Chapter 13/The Costs of Production 75 Chapter 13 The Costs of Production Which of the following is an implicit cost? a salaries paid to owners who work for the firm b interest on money borrowed to finance equipment purchases c cash payments for raw materials d foregone rent on office space owned and used by the firm ANSWER: d foregone rent on office space owned and used by the firm SECTION: 1 OBJECTIVE: 1 Samantha has been working for a law firm and earning an annual salary of $90,000. She decides to open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Samantha will cover her startup expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $1,000. Assuming that there are no additional expenses, Samantha’s annual implicit costs will equal a $55,200 b $221,400 c $91,000 d $146,200 ANSWER: a $55,200 SECTION: 1 OBJECTIVE: 1 Economists assume that the goal of the firm is to maximize a total revenue b profits c costs d All of the above are correct ANSWER: b maximize profits SECTION: 1 OBJECTIVE: 1 The difference between accounting profit and economic profit relates to a the manner in which revenues are defined b how total revenue is calculated c the manner in which costs are defined d the price of the good in the market ANSWER: c the manner in which costs are defined SECTION: 1 OBJECTIVE: 1 In this diagram, the shift in the total product curve represents an increase in the firm’s a costs of production b productivity c diseconomies d market share ANSWER: b productivity SECTION: 2 OBJECTIVE: 2 76 Chapter 13/The Costs of Production Which of the following could explain why the total product curve shifted in this diagram? a A reduction in capital equipment available to the firm b Labor skills have become rusty and outdated in the firm c The firm has developed new technology in their production facility d The firm is now receiving a higher price for its product ANSWER: c The firm has developed new technology in their production facility SECTION: 2 OBJECTIVE: 2 As Al’s Radiator Co. continues to add workers, while keeping the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Al’s Radiator Co. encounters a economies of scale b diseconomies of scale c increasing marginal returns d diminishing marginal returns ANSWER: d diminishing marginal returns SECTION: 2 OBJECTIVE: 2 Which of the following costs of publishing a book is a fixed cost? a author royalties of 5% per book b costs of paper and binding c shipping and postage d composition, typesetting, and jacket design ANSWER: d composition, typesetting, and jacket design SECTION: 3 OBJECTIVE: 2 Which of the following is the best example of a variable cost? a monthly payments for hired labor b property tax payments c monthly rent payments for a warehouse d pension payments to retired workers ANSWER: a monthly payments for hired labor SECTION: 3 OBJECTIVE: 3 Chapter 13/The Costs of Production 77 10 Smith Tire Co. has total fixed costs of $100,000 per year. The firm’s average variable cost is $80 for 10,000 tires. At that level of output, the firm’s average total costs equal a $90 b $100 c $110 d $120 ANSWER: a $90 SECTION: 3 OBJECTIVE: 3 11 Miller Technologies has average variable costs of $6 and average total costs of $10 when it produces 1,000 units of output. The firm’s total fixed costs equal a $2,000 b $3,000 c $4,000 d $5,000 ANSWER: c $4,000 SECTION: 3 OBJECTIVE: 3 12 At a firm’s current output level of 200 units per week, it has 10 employees at a weekly wage of $500 each. Raw materials, which are ordered and delivered daily, cost $1,000 per week. The weekly cost of the firm’s capital is $1,250. Which of the following statements is correct? Total Variable Cost Total Fixed Cost Total Cost a $5,000 $2,250 $7,250 b $6,000 $1,250 $7,250 c $1,250 $6,000 $7,250 d $2,250 $ 500 $2,750 ANSWER: b $6000 $1,250 $7,250 SECTION: 3 OBJECTIVE: 3 13 If marginal cost is greater than average total cost then a profits are increasing b economies of scale are becoming greater c average total cost remains constant d average total cost is increasing ANSWER: d average total cost is increasing SECTION: 3 OBJECTIVE: 3 14 The minimum points of the average variable cost and average total cost curves occur where a the marginal cost curve lies below the average variable cost and average total cost curves b the marginal cost curve intersects those curves c wages are the lowest d the slope of total cost is the smallest ANSWER: b the marginal cost curve intersects those curves SECTION: 3 OBJECTIVE: 3 78 Chapter 13/The Costs of Production th If Franco’s Pizza Parlor knows that the marginal cost of the 500 pizza is $3.00 and that the average total cost of making 