Ch5 Economics

ch5Student: ___________________________________________________________________________

1. The factors of production include: A. Money.B. Profit.C. Land, labor, capital, and entrepreneurship.D. Output in a production function.

2. Which of the following is a factor of production for Cathy's Cookies?

A. ProductivityB. FlourC. MoneyD. Cookies

3. Which of the following are factors of production for Terry's Taco Patio?

A. Economic costs and moneyB. Average total cost and entrepreneurshipC. Productivity and laborD. Corn tortillas and meat

4. Land, labor, capital and entrepreneurship are called:

A. Factors of production.B. Factors of demand.C. Fixed costs.D. Variable costs.

5. Which of the following are factors of production for a typical college?

A. Sporting event ticketsB. TuitionC. Parking feesD. The library

6. The maximum output that can be produced from a set of inputs is measured by:

A. The production function.B. The demand schedule.C. Fixed costs.D. Marginal costs.

7. Which of the following statements concerning the relationship between total product (TP) and marginal

physical product (MPP) is not correct? A. TP will continue to rise even though MPP is falling but greater than zero.B. TP is increasing at an increasing rate if MPP is increasing.C. TP will fall if MPP is negative.D. TP will fall if MPP is falling.

8. The limits to the production of any good are reflected in the:

A. Law of demand.B. Capacity curve.C. Demand curve.D. Production function.

9. When a firm produces a level of output on the production function: A. Marginal physical product is zero.B. Maximum efficiency is achieved.C. Opportunity cost for resources is at a maximum.D. Profits are maximized.

10. If the first, second, third and forth worker employed by the firm add 15, 21, 12 and 8 units of total

product respectively, we can conclude that: A. The marginal product of all four workers is 14.B. The total product of two workers is 42.C. after the second worker marginal product declines.D. adding a forth worker will cause total product to decline.

11. The law of diminishing returns means that:

A. The total product production function will eventually increase at a decreasing rate.B. The marginal product will increase at an increasing rate.C. Average total costs are rising and then falling as output is increased.D. Average fixed cost will fall as production increases.

12. The change in total output that results from one additional unit of input is the:

A. Marginal physical product.B. Average product of the input.C. Unit cost of the input.D. Input price.

13. Marginal physical product is:

A. Equal to the average output of a worker.B. The additional utility a consumer gets from the last unit of a product.C. The additional output from using one more unit of labor.D. Equal to the total product of labor.

14. The law of diminishing returns can explain why:

A. Marginal cost eventually increases in the short run as more output is produced.B. The demand curve is typically downward sloping.C. The average fixed-cost curve declines as long as output increases.D. Marginal cost decreases as more output is produced.

15. Ceteris paribus, the law of diminishing returns states that beyond some point the:

A. Return on stocks and bonds diminish as more are purchased.B. Addition to total utility declines as more units are consumed.C. Marginal physical product of a variable input declines as more of it is used.D. Output of any good or service increases as more variable input is used.

16. If more of an input factor is used, while holding other inputs constant, a firm will eventually

experience: A. Diminishing returns.B. Falling marginal cost.C. Rising marginal physical product.D. Rising consumer demand.

17. As more labor is hired in the short run, diminishing returns are observed because:

A. The new workers are lazy.B. The new workers have less capital and land to work with.C. All the workers begin to socialize more and work less.D. The new workers are less skilled.

18. The law of diminishing returns indicates that the marginal physical product of a factor declines as more: A. Output is produced with the most efficient combination of factors.B. Of the factor is used, holding output constant.C. Of the factor is used, holding other inputs constant.D. Of the good is consumed.

19. Assume a toy company hires an additional worker to assemble toys, and the size of the factory and

amount of equipment remain constant. As a result, the level of output increases but by a smaller amount than when the previous additional worker was hired. This is an example of: A. The law of poor planning.B. The law of diminishing returns.C. Say's Law.D. The law of substitution.

20. Assume a restaurant hires an additional chef who is as qualified as the current chefs. As a result, the level

of output increases but by a smaller amount than when the previous additional chef was hired. Which of the following best explains this occurrence? A. The chefs are working with a fixed amount of space and equipment and they get in each other's way.B. The additional wages cause profit to decrease.C. The amount of food available for preparation is limited so output decreases.D. The two chefs do not agree on food preparation and spend too much time arguing.

21. Which of the following is the best explanation of why the law of diminishing returns does not apply in the

long run? A. All factors of production are variable in the long run.B. The MPP does not change in the long run.C. In the long run, firms have enough time to find more qualified workers.D. All factors of production are fixed in the long run.

22. Total revenue minus total cost equals:

A. Profit.B. Variable costs.C. Economic costs.D. Marginal revenue.

23. Profit is the difference between:

A. Total cost and variable cost.B. Total revenue and total cost.C. Marginal cost and fixed cost.D. Average total cost and economic cost.

24. A firm can be identified as profitable if the:

A. Sum of total revenue and total costs is high.B. Difference between its total revenue and total costs is negative.C. Difference between its total revenue and total costs is positive.D. Total costs and marginal costs are low.

25. The most desirable rate of output is the one that:

A. Minimizes total costs.B. Maximizes total profit.C. Minimizes marginal costs.D. Maximizes total revenue.

26. The market value of all resources used in producing a good or service is expressed by:

A. Implicit costs.B. Total costs.C. Fixed costs.D. Variable costs.

27. Which of the following is equivalent to total cost? A. Fixed costs plus variable costs.B. Variable costs plus marginal costs.C. Economic costs plus accounting costs.D. Marginal costs plus implicit costs.

28. The sum of fixed cost and variable cost at any rate of output is equal to:

A. Average total cost.B. Total profit.C. Total cost.D. Marginal cost.

29. Which of the following will always increase as output increases?

A. Total costB. Average total costC. Marginal costD. Fixed costs

30. Costs of production that do not change with the rate of output are:

A. Nonexistent.B. Variable costs.C. Fixed costs.D. Marginal costs.

31. Which of the following is most likely a fixed cost?

A. Raw materialsB. Labor costC. Shipping costsD. Property taxes

32. Total cost is equal to _____ costs at an output level of zero.

A. VariableB. FixedC. EconomicD. Marginal

33. It is impossible to:

A. Determine total costs in the short run.B. Identify variable costs in the long run.C. Identify variable costs in the short run.D. Avoid fixed costs in the short run.

34. Costs of production that change with the rate of output are:

A. Sunk costs.B. Fixed costs.C. Opportunity costs.D. Variable costs.

35. When producing jeans, which of the following is not a variable cost in the short run?

A. WagesB. ZippersC. Rent for the factoryD. Denim material

36. Which of the following is most likely a variable cost in the short run?

A. LaborB. Property taxesC. RentD. A business license

37. If a firm increases output, total costs will rise because of a change in: A. Fixed costs.B. Absolute costs.C. Variable costs.D. Regular costs.

38. Average total cost is defined as:

A. Total cost divided by the quantity produced.B. The change in total cost because of a one-unit increase in output.C. The change in total output divided by the change in total cost.D. Total output times total cost.

39. Which of the following is equivalent to average total cost?

A. Fixed cost plus variable cost.B. Fixed cost and variable cost added together and then divided by output.C. The change in total cost divided by the change in output.D. Marginal cost plus variable cost.

40. The average total cost curve is:

A. Always upward sloping.B. U-shaped.C. Flat.D. Always downward sloping.

41. The reason the average total cost curve declines initially is because of:

A. Falling average fixed cost.B. Falling average variable costs.C. Falling marginal cost.D. Both A and B.

42. Marginal cost is equal to:

A. Total cost divided by output.B. The change in total cost divided by the change in output.C. The change in total cost divided by the change in price.D. Total cost divided by total revenue.

43. Marginal cost will increase with greater output if:

A. Marginal physical product is declining.B. Marginal physical product is increasing.C. Total variable cost is decreasing.D. Total fixed cost is increasing.

