CHAPTER 7—PRODUCTION AND COST
MULTIPLE CHOICE
1) A firm's profit is
a. greater if it is a corporation rather than if it is a sole proprietorship
b. higher if it raises its price than if it does not
c. lower if it lowers its price than if it does not
d. never taxed by the government
e. its revenue minus its costs
Answer: E
2) If the physical plant for a corporation is considered to be a fixed input, then
a. it is held constant in the long run
b. it can be changed in the long run
c. labor must be a variable input
d. technology must be changing
e. the firm will lose money in the short run, except under perfect competition
Answer: B
3) The "short run" may vary in length from industry to industry.
a. True
b. False
Answer: A
4) In the short run,
a. utilization of any input can be varied
b. production takes less than one year
c. all resources are limited in supply
d. utilization of some inputs is assumed constant
e. equilibrium cannot occur
Answer: D
5) The short run for Barbara's Bakery is defined as
a. one year
b. one month
c. the period of time during which all inputs are variable
d. the period of time during which at least one input is fixed
e. the time needed for a transaction to occur
Answer: D
6) Which of the following is most likely to be a fixed input in the short run for Joe's Garage?
a. the grease used to lubricate cars
b. the part-time labor employed to repair cars
c. the inventory of replacement parts
d. the electricity used to heat and light the garage
e. the garage used to repair cars
Answer: E
7) In a firm's planning horizon, the long run refers to
a. a period of one year or more
b. the term to which the current board of directors has been elected
c. the period during which all of the firm's inputs can be varied
d. the period during which at least one of the firm's inputs is fixed
e. the period during which the level of available technology is fixed
Answer: C
8) Consider a firm that needs one day to hire more labor, one week to increase its purchases
of raw materials, and three months to change the amount of its capital. This firm's long run is
a. three months
b. one week
c. one day
d. three months plus eight days
e. three months plus one week
Answer: A
9) As a firm increases its output in the short run,
a. it also varies its technology
b. it increases all of its inputs
c. it increases its plant size
d. it increases only one of its inputs
e. at least one of its inputs is fixed
Answer: E
10) In the long run,
a. at least one of the firm's inputs is fixed
b. customer tastes and preferences are fixed
c. the firm may vary all inputs
d. sunk costs become variable costs
e. government intervention is inevitable
Answer: C
11) In the short run,
a. at least one of the firm's inputs is fixed
b. customer tastes and preferences are fixed
c. the firm may vary all inputs
d. sunk costs are variable
e. government intervention is inevitable
Answer: A
12) Fixed inputs are those whose
a. quantity changes as the level of output changes
b. costs are irreversible
c. quantity remains constant regardless of the level of output
d. quantity determines the level of profit
e. appearance was damaged while being transported, but has been fixed
Answer: C
13) Variable inputs are those whose
a. quantity changes as the level of output changes
b. costs are irreversible
c. quantity remains constant regardless of the level of output
d. costs are considered sunk costs
e. price is continuously changing
Answer: A
14) Marginal product is the change in output divided by the change in the amount of an input
used.
a. True
b. False
Answer: A
15) The law of diminishing marginal returns says that as more of a variable input is combined
with a fixed input, total output will increase; however, the increases in the firm's output will
become ever smaller.
a. True
b. False
Answer: A
16) Total product begins to decline when diminishing marginal returns are first experienced.
a. True
b. False
Answer: B
17) Figure 7-1 shows the amounts of coal that a mining company could produce per week by
changing the number of workers while capital and technology remain constant. The marginal
product of employing the fourth worker is
a. 120 tons of coal
b. 480 tons of coal
c. 319 tons of coal
d. 180 tons of coal
e. 106.33 tons of coal
Answer: D
18) Figure 7-1 shows the amounts of coal that a mining company could produce per week by
changing the number of workers while capital and technology remain constant. Which
worker has a marginal product of 120 tons of coal?
a. first
b. second
c. third
d. fourth
e. fifth
Answer: C
19) Figure 7-1 shows the amounts of coal that a mining company could produce per week by
changing the number of workers while capital and technology remain constant.How many
workers could the mine hire before the marginal product of labor begins to decline?
a. 1 worker
b. 2 workers
c. 3 workers
d. 4 workers
e. 5 workers
Answer: D
20) Figure 7-2 shows how much a firm could produce with various amounts of labor holding
capital and technology constant. What is the marginal product of labor between 20 and 30
units of labor?