499 pizzas is $3.30, then a average costs are rising at Q = 500 b average costs are falling at Q = 500 c total costs are falling at Q = 500 d average variable costs must be falling ANSWER: b average costs are falling at Q = 500 SECTION: 3 OBJECTIVE: 3 15 16 When the marginal product of labor falls, the marginal cost of output a falls, then rises b becomes negative c rises d remains constant ANSWER: c rises SECTION: 3 OBJECTIVE: 4 17 Which of the following factors is most likely to shift IBM’s total cost and marginal cost curves downward? a a technological advance resulting in increased productivity b higher property taxes charged by the municipal government c increased wages to attract additional computer operators d a reduction in subsidies from the state government ANSWER: a a technological advance resulting in increased productivity SECTION: 3 OBJECTIVE: 4 18 Given the cost curve described in the diagrams below, the efficient scale of production occurs at point a A b B c C d D ANSWER: c C SECTION: 3 OBJECTIVE: 4 Chapter 13/The Costs of Production 79 19 Economies of scale a requires a change in the size of operations and therefore is a longrun consideration b requires a more intensive use of existing plant and therefore is a shortrun consideration c means that a doubling of plant size will double output d requires a change in the size of plant and therefore is a shortrun consideration ANSWER: a requires a change in the size of operations and therefore is a longrun consideration SECTION: 4 OBJECTIVE: 4 20 Since the 1980s, WalMart stores have appeared in almost every community in America. WalMart buys their goods in large quantities and therefore at cheaper prices. WalMart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at WalMart because of low prices and free parking. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that a consumers are boycotting local retailers whose prices are relatively higher b there are diseconomies of scale in retail sales c there are economies of scale in retail sales d there are diminishing returns to producing and selling retail goods ANSWER: c there are economies of scale in retail sales SECTION: 4 OBJECTIVE: 5 21 Some reasons that firms may experience diseconomies of scale include that a the firm is too small to take advantage of specialization b large management structures may be bureaucratic and inefficient c if there are too many employees, the work place becomes crowded and people become less productive d average fixed costs begin to rise again ANSWER: b large management structures may be bureaucratic and inefficient SECTION: 4 OBJECTIVE: 5 80 Chapter 13/The Costs of Production 22 A local bagel company plans to keep and maintain its bagel factory, which is estimated to last 25 years. All cost decisions it makes during the 25year period a are shortrun decisions b are longrun decisions c involve only maintenance of the factory d are zero, since the cost decisions were made at the beginning of the business ANSWER: a are shortrun decisions SECTION: 4 OBJECTIVE: 5 23 If a firm experiences constant returns to scale at all output levels, then its longrun average total cost curve would a slope downward b be horizontal c slope upward d slope downward for low output levels and upward for high output levels ANSWER: b be horizontal SECTION: 4 OBJECTIVE: 5 24 Which of the following explains why longrun average cost at first decreases as output increases? a diseconomies of scale b lessefficient use of inputs c fixed costs becoming spread out over more units of output d gains from specialization of inputs ANSWER: d gains from specialization of inputs SECTION: 4 OBJECTIVE: 5 25 The total cost to the firm of producing zero units of output is a zero in both the short run and the long run b its fixed cost in the short run, zero in the long run c its fixed cost in both the short run and the long run d its variable cost in both the short run and the long run ANSWER: b its fixed cost in the short run, zero in the long run SECTION: 4 OBJECTIVE: 5 ...76 Chapter 13/ The Costs of Production Which of the following could explain why the total product curve shifted in this diagram?... pension payments to retired workers ANSWER: a monthly payments for hired labor SECTION: 3 OBJECTIVE: 3 Chapter 13/ The Costs of Production 77 10 Smith Tire Co. has total fixed costs of $100,000 per year. The firm’s average variable cost is $80 for ... the slope of total cost is the smallest ANSWER: b the marginal cost curve intersects those curves SECTION: 3 OBJECTIVE: 3 78 Chapter 13/ The Costs of Production th If Franco’s Pizza Parlor knows that the marginal cost of the 500