44. If an additional unit of labor costs $30 and has an MPP of 50 units of output, the marginal cost is:

A. $0.60.B. $1.66.C. $15.00.D. $1500.00.


A. $2,000.00.B. $40.00.C. $1.25.D. $0.80.


A. $0.63.B. $1.60.C. $25.00.D. $1,000.00.

47. Marginal cost: A. Is the change in fixed cost divided by the change in quantity.B. May initially decline and then increases as more output is produced.C. May initially increase and then falls as more output is produced.D. Is fixed cost and variable cost added together and then divided by quantity.

48. Rising marginal costs result from:

A. Rising marginal physical product.B. Falling prices of variable inputs.C. Falling marginal physical product.D. Rising prices of fixed inputs.

49. Rising marginal costs are the result of:

A. Increasing returns to scale.B. Rising marginal physical product.C. The law of variable returns.D. The law of diminishing returns.

50. The selection of the short-run rate of output is the:

A. Production decision.B. Investment decision.C. Marginal decision.D. Industrial decision.

51. The short-run supply decision focuses on:

A. Marginal output versus price.B. Marginal cost versus price.C. Average total cost versus marginal revenue.D. Variable costs versus fixed costs.

52. In the short run, a manufacturer should produce the next unit of output as long as:

A. Marginal cost is greater than price.B. Price is greater than total cost.C. Price is greater than marginal cost.D. Price equals total cost.

53. If price is greater than marginal cost for the last unit produced:

A. Profit is increasing.B. Profit is decreasing.C. Only economic costs are being covered.D. Average total cost is covered.

54. If price is greater than marginal cost but not average total cost, then:

A. Total revenues are greater than total costs.B. The firm is earning a profit.C. Eventually the firm will go out of business.D. The firm is experiencing diminishing marginal utility.

55. In the long run, a company will stay in business as long as price is:

A. Greater than or equal to marginal costs.B. Equal to variable costs.C. Equal to marginal physical product.D. Greater than or equal to average total costs.

56. When a firm makes an investment decision, it views all inputs as:

A. Variable over the long run.B. Variable over the short run.C. Fixed over the long run.D. Fixed over the short run.

57. The decision to build, buy, or lease a plant is known as the: A. Output decision.B. Profit-maximizing decision.C. Production decision.D. Investment decision.

58. Which of the following must be considered in long run planning?

A. Production choices.B. Fixed costs.C. Investment choices.D. Declining marginal physical product.

59. Which of the following is not a long-run investment decision?

A. Whether to buy or lease equipment.B. The size of the factory.C. Whether or not to enter into the industry.D. How intensively to use the existing plant.

60. The main difference to an economist between "short-run" and "long-run" is that:

A.

Variable costs are short-run investment decisions where as fixed costs are long-run production decisions.

B. In the short-run all resources are fixed where as in the long-run all resources are variable.C. In the long-run all resources are variable where as in the short-run at least one resource is fixed.D. Fixed costs are more important then variable costs in the short-run.

61. The planning period over which at least one resource input is fixed in quantity is the:

A. Long run.B. Production run.C. Short run.D. Investment decision.

62. Which of the following is true about the short run?

A. Some inputs are fixed.B. It is less than one year.C. It is one to two years.D. All inputs are variable.

63. During the short run:

A. All inputs can be changed.B. Some inputs are fixed.C. Factory size can be changed.D. The number of workers cannot be changed.

64. The long run refers to:

A. A time period longer than one year.B. A time period less than one year.C. A period of time long enough for all inputs to be varied.D. The time period required for a firm to cycle its inventory.

65. During the long run:

A. Output is limited by the law of diminishing returns.B. The firm can build or lease any size factory.C. Some inputs are fixed and some are variable.D. There are no economic costs.

66. Explicit costs: A. Include only payments to labor.B. Are the sum of actual monetary payments made for resources used to produce a good.C. Include the market value of all resources used to produce a good.D.

Are the total value of resources used to produce a good but for which no monetary payment is actually made.

67. Economic cost is:

A. Equal to explicit costs minus implicit costs.B. The same as dollar costs.C. Equal to the accounting cost minus implicit costs.D. The value of all resources used to produce a good or service.

68. In defining costs, economists recognize:

A. Explicit and implicit costs while accountants recognize only implicit costs.B. Explicit and implicit costs while accountants recognize only explicit costs.C. Only explicit costs while accountants recognize only implicit costs.D. Only explicit costs while accountants recognize explicit and implicit costs.

69. Economic and accounting costs will differ:

A. Whenever there is more than one factor of production.B. Whenever the firm fails to maximize its profits.C. Whenever any factor of production is not paid an explicit factor payment equal to its market value.D. In every case.

70. Economic costs are greater than accounting costs:

A. Only if implicit costs are greater than zero.B. Only if explicit costs are greater than implicit costs.C. Only in the long run.D. In the short run but not the long run.

71. The best measure of the economic cost of doing your homework is:

A. The tuition you pay for the class.B. The amount you would have to pay to get someone else to do it.C. Your instructor's salary.D. The best opportunity you give up when you do your homework.

72. Which of the following definitions is correct?

A. Economic costs + accounting costs = Profit.B. Economic profit = accounting profit - implicit costs.C. Economic profit - implicit costs = accounting profits.D. Economic costs + explicit costs + implicit costs.

73. Economic profit is equal to total revenue minus:

A. Explicit costs.B. Implicit costs.C. Both implicit costs and explicit costs.D. Marginal costs.

74. Suppose a firm incurred explicit costs of $900 and implicit costs of $200 during a day. If that day the firm

sold 8 units at $300 per unit its accounting profits are: A. $1,500 and its economic profits are $1,700B. $1,500 and its economic profits are $1,300C. $1,300 and its economic profits are $1,700D. $1,300 and its economic profits are $1,300

Suppose a firm has the following expenditures per day: $240 for wages, $150 for materials, and $80 for equipment rental. The owner of the firm owns the building in which it operates. If the firm were not operating in the building, he could rent the building for $70 per day. Total daily revenue is $600.

75. What are the daily accounting costs for the firm described above? A. $320B. $390C. $470D. $540

76. What are the daily explicit costs for the firm described above?

A. $320B. $390C. $400D. $470

77. What are the daily implicit costs for the firm described above?

A. $70B. $80C. $150D. $220

78. Based on the law of diminishing returns, if the number of workers increases and capital investments do

not keep pace then, ceteris paribus: A. Marginal physical product of labor will increase.B. Marginal physical product of labor will decrease.C. The production function will definitely shift upward.D. The average total cost curve will definitely decrease.

79. A firm's rising factor costs can be offset by:

A. Increases in productivity.B. Diminishing marginal product.C. Diminishing marginal utility.D. Rising marginal cost.

80. Which of the following government policies is least likely to increase productivity?

A. Subsidies for schoolsB. Student loansC. Tax incentives for firms that invest in capitalD. Transfer payments to unemployed workers

81. If government policies to increase productivity are successful, then the:

A. Production function will shift upward.B. Marginal cost curve will shift upward.C. Average total cost curve will shift upward.D. Variable cost curve will shift upward.

82. Advances in managerial knowledge shift the production function:

A. And the marginal cost curve upward.B. And the average total cost curve downward.C. Upward and the average total cost curve downward.D. Downward and the marginal cost curve upward.

83. Improvements in technology shift the:

A. Production function downward.B. Marginal cost curve downward.C. Average total cost curve upward.D. Fixed cost curve upward.

84. Which of the following would cause a firm's production function to shift upward? A. An increase in production by the firm.B. Hiring more workers.C. Increased investment in capital.D. An increase in factor costs.

85. An investment in human and nonhuman capital will result in:

A. An increase in the marginal physical product of labor.B. An increase in marginal costs.C. A decrease in the production function.D. A decrease in production possibilities.

