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.

(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.

(d) $294,000.

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

(a) $150,000.

(b) $80,000.

(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.

(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.

(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.

(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.

(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.

(d) negative.

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

(a) five workers are hired.

(b) four 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.

(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

(d) OAFQ

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

(a) OBEQ

(b) BCDE

(d) OCDQ

(13) When diseconomies of scale occur:

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

(b) marginal cost intersects average total cost.

(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

(d) $24

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

(a) $14

(b) $12

(d) $16

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

(a) $24

(b) $12

(d) $8