Multiple Choice Questions for Production Costs

  1. Suppose you know that long run marginal costs for any firm in a particular industry are always less than long run average costs. In the long run, in the absence of any regulation, it is most likely that:
    1. Since larger firms would have a cost advantage over smaller firms, we might expect to eventually see an industry made up of a single firm.
    2. Since smaller firms would have a cost advantage over larger firms, we might expect to see an industry made up of many small firms.
    3. Since we cannot predict the cost advantage in such an industry, we might expect to see an industry made up of a few firms of roughly equal size.
    4. Since no particular cost advantages arise from any specific size in such an industry, we might expect to see an industry made up of firms of a wide variety of sizes.
    5. Since there should be a definite cost advantages arising from size, we might expect to see an industry made up of many large firms.
    Answer for the Question Above

    Table 1
    Jamie's Factory
    Number of Workers Total Output
    1 10
    2 22
    3 31
    4 40
    5 47
    6 52
    7 56
    8 58
    9 60
    10 61
  2. Consider Jamie's production data given in Table 1. Suppose Jamie has to pay her workers $20 per hour and suppose her fixed costs work out to be $10 per hour. (This means that her fixed costs are $87,600 per year). What is the marginal product of the 5th worker?
    1. 5
    2. 7
    3. 8 2/3
    4. 9 2/5
    5. 47
    Answer for the Question Above

  3. Using the information above, what is the average fixed cost of the 40th unit of output is:
    1. $0.25
    2. $1.25
    3. $2.50
    4. $4.00
    5. $5.00
    Answer for the Question Above

  4. Using the information above, what is the approximate marginal cost of the 52nd unit of output is:
    1. $0.25
    2. $1.25
    3. $2.50
    4. $4.00
    5. $5.00
    Answer for the Question Above

  5. Again, using the information about Jamie's Factory in Table 1, suppose she still has to pay her workers $20 per hour. Also suppose that her fixed costs increase by $10 per hour. The approximate marginal cost of the 52nd unit of output is:
    1. $0.25
    2. $1.25
    3. $2.50
    4. $4.00
    5. $5.00
    Answer for the Question Above

  6. Suppose workers in a particular firm join a company health program and decide to cut down on smoking and drinking, and start exercising regularly. Further, suppose this significantly increases their productivity. Which of the following will be true:
    1. because marginal product of the workers has fallen, the marginal cost curve, average variable cost curve, average fixed cost curve, and average total cost curves will all shift down (indicating lower cost at any given level of output).
    2. because marginal product of the workers has fallen, the marginal cost curve, average variable cost curve, and average total cost curves will all shift down (indicating lower cost at any given level of output).
    3. because marginal product of the workers has risen, the marginal cost curve, average variable cost curve, and average total cost curves will all shift up (indicating higher cost at any given level of output).
    4. because marginal product of the workers has risen, the marginal cost curve, average variable cost curve, average fixed cost curve, and average total cost curves will all shift down (indicating lower cost at any given level of output).
    5. because marginal product of the workers has risen, the marginal cost curve, average variable cost curve, and average total cost curve will all shift down (indicating lower cost at any given level of output).
    Answer for the Question Above

  7. Increasing Returns to Scale implies that:
    1. the Long Run Average Total Cost curve is upward sloping.
    2. the Marginal Product of labor is increasing.
    3. Long Run Average Total Cost falls as output levels increase.
    4. the Short Run Average Total Cost curves shift to the right as output levels increases.
    5. the principle of the law of diminishing returns is being observed.
    Answer for the Question Above

  8. Monroe Bread Company is a newly opened bakery. In the first month, it made 6000 loaves of bread with an average variable cost of $1 per loaf. In the same time, the average total cost of making one loaf of bread was $1.20. What is the fixed cost of the Monroe Bread Company?
    1. $1,200.
    2. $3,600.
    3. $6,000.
    4. $7,200.
    5. $13,200.
    Answer for the Question Above

  9. Consider a manufacturing firm which uses natural gas to generate its own electricity. In order to increase production the firm needs more electricity. If the price of natural gas rises this would lead to:
    1. a shift up (indicating higher costs at any given level of output) in the marginal cost, average variable cost, and average fixed cost curves.
    2. a shift up (indicating higher costs at any given level of output) in the average fixed cost and average total cost curves.
    3. a shift up (indicating higher costs at any given level of output) in the marginal cost, average total cost, and average fixed cost curves.
    4. a shift up (indicating higher costs at any given level of output) in the marginal cost, average variable cost, and average total cost curves.
    5. a shift up (indicating higher costs at any given level of output) only in the average total cost curve.
    Answer for the Question Above

  10. Decreasing Returns to Scale implies that:
    1. Long Run Average Total Costs are increasing as output increases.
    2. Long Run Average Total Costs are decreasing as output increases.
    3. the Short Run Average Total Cost curves shift to the right as output levels increases.
    4. the principle of the law of diminishing returns is being observed.
    5. as firm size changes, Average Total Cost remains about the same.
  11. When Harry's publishing company prints 800 books per day its total cost is $4000.00. Its total costs increase to $5000.00 when it produces 1300 books per day. The firm's total fixed costs are $1000.00 per day. The marginal cost of producing the 1300th book is:
    1. $1.25
    2. $2.00
    3. $3.75
    4. $4.00
    5. $5.00
    Answer for Question Above