Table 5.1—Labor and output data

86. What is the marginal physical product of the first unit of labor in Table 5.1?

A. 0B. 14C. 16D. 30

87. What is the marginal physical product of the second unit of labor in Table 5.1?

A. 12B. 14C. 16D. 30

88. What is the marginal physical product of the fourth unit of labor in Table 5.1?

A. 51B. 42C. 12D. 9

89. With which unit of labor do diminishing marginal returns first appear in Table 5.1?

A. FirstB. SecondC. ThirdD. Fourth

Table 5.2—Jeans Production

90. What is the marginal cost of the 15th pair of jeans in Table 5.2? A. $8.17B. $20.00C. $1.33D. $4.00

91. What is the marginal cost of the 30th pair of jeans in Table 5.2?

A. $4.50B. $45.00C. $6.00D. $1.50

92. What is the marginal cost of the 40th pair of jeans in Table 5.2?

A. $7.25B. $11.00C. $110.00D. $2.75

93. If the firm in Table 5.2 receives $7.00 for each pair of jeans, in the short run it should:

A. Produce 30 pairs of jeans.B. Produce 40 pairs of jeans.C. Produce 20 pairs of jeans.D. Only produce jeans if the price is greater than average total cost.

94. If the firm in Table 5.2 can sell jeans for $7.00 per pair, the total profit from producing 30 pair is:

A. $13.B. $3.C. $30.D. $210.

95. If the firm in Table 5.2 can sell jeans for $7.00 per pair, the total profit from producing 40 pair is:

A. $-10.B. $10.C. $290.D. $280.

Table 5.3—Yearbook costs(This table shows the total cost of producing yearbooks using a school's print shop.)

96. The production rate in Table 5.3 at which the lowest possible average total cost for yearbooks is achieved

would be: A. 200 yearbooks per year.B. 300 yearbooks per year.C. 400 yearbooks per year.D. 500 yearbooks per year.

97. In Table 5.3, marginal cost per yearbook, between 100 and 200 yearbooks is equal to:

A. $400.B. $4.C. $16.D. $12.

98. The marginal cost is at a minimum in Table 5.3 when: A. The first 100 units are produced.B. Output increases from 300 units to 400 units.C. Output increases from 100 units to 200 units.D. Output increases from 200 units to 300 units.

Table 5.4—Plant costs

This table shows total costs at different output levels for a given plant.

99. In Table 5.4, fixed costs:

A. Are equal to $40.B. Are equal to zero.C. Increase as output increases.D. Decrease as output increases.

100.In Table 5.4, variable cost,

A. Is equal to $25 at an output of 10 units.B. Is the greatest at an output of zero units.C. Decreases as output increases.D. Is equal to $40 at every output level.

101.In Table 5.4, the marginal cost is at a minimum when:

A. The first 10 units are produced.B. Output increases from 10 units to 20 units.C. Output increases from 20 units to 30 units.D. Output increases from 30 units to 40 units.

102.In Table 5.4, the lowest average total cost occurs at a production rate of:

A. 10 units per day.B. 20 units per day.C. 30 units per day.D. 40 units per day.

Table 5.5—Production costs

103.In Table 5.5, the marginal cost of the first unit of output is:

A. $19.B. $10.C. $9.D. $3.

104.In Table 5.5, the total cost of 2 units is:

A. $3.B. $10.C. $12.D. $22.

105.In Table 5.5, the total cost of 3 units is: A. $25.B. $15.C. $10.D. $3.

106.In Table 5.5, the total variable cost of the first unit is:

A. $9.B. $10.C. $19.D. $29.

Table 5.6Complete the following table, and use the information in the table to answer the question(s) below.

107.In Table 5.6, total fixed costs are equal to:

A. $0 because the problem involves the long run.B. $4.C. $15.D. $23.

108.In Table 5.6, the marginal cost of the third unit of output is:

A. $3.B. $5.C. $6.D. $15.

109.In Table 5.6, the total cost of 2 units of output is:

A. $4.B. $6.C. $12.D. $27.

110.In Table 5.6, the total cost of 3 units of output is:

A. $5.B. $10.C. $15.D. $30.

111.In Table 5.6, the total variable cost of 2 units of output is:

A. $8.B. $12.C. $15.D. $27.

112.In Table 5.6, the total variable cost of 1 unit of output is:

A. $8.B. $12.C. $15.D. $23.

113.In Table 5.6, the average variable cost of 3 units of output is: A. $3.B. $5.C. $15.D. $30.

Figure 5.1

114.In Figure 5.1, the marginal physical product of the third unit of labor is:

A. 8.B. 12.C. 28.D. 40.

115.In Figure 5.1, the marginal physical product of the fourth unit of labor is:

A. 6.B. 12.C. 40.D. 46.

116.In Figure 5.1, diminishing marginal returns first occur with the:

A. Second worker.B. Third worker.C. Fifth worker.D. Sixth worker.

Figure 5.2

117.In Figure 5.2, what is the marginal cost of the 12th unit of output?

A. $6.00B. $20.00C. $52.00D. $72.00

118.In Figure 5.2, what is the total fixed cost?

A. $20.00B. $240.00C. $740.00D. $864.00

119.In Figure 5.2, what is the total cost of 10 units?

A. $240.00B. $288.00C. $500.00D. $740.00

120.In Figure 5.2, what is the total variable cost when output is 10 units?

A. $500.00B. $520.00C. $720.00D. $740.00

121.In Figure 5.2, what is the total variable cost when output is 12 units?

A. $500.00B. $624.00C. $720.00D. $864.00

122.The production function indicates how much output producers will actually produce.

True False 123.A production function shows the maximum amount of a particular good or service that can be produced

with different combinations of resources. True False

124.Actual output will always equal the limit described by the production function.

True False 125.Marginal physical product is the change in total output associated with an additional unit of input.

True False

126.Total output may continue to rise even though marginal physical product is decreasing. True False

127.If the marginal physical product of an input is decreasing, output will also be decreasing.

True False 128.According to the law of diminishing returns, the marginal physical product of a variable input declines as

more of it is employed with a given quantity of other inputs. True False

129.The short run implies that all factor inputs are fixed.

True False 130.In the long run, all costs are variable.

True False 131.Profit is equal to total revenue minus total cost.

True False 132.Fixed costs are the same as total costs at a production rate of zero units in the short run.

True False 133.Fixed costs can be avoided in the short run.

True False 134.In the short run, when output is zero, total costs are zero.

True False 135.Marginal cost is equal to the change in variable costs divided by the change in output.

True False 136.In the short run, if marginal cost is less than price for the last unit produced, the firm should expand

output. True False

137.How intensively to use existing plant and equipment is a long-run investment decision.

True False 138.Long-run choices imply that all factors are variable.

True False 139.Investment decisions are long-run decisions.

True False 140.Economic costs are the value of all resources used to produce a good or service.

True False 141.Economic and accounting costs differ by the amount of explicit costs.

True False 142.Economic costs include only the explicit payments made for a factor of production.

True False 143.When implicit costs exist, economic profit will be less than accounting profit.

True False 144.School subsidies and capital investment tax incentives are examples of government policy designed to

increase productivity. True False

145.A firm's production function will shift downward if worker productivity increases.

True False

146.When the marginal physical product curve shifts upward because of technological advances, the marginal cost curve shifts downward. True False

147.Why in the short-run does marginal physical product increase but beyond some point start to decrease and

eventually become negative?

148.Explain how the firm's total cost curve would change if the wage rate paid to the labors increases verses

the effect when the firm's property taxes are doubled? What would happen to the firm's profits assuming the revenue does not change? What might the firm do in the long-run verses the short-run?

149.What is the relationship between increasing returns to scale and decreasing long run average total costs?

150.What happens along the average total cost curve as:

Marginal product is increasing?Marginal cost is decreasing?Average variable costs are decreasing?Total product increases at a decreasing rate?

151.Distinguish between explicit and implicit costs and give an example of each. Why would accounting

profit be greater than or equal to economic profit?

ch5 Key 1. The factors of production include:

A. Money.B. Profit.C. Land, labor, capital, and entrepreneurship.D. Output in a production function.

The four factors of production are land, labor, capital, and entrepreneurship.

AACSB: Analytic

Blooms: RememberDifficulty: Easy

Learning Objective: 05-01Schiller - Chapter 05 #1

Topic: Capacity Constraints: The Production Function

2. Which of the following is a factor of production for Cathy's Cookies? A. ProductivityB. FlourC. MoneyD. Cookies

Flour would be included in capital. Cookies are the final good.

