 third worker.

(d)                 second worker.

 

(8) In Table 2, the marginal product of the sixth worker is:

 

(a)                 180 units of output.

(b)                 30 units of output.

(c)                 15 units of output.

(d)                 negative.

 

(9) In Table 2, average product is at a maximum when:

 

(a) five workers are hired.

(b) four workers are hired.

(c) three workers are hired.

(d) two workers are hired.

 

Consider Figure 1 in answering Question (10).

Figure 1

$/Q

 

Q(x)

 

Quantity (Q)

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(10) In Figure 1, the short-run average total cost curves are provided for four different plant sizes for the firm. In the long run, the firm should produce output Q(x) with a plant size:

(a)                 #4.

(b)                 #3.

(c)                 #2.

(d)                 #1.

Refer to Figure 2 in answering Questions (11) and (12).

Marginal Cost

 
Figure 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(11) In Figure 2, at output level Q, total variable cost is:

 

(a)                 OBEQ

(b)                 BCDE

(c)                 OCDQ

(d)                 OAFQ

 

(12) In Figure 2, at output level Q, total fixed cost is:

 

(a)                 OBEQ

(b)                 BCDE

(c)                 OAFQ

(d)                 OCDQ

 

 

(13) When diseconomies of scale occur:

(a)                 the long-run average total cost curve falls.

(b)                 marginal cost intersects average total cost.

(c)                 the long-run average total cost curve rises.

(d)                 the long-run average total cost curve is horizontal.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consider the information in and complete Table 3 in answering Questions (14), (15), and (16).

Table 3

Total Fixed Variable Average Average Average Margin-

Output Cost Cost Cost Fixed Cost Variable Cost Total Cost al Cost

0 $24 ____ ____ _____ ______ ______ _____

1 33 ____ ____ _____ ______ ______ _____

2 41 ____ ____ _____ ______ ______ _____

3 48 ____ ____ _____ ______ ______ _____

4 54 ____ ____ _____ ______ ______ _____

5 61 ____ ____ _____ ______ ______ _____

6 69 ____ ____ _____ ______ ______ _____

 

(14) In Table 3, the (total) variable cost of producing 5 units is:

 

(a)                 $61

(b)                 $48

(c)                 $37

(d)                 $24

 

(15) In Table 3, the average total cost of producing 3 units of output is:

 

(a)                 $14

(b)                 $12

(c)                 $13.50

(d)                 $16

 

(16) In Table 3, the marginal cost of producing the sixth unit of output is:

 

(a)                 $24

(b)                 $12

(c)                 $16

(d)                 $8