  12. (Remeber the following from the previous question: When Harry's publishing company prints 800 books per day its total cost is $4000.00. Its total costs increase to $5000.00 when it produces 1300 books per day. The firm's total fixed costs are $1000.00 per day.) When the publishing company produces 800 books its average variable costs are:
    1. $1.25
    2. $2.00
    3. $3.75
    4. $4.00
    5. $5.00
    Answer for the Question Above

  13. (The publishing company's total cost of producing 800 books per day is $4000.00. Its total costs increase to $5000.00 when it produces 1300 books per day. The firm's total fixed costs are $1000.00 per day.) When the publishing company produces 800 books its average fixed costs are:
    1. $1.25
    2. $3.75
    3. $4.00
    4. $15.00
    5. $1000.00
    Answer for the Question Above

  14. (The publishing company's total cost of producing 800 books per day is $4000.00. Its total costs increase to $5000.00 when it produces 1300 books per day. The firm's total fixed costs are $1000.00 per day.) Suppose in the short run, the publishing company increases book production to 1500 books, its fixed costs are:
    1. $1.25
    2. $3.75
    3. $4.00
    4. $15.00
    5. $1000.00
    Answer for the Question Above

  15. A basic distinction between the long run and the short run is that
    1. if a firm produces no output in the long run it still incurs a cost, while in the short run a firm incurs a cost only if produces output.
    2. the opportunity costs of production are constant in the long run, while the opportunity costs of production are variable in the long run.
    3. in the long run some inputs are fixed, while in the short run all inputs are variable.
    4. in the short run complete adjustment of all inputs in impossible, while in the long-run all inputs can be adjusted.
    5. the law of diminishing returns is a more likely economic concept in the long run, while economists have not observed diminished returns in the short run
    Answer for the Question Above

  16. Suppose that insurance rates for Billy Bob's Paint Shop double. We would expect to see:
    1. a shift in the marginal cost curve.
    2. a shift in the average total cost curve.
    3. a shift in the average variable cost curve.
    4. a shift in the marginal cost curve and the average total cost curve.
    5. a shift in the marginal cost curve, the average total cost curve and the average variable cost curve.
    Answer for the Question Above

  17. The law of diminishing returns implies that as the number of workers increase:
    1. output rises, but in the long run it increases at a increasing rate after the first few workers.
    2. output falls, but in the short run it increases at a decreasing rate after the first few workers.
    3. output rises, but in the long run it increases at a decreasing rate after the first few workers.
    4. output falls, but in the short run it increases at a increasing rate after the first few workers.
    5. output rises, but in the short run it increases at a decreasing rate after the first few workers.
    Answer for the Question Above

  18. Let's suppose we have a company producing sandals with a labor force of 1000. Now, let's further suppose that the labor force increases. In the short run, we predict marginal product will:
    1. rise at a decreasing rate; as labor increases, people are having to share the same factory space and machinery used to produce the output.
    2. fall at a decreasing rate; as variable input increases, output per worker diminishes at a decreasing rate.
    3. rise at a increasing rate; since people could specialize as labor increases, they would continuously produce more output and at a faster rate.
    4. remain at a constant rate; since no one can predict how competent the new labor will be, we cannot predict whether or not we'll have increasing or decreasing returns. Therefore, overall, we'd predict constant returns.
    5. fall at a increasing rate; as labor increases, output decreases but at an increasing rate, because the more people in the factory, the more people can specialize.
    Answer for the Question Above

    Workers (L) Q MP AP
    0 0 0 0.0
    1 3 3 3.0
    2 9 6 4.5
    3 16 7 5.3
    4 23 7 5.8
    5 29 6 5.8
    6 34 5 5.7
    7 38 4 5.4
    8 41 3 5.1
    9 43 2 4.8
    10 44 1 4.4

  19. Alex owns a small restaurant. He has a two-year lease which costs $10,000 per month. Food, labor, gas, water, and electricity cost $11,000 per month when he operates the restaurant. He is finally making a profit and had promised his workers all a large wage increase once the restaurant starting making a profit; they've been working without raises for close to two years. With this wage increase ($4000 per month) we would expect:
    1. Alex would go out of business because his revenues will be too low.
    2. Alex would stay in business in the short run because he is able to lower his losses per month by doing so.
    3. Because we don't care about sunk costs, we may conclude that Alex is making $4000 per month in economic profits.
    4. Alex's marginal cost curve to shift back (indicating higher cost at any given level of output
    5. He should go out of business unless he can lower his lease costs by $6000 per month.
    Answer for Question Above

  20. If all inputs in a productive process are increased in amount by 100 percent, and the result is an increase in output of 120 percent, this would


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