AACSB: Analytic

Blooms: UnderstandDifficulty: Medium



3. Which of the following are factors of production for Terry's Taco Patio? A. Economic costs and moneyB. Average total cost and entrepreneurshipC. Productivity and laborD. Corn tortillas and meat

Corn tortillas and meat would be a part of variable capital.

AACSB: Analytic




4. Land, labor, capital and entrepreneurship are called: A. Factors of production.B. Factors of demand.C. Fixed costs.D. Variable costs.

The four factors of production are land, labor, capital and entrepreneurship.

AACSB: Analytic




5. Which of the following are factors of production for a typical college? A. Sporting event ticketsB. TuitionC. Parking feesD. The library

Sporting event tickets, tuition and parking fees are sources of revenue for the college but the library would be included in capital.

AACSB: Analytic

Blooms: RememberDifficulty: Medium



6. The maximum output that can be produced from a set of inputs is measured by: A. The production function.B. The demand schedule.C. Fixed costs.D. Marginal costs.

A production function gives the maximum amount of output with a given amount of inputs.

AACSB: Analytic




7. Which of the following statements concerning the relationship between total product (TP) and marginal physical product (MPP) is not correct? A. TP will continue to rise even though MPP is falling but greater than zero.B. TP is increasing at an increasing rate if MPP is increasing.C. TP will fall if MPP is negative.D. TP will fall if MPP is falling.

So long as MPP is greater than zero, it will be adding to TP at a decreasing rate.

AACSB: Reflective Thinking

Blooms: ApplyDifficulty: Hard



8. The limits to the production of any good are reflected in the: A. Law of demand.B. Capacity curve.C. Demand curve.D. Production function.

A production function shows the potential total output available by using various amounts of inputs.

AACSB: Analytic

Blooms: UnderstandDifficulty: Easy



9. When a firm produces a level of output on the production function: A. Marginal physical product is zero.B. Maximum efficiency is achieved.C. Opportunity cost for resources is at a maximum.D. Profits are maximized.

A point on the production function represents a maximum efficient output for that amount of inputs.

AACSB: Analytic

Blooms: UnderstandDifficulty: Hard



10. If the first, second, third and forth worker employed by the firm add 15, 21, 12 and 8 units of total product respectively, we can conclude that: A. The marginal product of all four workers is 14.B. The total product of two workers is 42.C. after the second worker marginal product declines.D. adding a forth worker will cause total product to decline.

At first marginal physical product increases but eventually the law of diminishing returns will cause marginal physical product to decline.


Blooms: ApplyDifficulty: Medium



11. The law of diminishing returns means that: A. The total product production function will eventually increase at a decreasing rate.B. The marginal product will increase at an increasing rate.C. Average total costs are rising and then falling as output is increased.D. Average fixed cost will fall as production increases.

Total production will at first increase at an increasing rate but because of the law of diminishing returns, will eventually increase at a decreasing rate until it turns negative.





12. The change in total output that results from one additional unit of input is the: A. Marginal physical product.B. Average product of the input.C. Unit cost of the input.D. Input price.

Marginal physical product is equal to the change in total product divided by the change in the quantity of resource applied.

AACSB: Analytic




13. Marginal physical product is: A. Equal to the average output of a worker.B. The additional utility a consumer gets from the last unit of a product.C. The additional output from using one more unit of labor.D. Equal to the total product of labor.

Marginal physical product is equal to the change in total product divided by the change in the quantity of resource applied.

AACSB: Analytic




14. The law of diminishing returns can explain why: A. Marginal cost eventually increases in the short run as more output is produced.B. The demand curve is typically downward sloping.C. The average fixed-cost curve declines as long as output increases.D. Marginal cost decreases as more output is produced.

The extra cost of producing one more unit of output increases because it takes more and more of the input to produce the same increase in output.


Blooms: AnalyzeDifficulty: Hard



15. Ceteris paribus, the law of diminishing returns states that beyond some point the: A. Return on stocks and bonds diminish as more are purchased.B. Addition to total utility declines as more units are consumed.C. Marginal physical product of a variable input declines as more of it is used.D. Output of any good or service increases as more variable input is used.

By varying one factor while holding all other factors of production constant less and less additional output will be produced.

AACSB: Analytic




16. If more of an input factor is used, while holding other inputs constant, a firm will eventually experience: A. Diminishing returns.B. Falling marginal cost.C. Rising marginal physical product.D. Rising consumer demand.

The fixed factors of production must be used with more and more units of the variable factor and beyond some point additional amounts of input will yield less and less output.

AACSB: Analytic




17. As more labor is hired in the short run, diminishing returns are observed because: A. The new workers are lazy.B. The new workers have less capital and land to work with.C. All the workers begin to socialize more and work less.D. The new workers are less skilled.


AACSB: Analytic




18. The law of diminishing returns indicates that the marginal physical product of a factor declines as more: A. Output is produced with the most efficient combination of factors.B. Of the factor is used, holding output constant.C. Of the factor is used, holding other inputs constant.D. Of the good is consumed.


AACSB: Analytic

Blooms: RememberDifficulty: Hard



19. Assume a toy company hires an additional worker to assemble toys, and the size of the factory and amount of equipment remain constant. As a result, the level of output increases but by a smaller amount than when the previous additional worker was hired. This is an example of: A. The law of poor planning.B. The law of diminishing returns.C. Say's Law.D. The law of substitution.



Blooms: AnalyzeDifficulty: Easy



20. Assume a restaurant hires an additional chef who is as qualified as the current chefs. As a result, the level of output increases but by a smaller amount than when the previous additional chef was hired. Which of the following best explains this occurrence? A. The chefs are working with a fixed amount of space and equipment and they get in each other's

way.B. The additional wages cause profit to decrease.C. The amount of food available for preparation is limited so output decreases.D. The two chefs do not agree on food preparation and spend too much time arguing.

Since the other factors of production are fixed, they must be used with more of the variable input which means that while the total output will increase each chef will yield less output.


Blooms: AnalyzeDifficulty: Medium



21. Which of the following is the best explanation of why the law of diminishing returns does not apply in the long run? A. All factors of production are variable in the long run.B. The MPP does not change in the long run.C. In the long run, firms have enough time to find more qualified workers.D. All factors of production are fixed in the long run.

Short run assumes that only the variable factors can be changed whereas in the long run all factors of production can be changed.





22. Total revenue minus total cost equals: A. Profit.B. Variable costs.C. Economic costs.D. Marginal revenue.

While profit can be negative or positive, it is the difference between total revenue and total costs.

AACSB: Analytic



Topic: Costs Of Production

23. Profit is the difference between: A. Total cost and variable cost.B. Total revenue and total cost.C. Marginal cost and fixed cost.D. Average total cost and economic cost.

Total revenue minus total costs equals profit and if total revenue is greater then total costs then the profit will be positive.

AACSB: Analytic




24. A firm can be identified as profitable if the: A. Sum of total revenue and total costs is high.B. Difference between its total revenue and total costs is negative.C. Difference between its total revenue and total costs is positive.D. Total costs and marginal costs are low.

If total revenue is greater than total costs then the profit is positive.





25. The most desirable rate of output is the one that: A. Minimizes total costs.B. Maximizes total profit.C. Minimizes marginal costs.D. Maximizes total revenue.

Profit is maximized when the difference between total revenue and total costs is greatest.

AACSB: Analytic




26. The market value of all resources used in producing a good or service is expressed by: A. Implicit costs.B. Total costs.C. Fixed costs.D. Variable costs.

Whether the firm purchases a resource or uses one that it owns the market value of those resources will equal total costs.

AACSB: Analytic




27. Which of the following is equivalent to total cost? A. Fixed costs plus variable costs.B. Variable costs plus marginal costs.C. Economic costs plus accounting costs.D. Marginal costs plus implicit costs.

Total cost is equal to costs that can vary in the short run (variable) and costs which can only vary in the long run (fixed).

AACSB: Analytic




28. The sum of fixed cost and variable cost at any rate of output is equal to: A. Average total cost.B. Total profit.C. Total cost.D. Marginal cost.

Total costs is equal to variable costs plus fixed costs.

AACSB: Analytic




29. Which of the following will always increase as output increases? A. Total costB. Average total costC. Marginal costD. Fixed costs

Since total cost is composed of fixed cost which do not change in the short-run and variable costs which do change in the short-run, an increase in volume will increase variable cost and therefore total costs.





30. Costs of production that do not change with the rate of output are: A. Nonexistent.B. Variable costs.C. Fixed costs.D. Marginal costs.

Fixed costs in the short run are constant and do not vary with output.

AACSB: Analytic




31. Which of the following is most likely a fixed cost? A. Raw materialsB. Labor costC. Shipping costsD. Property taxes

Property taxes would likely be fixed costs because they are not related to production volume and would not change in amount.





32. Total cost is equal to _____ costs at an output level of zero. A. VariableB. FixedC. EconomicD. Marginal

Since fixed costs are constant at all levels of output then at an output of zero they would equal total costs.





33. It is impossible to: A. Determine total costs in the short run.B. Identify variable costs in the long run.C. Identify variable costs in the short run.D. Avoid fixed costs in the short run.

While fixed costs do not factor in to short-run production decisions a certain amount of fixed capital is necessary for any amount of production.

AACSB: Analytic




34. Costs of production that change with the rate of output are: A. Sunk costs.B. Fixed costs.C. Opportunity costs.D. Variable costs.

Variable costs are related to production volume and will increase with increased output.

AACSB: Analytic




35. When producing jeans, which of the following is not a variable cost in the short run? A. WagesB. ZippersC. Rent for the factoryD. Denim material

Factory rent would not normally be related to production volume and would be defined as fixed costs.

AACSB: Analytic




36. Which of the following is most likely a variable cost in the short run? A. LaborB. Property taxesC. RentD. A business license

Since labor would be directly related to levels of production it would be a variable cost.

AACSB: Analytic




37. If a firm increases output, total costs will rise because of a change in: A. Fixed costs.B. Absolute costs.C. Variable costs.D. Regular costs.

Since variable costs are related to changes in volume and total costs is the sum of both fixed and variable costs, total costs will increase with increased volume.





38. Average total cost is defined as: A. Total cost divided by the quantity produced.B. The change in total cost because of a one-unit increase in output.C. The change in total output divided by the change in total cost.D. Total output times total cost.

Average total cost is found at any point of the total cost curve by dividing total cost by units of output.

AACSB: Analytic




39. Which of the following is equivalent to average total cost? A. Fixed cost plus variable cost.B. Fixed cost and variable cost added together and then divided by output.C. The change in total cost divided by the change in output.D. Marginal cost plus variable cost.

Since total costs is equal to variable cost plus fixed costs and average total cost is defined as total costs divided by the quantity produced, therefore fixed cost plus variable costs divided by the quantity produced would equal average total cost.





40. The average total cost curve is: A. Always upward sloping.B. U-shaped.C. Flat.D. Always downward sloping.

The average total costs curve falls at first because both the average variable cost curve and the average fixed cost curve are falling but since the average variable cost curve will start to rise beyond some point in production volume (because of the law of diminishing returns), average total cost curve will also rise.

AACSB: Analytic




41. The reason the average total cost curve declines initially is because of: A. Falling average fixed cost.B. Falling average variable costs.C. Falling marginal cost.D. Both A and B.

The average total costs curve falls at first because both the average variable cost curve and the average fixed cost curve are falling but since the average variable cost curve will start to rise beyond some point in production volume (because of the law of diminishing returns), average total cost curve will start to rise.





42. Marginal cost is equal to: A. Total cost divided by output.B. The change in total cost divided by the change in output.C. The change in total cost divided by the change in price.D. Total cost divided by total revenue.

The increase in total costs divided by the change in output is defined as marginal cost.

AACSB: Analytic




43. Marginal cost will increase with greater output if: A. Marginal physical product is declining.B. Marginal physical product is increasing.C. Total variable cost is decreasing.D. Total fixed cost is increasing.

If the additional output per unit of labor is declining then in order to attain the same additional amount of output will require more labor and therefore higher marginal cost.

AACSB: Analytic




44. If an additional unit of labor costs $30 and has an MPP of 50 units of output, the marginal cost is: A. $0.60.B. $1.66.C. $15.00.D. $1500.00.

Marginal cost is found by dividing the change in cost by the change in output.





45. If an additional unit of labor costs $40 and has an MPP of 50 units of output, the marginal cost is: A. $2,000.00.B. $40.00.C. $1.25.D. $0.80.






46. If an additional unit of labor costs $25 and has an MPP of 40 units of output, the marginal cost is: A. $0.63.B. $1.60.C. $25.00.D. $1,000.00.






47. Marginal cost: A. Is the change in fixed cost divided by the change in quantity.B. May initially decline and then increases as more output is produced.C. May initially increase and then falls as more output is produced.D. Is fixed cost and variable cost added together and then divided by quantity.

Marginal cost may initially decline because the marginal physical product is initially increasing and additional labor increases unit output however beyond some point marginal physical product (because of the law of diminishing returns) will start to decline and marginal cost will then start to rise.





48. Rising marginal costs result from: A. Rising marginal physical product.B. Falling prices of variable inputs.C. Falling marginal physical product.D. Rising prices of fixed inputs.

Since each additional unit of labor yields less output, each unit is less productive and so labor cost (marginal cost) rises.





49. Rising marginal costs are the result of: A. Increasing returns to scale.B. Rising marginal physical product.C. The law of variable returns.D. The law of diminishing returns.

Since any factor of production will be affected by the law of diminishing returns, more of each factor will be required to produce the same additional output and so additional costs will rise.





50. The selection of the short-run rate of output is the: A. Production decision.B. Investment decision.C. Marginal decision.D. Industrial decision.

In the short run a producer can only make changes to variable factors of production.

AACSB: Analytic



Topic: Supply Horizons

51. The short-run supply decision focuses on: A. Marginal output versus price.B. Marginal cost versus price.C. Average total cost versus marginal revenue.D. Variable costs versus fixed costs.

In the short-run a producer will want to operate at a level where the price is equal to the marginal cost.

AACSB: Analytic




52. In the short run, a manufacturer should produce the next unit of output as long as: A. Marginal cost is greater than price.B. Price is greater than total cost.C. Price is greater than marginal cost.D. Price equals total cost.

For a manufacturer if the price is greater than the marginal cost then the total profit will increase or a loss will decrease.





53. If price is greater than marginal cost for the last unit produced: A. Profit is increasing.B. Profit is decreasing.C. Only economic costs are being covered.D. Average total cost is covered.

If the additional revenue (price) added is greater than the additional cost, profits will increase or the loss will decrease.





54. If price is greater than marginal cost but not average total cost, then: A. Total revenues are greater than total costs.B. The firm is earning a profit.C. Eventually the firm will go out of business.D. The firm is experiencing diminishing marginal utility.

Since price in a competitive market is equal to marginal revenue and average revenue and if average revenue is less than average total cost, the firm's profit will be negative and the firm will eventually go out of business.





55. In the long run, a company will stay in business as long as price is: A. Greater than or equal to marginal costs.B. Equal to variable costs.C. Equal to marginal physical product.D. Greater than or equal to average total costs.

Since price in a competitive market is equal to marginal revenue and average revenue and if average revenue is greater than or equal to average total cost, the firm will be operating at a profit or breakeven.





56. When a firm makes an investment decision, it views all inputs as: A. Variable over the long run.B. Variable over the short run.C. Fixed over the long run.D. Fixed over the short run.

Since in the long run all factors of production are variable they are investment decisions.

AACSB: Analytic




57. The decision to build, buy, or lease a plant is known as the: A. Output decision.B. Profit-maximizing decision.C. Production decision.D. Investment decision.

Unlike a production decision investment decisions involve fixed factors of production.

AACSB: Analytic




58. Which of the following must be considered in long run planning? A. Production choices.B. Fixed costs.C. Investment choices.D. Declining marginal physical product.

In the short run firms focus on production choices but in the long run all decisions are investment choices.

AACSB: Analytic




59. Which of the following is not a long-run investment decision? A. Whether to buy or lease equipment.B. The size of the factory.C. Whether or not to enter into the industry.D. How intensively to use the existing plant.

How intensively to use an existing plant is a short run production decision.





60. The main difference to an economist between "short-run" and "long-run" is that: A. Variable costs are short-run investment decisions where as fixed costs are long-run production

decisions.B. In the short-run all resources are fixed where as in the long-run all resources are variable.C. In the long-run all resources are variable where as in the short-run at least one resource is fixed.D. Fixed costs are more important then variable costs in the short-run.

In the long-run capital investment decisions are considered while in the short run the emphasis is on making production decisions.





61. The planning period over which at least one resource input is fixed in quantity is the: A. Long run.B. Production run.C. Short run.D. Investment decision.

In the short run we assume that only the variable factors of production can be changed.

AACSB: Analytic




62. Which of the following is true about the short run? A. Some inputs are fixed.B. It is less than one year.C. It is one to two years.D. All inputs are variable.

The short run is defined as a period of time in which only variable factors of production can be changed.

AACSB: Analytic




63. During the short run: A. All inputs can be changed.B. Some inputs are fixed.C. Factory size can be changed.D. The number of workers cannot be changed.

Although in the short run variable factors of production can be changed, fixed factors of production cannot.

AACSB: Analytic




64. The long run refers to: A. A time period longer than one year.B. A time period less than one year.C. A period of time long enough for all inputs to be varied.D. The time period required for a firm to cycle its inventory.

Unlike the short-run where only variable factors can be changed, the long run assumes that all factors of production can be changed.

AACSB: Analytic




65. During the long run: A. Output is limited by the law of diminishing returns.B. The firm can build or lease any size factory.C. Some inputs are fixed and some are variable.D. There are no economic costs.

Unlike the short-run where only variable factors can be changed, the long run assumes that all factors of production can be changed.

AACSB: Analytic




66. Explicit costs: A. Include only payments to labor.B. Are the sum of actual monetary payments made for resources used to produce a good.C. Include the market value of all resources used to produce a good.D.

Are the total value of resources used to produce a good but for which no monetary payment is actually made.

Explicit costs are the monetary payments that a firm must make to outsiders.

AACSB: Analytic



Topic: Economic Versus Accounting Costs

67. Economic cost is: A. Equal to explicit costs minus implicit costs.B. The same as dollar costs.C. Equal to the accounting cost minus implicit costs.D. The value of all resources used to produce a good or service.

Economic costs equal both the explicit and implicit costs to produce a good or service.

AACSB: Analytic




68. In defining costs, economists recognize: A. Explicit and implicit costs while accountants recognize only implicit costs.B. Explicit and implicit costs while accountants recognize only explicit costs.C. Only explicit costs while accountants recognize only implicit costs.D. Only explicit costs while accountants recognize explicit and implicit costs.

Economic cost includes those costs which must be made with a monetary payment and those that the firm pays by using its own resources.

AACSB: Analytic




69. Economic and accounting costs will differ: A. Whenever there is more than one factor of production.B. Whenever the firm fails to maximize its profits.C. Whenever any factor of production is not paid an explicit factor payment equal to its market value.D. In every case.

An accounting cost is one in which actual dollars for an input is paid.





70. Economic costs are greater than accounting costs: A. Only if implicit costs are greater than zero.B. Only if explicit costs are greater than implicit costs.C. Only in the long run.D. In the short run but not the long run.

Since implicit costs are cost in which no monetary payment is made, they would not be counted in accounting costs but would be included in economic costs.





71. The best measure of the economic cost of doing your homework is: A. The tuition you pay for the class.B. The amount you would have to pay to get someone else to do it.C. Your instructor's salary.D. The best opportunity you give up when you do your homework.

Economic costs are best measured by what you must give up in order to receive the good or service.





72. Which of the following definitions is correct? A. Economic costs + accounting costs = Profit.B. Economic profit = accounting profit - implicit costs.C. Economic profit - implicit costs = accounting profits.D. Economic costs + explicit costs + implicit costs.

Economic profit would generally be less than accounting profit by the amount of implicit costs which would not be counted in accounting costs.





73. Economic profit is equal to total revenue minus: A. Explicit costs.B. Implicit costs.C. Both implicit costs and explicit costs.D. Marginal costs.

Economic profit is total revenue minus costs that are paid with firm's resources and those costs which exist but are not paid by monetary means.





74. Suppose a firm incurred explicit costs of $900 and implicit costs of $200 during a day. If that day the firm sold 8 units at $300 per unit its accounting profits are: A. $1,500 and its economic profits are $1,700B. $1,500 and its economic profits are $1,300C. $1,300 and its economic profits are $1,700D. $1,300 and its economic profits are $1,300

Economic profit is $200 less than accounting profit by the amount of implicit costs or $1,300.





Suppose a firm has the following expenditures per day: $240 for wages, $150 for materials, and $80 for equipment rental. The owner of the firm owns the building in which it operates. If the firm were not operating in the building, he could rent the building for $70 per day. Total daily revenue is $600.

Schiller - Chapter 05

75. What are the daily accounting costs for the firm described above? A. $320B. $390C. $470D. $540

Accounting costs would be those costs that the firm paid out with monetary consideration.





76. What are the daily explicit costs for the firm described above? A. $320B. $390C. $400D. $470

Explicit costs are those costs that the firm pays with monetary resources.





77. What are the daily implicit costs for the firm described above? A. $70B. $80C. $150D. $220

Implicit costs are the monetary income that a firm sacrifices when it uses a resource that it owns.





78. Based on the law of diminishing returns, if the number of workers increases and capital investments do not keep pace then, ceteris paribus: A. Marginal physical product of labor will increase.B. Marginal physical product of labor will decrease.C. The production function will definitely shift upward.D. The average total cost curve will definitely decrease.

Worker productivity is tied to the amount of capital per worker and if the amount of capital relative to labor decreases then so too will worker productivity.




Topic: Policy Perspectives

79. A firm's rising factor costs can be offset by: A. Increases in productivity.B. Diminishing marginal product.C. Diminishing marginal utility.D. Rising marginal cost.

Factor costs increase because of the diminishing returns from the factor and this can be offset by increasing the use of the other factors.





80. Which of the following government policies is least likely to increase productivity? A. Subsidies for schoolsB. Student loansC. Tax incentives for firms that invest in capitalD. Transfer payments to unemployed workers

While unemployment benefits may be a good safety net they do not add to the nation's stock of capital and therefore will not increase productivity.

AACSB: Analytic




81. If government policies to increase productivity are successful, then the: A. Production function will shift upward.B. Marginal cost curve will shift upward.C. Average total cost curve will shift upward.D. Variable cost curve will shift upward.

If productivity increases then output will be greater at each level of input and the production function will shift upward.





82. Advances in managerial knowledge shift the production function: A. And the marginal cost curve upward.B. And the average total cost curve downward.C. Upward and the average total cost curve downward.D. Downward and the marginal cost curve upward.

When a factor of production such as managerial knowledge becomes more productive then the marginal physical product of that factor will increase causing the average total cost curve to decrease and the production function to shift upward.

AACSB: Analytic




83. Improvements in technology shift the: A. Production function downward.B. Marginal cost curve downward.C. Average total cost curve upward.D. Fixed cost curve upward.

Improvements in technology will cause the marginal physical product of that factor to increase and therefore cause marginal cost to decrease and the marginal cost curve to shift downward.





84. Which of the following would cause a firm's production function to shift upward? A. An increase in production by the firm.B. Hiring more workers.C. Increased investment in capital.D. An increase in factor costs.

Increased investment in capital would improve the marginal efficiency of capital whereas the other changes would be a movement along the production function curve.





85. An investment in human and nonhuman capital will result in: A. An increase in the marginal physical product of labor.B. An increase in marginal costs.C. A decrease in the production function.D. A decrease in production possibilities.

An investment in human and nonhuman capital will improve the efficiency of capital and increase the marginal physical product of labor.





Table 5.1—Labor and output data


86. What is the marginal physical product of the first unit of labor in Table 5.1? A. 0B. 14C. 16D. 30

Since the output at zero units of input is zero and the output at one unit of input is 14 the marginal physical product is the change in output per one unit of input which is 14.





87. What is the marginal physical product of the second unit of labor in Table 5.1? A. 12B. 14C. 16D. 30

Since total physical product is equal to the sums of the marginal physical products then the marginal physical product of the second unit would be the total physical product minus the marginal physical product of the first unit.





88. What is the marginal physical product of the fourth unit of labor in Table 5.1? A. 51B. 42C. 12D. 9

Since total physical product is equal to the sums of the marginal physical products then the marginal physical product of the forth unit would be total physical product minus the marginal physical products of the first three units.





89. With which unit of labor do diminishing marginal returns first appear in Table 5.1? A. FirstB. SecondC. ThirdD. Fourth

Prior to the third unit, marginal physical product is increasing.





Table 5.2—Jeans Production



The change in cost from the 10th to the 15th units is $20 and the change in units is five so the marginal cost would be the change in cost divided by the change in output.






The change in cost from the 20th to the 30th units is $45 and the change in units is ten so the marginal cost would be the change in cost divided by the change in output.






The change in cost from the 30th to the 40th units is $110 and the change in units is ten so the marginal cost would be the change in cost divided by the change in output.





93. If the firm in Table 5.2 receives $7.00 for each pair of jeans, in the short run it should: A. Produce 30 pairs of jeans.B. Produce 40 pairs of jeans.C. Produce 20 pairs of jeans.D. Only produce jeans if the price is greater than average total cost.

Since the marginal cost of producing at a rate of 30 pairs of jeans in $4.50 the firm would make a profit of $2.50 per pair of jeans whereas at a rate of 40 pairs of jeans the firm would lose $4.00 per pair of jeans.





94. If the firm in Table 5.2 can sell jeans for $7.00 per pair, the total profit from producing 30 pair is: A. $13.B. $3.C. $30.D. $210.

The profit would be calculated by subtracting the total costs of $180 from the total revenue ($7.00 X 30 = $210 - $180).





95. If the firm in Table 5.2 can sell jeans for $7.00 per pair, the total profit from producing 40 pair is: A. $-10.B. $10.C. $290.D. $280.

The profit is calculated by subtracting the total costs of $290 from the total revenue ($7.00 X 40 = $280 - $290).





Table 5.3—Yearbook costs(This table shows the total cost of producing yearbooks using a school's print shop.)


96. The production rate in Table 5.3 at which the lowest possible average total cost for yearbooks is achieved would be: A. 200 yearbooks per year.B. 300 yearbooks per year.C. 400 yearbooks per year.D. 500 yearbooks per year.

The average total cost would be $2,200 divided by 400 yearbooks.





97. In Table 5.3, marginal cost per yearbook, between 100 and 200 yearbooks is equal to: A. $400.B. $4.C. $16.D. $12.

The change in costs is $400 and the change in quantity is 100 so the marginal cost would be $4.00 ($400 divided by 100).





98. The marginal cost is at a minimum in Table 5.3 when: A. The first 100 units are produced.B. Output increases from 300 units to 400 units.C. Output increases from 100 units to 200 units.D. Output increases from 200 units to 300 units.

The smallest change in costs ($200) is between 200 and 300 units.





Table 5.4—Plant costs

This table shows total costs at different output levels for a given plant.


99. In Table 5.4, fixed costs: A. Are equal to $40.B. Are equal to zero.C. Increase as output increases.D. Decrease as output increases.

At zero output variable cost is zero and since total costs are equal to $40, then fixed cost is $40.





100. In Table 5.4, variable cost, A. Is equal to $25 at an output of 10 units.B. Is the greatest at an output of zero units.C. Decreases as output increases.D. Is equal to $40 at every output level.

Since fixed cost is $40 at zero and total cost is $65 at 10 units of output variable cost must equal $25.





101. In Table 5.4, the marginal cost is at a minimum when: A. The first 10 units are produced.B. Output increases from 10 units to 20 units.C. Output increases from 20 units to 30 units.D. Output increases from 30 units to 40 units.

Marginal cost is found by dividing the change in cost by the change in units and the smallest change in cost is from 10 to 20 units.





102. In Table 5.4, the lowest average total cost occurs at a production rate of: A. 10 units per day.B. 20 units per day.C. 30 units per day.D. 40 units per day.

The lowest average total cost occurs at the point where marginal cost is less then or equal to average total cost which would occur at 30 units.





Table 5.5—Production costs


103. In Table 5.5, the marginal cost of the first unit of output is: A. $19.B. $10.C. $9.D. $3.

Total cost at zero level of output is $10 and at one unit of output it is $19 so the change is $9.





104. In Table 5.5, the total cost of 2 units is: A. $3.B. $10.C. $12.D. $22.

Since the additional cost from two to three units is $3 and the total cost of two units is $19, the total cost of three units is $22.





105. In Table 5.5, the total cost of 3 units is: A. $25.B. $15.C. $10.D. $3.

Since total cost is equal to fixed cost and variable cost, then at 3 units of production the fixed cost is $10 and the variable cost is $15.





106. In Table 5.5, the total variable cost of the first unit is: A. $9.B. $10.C. $19.D. $29.

Since the fixed cost is $10 and the total cost at the first unit is $19 the variable cost is $9.





Table 5.6Complete the following table, and use the information in the table to answer the question(s) below.


107. In Table 5.6, total fixed costs are equal to: A. $0 because the problem involves the long run.B. $4.C. $15.D. $23.

Since at a zero level of output total cost equal $15 and since variable cost at that level of output would be zero, fixed cost equals $15.





108. In Table 5.6, the marginal cost of the third unit of output is: A. $3.B. $5.C. $6.D. $15.

Since the marginal cost of the second unit of output is $4 then the total cost of two units of output is $27. Then the total cost of three units of output is the sum of the fixed cost and variable cost or $30 so the marginal cost of the third unit is $3.





109. In Table 5.6, the total cost of 2 units of output is: A. $4.B. $6.C. $12.D. $27.

The total cost of two units of output would be equal to the total cost of one unit ($23) plus the marginal cost of the second unit or $4.





110. In Table 5.6, the total cost of 3 units of output is: A. $5.B. $10.C. $15.D. $30.

Since the variable cost of the third unit of output is $15 and the fixed cost is $15 the total cost of three units is $30.





111. In Table 5.6, the total variable cost of 2 units of output is: A. $8.B. $12.C. $15.D. $27.

Since the total cost of 2 units is $27 and the fixed cost is $15 the variable cost would be $12.





112. In Table 5.6, the total variable cost of 1 unit of output is: A. $8.B. $12.C. $15.D. $23.

Since the fixed cost is $15 and the total cost at 1 unit of output is $23 then the variable cost is $8.





113. In Table 5.6, the average variable cost of 3 units of output is: A. $3.B. $5.C. $15.D. $30.

Since the variable cost at 3 units is $15 the average variable cost is $5.





Figure 5.1


114. In Figure 5.1, the marginal physical product of the third unit of labor is: A. 8.B. 12.C. 28.D. 40.

The total product of 2 units is 28 and the total product of 3 units is 40 so the change is 12.





115. In Figure 5.1, the marginal physical product of the fourth unit of labor is: A. 6.B. 12.C. 40.D. 46.

The total product of 3 units is 40 and the total product of 4 units is 46 so the change is 6.





116. In Figure 5.1, diminishing marginal returns first occur with the: A. Second worker.B. Third worker.C. Fifth worker.D. Sixth worker.

The additional product of the second worker is 16 where as the additional product of the third worker is 12.





Figure 5.2


117. In Figure 5.2, what is the marginal cost of the 12th unit of output? A. $6.00B. $20.00C. $52.00D. $72.00

The marginal cost of the 12th unit is $72 and occurs at the intersection with the average total cost curve, which also equals $72 at an output level of 12.





118. In Figure 5.2, what is the total fixed cost? A. $20.00B. $240.00C. $740.00D. $864.00

The fixed cost would be represented by subtracting the average variable cost from the average total cost at either 10 or 12 units (or any units) and multiplying that difference by the units chosen.





119. In Figure 5.2, what is the total cost of 10 units? A. $240.00B. $288.00C. $500.00D. $740.00

Since at 10 units of output the average cost would be $74 so the total cost would be the quantity times the average total cost or 10 times $74 or $740.





120. In Figure 5.2, what is the total variable cost when output is 10 units? A. $500.00B. $520.00C. $720.00D. $740.00

At 10 units of output the average variable cost would be $50 so the variable cost would be 10 times $50 or $500.





121. In Figure 5.2, what is the total variable cost when output is 12 units? A. $500.00B. $624.00C. $720.00D. $864.00

The average variable cost at 12 units would be $52 and so the variable cost would be 12 X $52 or $624.





122. The production function indicates how much output producers will actually produce. FALSE

The production function indicates the potential output producers can produce.

AACSB: Analytic




123. A production function shows the maximum amount of a particular good or service that can be produced with different combinations of resources. TRUE

The production function is a schedule that gives the different amounts of output that can be produced with various combinations of inputs.

AACSB: Analytic




124. Actual output will always equal the limit described by the production function. FALSE

Actual output may be less then potential output.

AACSB: Analytic




125. Marginal physical product is the change in total output associated with an additional unit of input. TRUE

Marginal physical product is the additional output produced when one additional unit of a resource is employed.





126. Total output may continue to rise even though marginal physical product is decreasing. TRUE

Although marginal physical product may be decreasing, it can still be adding to total physical product at a decreasing rate.

AACSB: Analytic




127. If the marginal physical product of an input is decreasing, output will also be decreasing. FALSE

Although marginal physical product may be decreasing, it can still be adding to total physical product at a decreasing rate.





128. According to the law of diminishing returns, the marginal physical product of a variable input declines as more of it is employed with a given quantity of other inputs. TRUE

Since all of the other factors are fixed the variable input will yield less and less output.

AACSB: Analytic




129. The short run implies that all factor inputs are fixed. FALSE

The short run assumes that at least one factor is fixed while at least one other is variable. In the short run capital is usually fixed while labor is variable.

AACSB: Analytic




130. In the long run, all costs are variable. TRUE

The long run implies that all factor inputs are variable.

AACSB: Analytic




131. Profit is equal to total revenue minus total cost. TRUE

The difference between total revenue and total cost is the profit.

AACSB: Analytic




132. Fixed costs are the same as total costs at a production rate of zero units in the short run. TRUE

Fixed costs exist and are the same at all levels of production and so at zero units of output would equal total costs.





133. Fixed costs can be avoided in the short run. FALSE

Fixed costs cannot be avoided because a certain amount of capital and land are necessary and will be the same at all levels of production.

AACSB: Analytic




134. In the short run, when output is zero, total costs are zero. FALSE

Fixed costs exist at all levels of production and when output is zero fixed cost equal total costs.

AACSB: Analytic




135. Marginal cost is equal to the change in variable costs divided by the change in output. TRUE

Marginal cost is equal to the change in total costs divided by the change in output and since in the short run fixed costs are constant marginal cost is equal to variable cost changes divided by change in output.





136. In the short run, if marginal cost is less than price for the last unit produced, the firm should expand output. TRUE

If the price is greater than the additional cost then the firm's profit will rise if it expands output.

AACSB: Analytic


Learning Objective: 05-04Schiller - Chapter 05 #136Topic: Supply Horizons

137. How intensively to use existing plant and equipment is a long-run investment decision. FALSE

The more intensively existing plant and equipment is used is a related to the amount of variable inputs used and is therefore a short-run decision.

AACSB: Analytic



138. Long-run choices imply that all factors are variable. TRUE

In the long-run all inputs are variable.

AACSB: Analytic



139. Investment decisions are long-run decisions. TRUE

Investment decisions involve changes in plant and equipment and are therefore long-run decisions.

AACSB: Analytic



140. Economic costs are the value of all resources used to produce a good or service. TRUE

Economic costs include monetary payments for resources and use of the firm's own resources (non-monetary) that must be made to produce a good or service.

AACSB: Analytic




141. Economic and accounting costs differ by the amount of explicit costs. FALSE

Economic and accounting costs differ by the amount of implicit costs.

AACSB: Analytic




142. Economic costs include only the explicit payments made for a factor of production. FALSE

Economic costs include both implicit and explicit payments made for a factor of production.

AACSB: Analytic




143. When implicit costs exist, economic profit will be less than accounting profit. TRUE

Implicit costs payments are not counted in accounting costs or accounting profit.





144. School subsidies and capital investment tax incentives are examples of government policy designed to increase productivity. TRUE

Spending on human capital increases productivity.

AACSB: Analytic




145. A firm's production function will shift downward if worker productivity increases. FALSE

A firm's production function will shift upward if worker productivity increases.

AACSB: Analytic




146. When the marginal physical product curve shifts upward because of technological advances, the marginal cost curve shifts downward. TRUE

If marginal physical product increases then marginal cost will decrease.

AACSB: Analytic




147. Why in the short-run does marginal physical product increase but beyond some point start to decrease and eventually become negative?

At first when the fixed inputs are relatively plentiful, more intensive utilization of fixed inputs by variable inputs may increase the marginal physical product, however beyond some point each variable input has on average fewer units of the fixed input with which to work and the increase in intensity of use of the fixed input yields progressively less and less additional returns. Eventually as variable inputs are added returns can become negative.





148. Explain how the firm's total cost curve would change if the wage rate paid to the labors increases verses the effect when the firm's property taxes are doubled? What would happen to the firm's profits assuming the revenue does not change? What might the firm do in the long-run verses the short-run?

a) In the short-run a wage increase would affect variable costs where as an increase in property taxes would affect fixed costs. A change in a variable cost would reduce output because the marginal cost would increase at each level of output and so to maximize profits a firm would cut back output so as to reduce marginal cost at or below the market price. A change in a fixed cost would not affect marginal costs and so the firm would keep the same production level.b) Both changes would reduce profit but a change in variable costs would also reduce output.c) In the long-run if a firm's ATC curve was still downward sloping it might want to increase fixed cost by using more efficient fixed inputs thereby increasing the efficiency of the variable inputs. If economic profits are less than zero the firm might want to exit the market.





149. What is the relationship between increasing returns to scale and decreasing long run average total costs?

In the long-run when adding an additional unit of a capital increases the output per unit of labor input then the same unit of output will cost less to produce since the additional cost of the input is spread over more of the output and so the average total cost, which includes average variable costs, will decline.





150. What happens along the average total cost curve as: Marginal product is increasing?Marginal cost is decreasing?Average variable costs are decreasing?Total product increases at a decreasing rate?

a) When marginal product increases average total costs would be falling because average fixed costs would be falling and average variable costs would also be falling because the inputs were becoming more efficient.b) If the marginal cost of the next unit is less than the previous then average total costs will be decreasing.c) Since average total cost is the sum of average fixed cost and average variable cost and since both would be falling so to would average total cost. d) If total product was increasing at a decreasing rate marginal physical product would be decreasing and marginal cost would be increasing at the point marginal cost was greater than average total cost, average total cost would start to increase.





151. Distinguish between explicit and implicit costs and give an example of each. Why would accounting profit be greater than or equal to economic profit?

a) Explicit costs are a monetary payment that a firm must to obtain a resource whereas implicit cost is the monetary income that a firm sacrifices when it uses a resource it owns rather than selling the resource on the open market.b) Accounting profit only includes explicit costs whereas economic profit includes implicit cost and so economic profit will always be less than or equal to accounting profit.





ch5 Summary Category # of Questions

AACSB: Analytic 64

AACSB: Reflective Thinking 87

Blooms: Analyze 44

Blooms: Apply 40

Blooms: Remember 23

Blooms: Understand 44

Difficulty: Easy 30

Difficulty: Hard 44

Difficulty: Medium 77

Learning Objective: 05-01 22





Schiller - Chapter 05 160

Topic: Capacity Constraints: The Production Function 39

Topic: Costs Of Production 69

Topic: Economic Versus Accounting Costs 17

Topic: Policy Perspectives 11

Topic: Supply Horizons 15

Ch5 Economics

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