a. 340 units
b. 220 units
c. 11 units
d. 110 units
e. 34 units
Answer: C
21) Figure 7-2 shows how much a firm could produce with various amounts of labor holding
capital and technology constant. What is the average product of labor when 20 units of labor
are employed?
a. 230 units
b. 11.5 units
c. 130 units
d. 6.5 units
e. 110 units
Answer: B
22) The marginal product of labor is the
a. total output produced when one more worker is hired
b. change in average output produced when one more worker is hired
c. total output per worker when one more worker is hired
d. change in total output when one more worker is hired
e. maximum quantity of output when one more worker is hired
Answer: D
23) When the marginal product of labor increases as the amount of labor employed increases,
a. the additional worker has made other workers more productive
b. the firm also must have increased the amount of capital
c. the firm is experiencing economies of scale
d. there has been an improvement in the available technology
e. the law of diminishing returns has been violated
Answer: A
24) The marginal product of labor is the
a. additional output produced when one more worker is hired
b. amount of output associated with labor inputs
c. maximum amount of output produced by a given set of inputs
d. maximum profit "produced" by selling a firm's output
e. additional cost associated with an additional unit of labor
Answer: A
25) If a firm is experiencing diminishing marginal returns to labor, then
a. total output must be decreasing
b. total output rises more slowly as additional workers are added
c. the firm must decrease the amount of labor it hires
d. total output per worker must be rising
e. the firm must be operating in the long run
Answer: B
26) The law of diminishing marginal returns says that
a. total product will eventually remain constant as more of an input is added to production
b. total revenue decreases as output increases, holding technology fixed
c. marginal product eventually falls as more of an input is employed
d. the quantity demanded of a good decreases as its price rises
e. utility falls as more of a good is consumed
Answer: C
27) For the total product curve shown in Figure 7-3, the marginal product of hiring the fifth
unit of labor is
a. 200
b. 50
c. 20
d. 1,000
e. 1
Answer: C
28) For the total product curve shown in Figure 7-3, diminishing marginal returns to labor
a. do not occur over this range
b. begin with the third unit of labor
c. exist for every unit of labor
d. begin with the fourth unit of labor
e. begin with the first unit of labor
Answer: B
29) For the total product curve shown in Figure 7-3, for which unit of labor is the marginal
product 20 units of output?
a. first
b. second
c. third
d. fourth
e. fifth
Answer: D
30) The law of diminishing marginal returns says that as additional units of a variable input
are added to
a. fixed amounts of other inputs, total output will eventually remain constant
b. varying amounts of other inputs, total output will eventually decline
c. fixed amounts of other inputs, the resulting increases in total output will eventually become
smaller
d. varying amount of other inputs, the resulting increases in total output will eventually
become smaller
e. a declining amount of output, technology will eventually deteriorate
Answer: C
31) If there are diminishing marginal returns to labor,
a. output diminishes as additional workers are added
b. the management team grows as more workers are hired
c. the rise in output becomes smaller and smaller with each successive worker hired
d. the management team shrinks as successive workers are added
e. macroeconomic business cycles are generated by microeconomic production functions
Answer: C
32) If the marginal product of labor is positive and increasing, then the total product of labor
curve is
a. constant
b. upward sloping and becoming steeper
c. downward sloping and becoming flatter
d. lies above the total cost curve
e. lies below the total cost curve
Answer: B
33) In Figure 7-4, marginal product of labor is increasing for levels of employment
a. between 0 and 35 workers
b. equal to 35 workers
c. between 35 and 80 workers
d. greater than 80 workers
e. none of the above
Answer: A
34) In Figure 7-4, marginal product of labor is diminishing for levels of employment
a. between 0 and 35 workers
b. equal to 35 workers
c. between 35 and 80 workers
d. greater than 80 workers
e. none of the above
Answer: C
35) In Figure 7-4, marginal product of labor is positive for levels of employment
a. between 0 and 80 workers
b. equal to 35 workers
c. between 35 and 80 workers
d. greater than 80 workers
e. none of the above
Answer: A
36) In Figure 7-4, marginal product of labor is negative for levels of employment
a. between 0 and 80 workers
b. equal to 35 workers
c. between 35 and 80 workers
d. greater than 80 workers
e. none of the above
Answer: D
37) Consider the total product curve depicted in Figure 7-5. The firm experiences the greatest
marginal returns to labor
a. when employing more than 200 workers
b. when employing between 80 and 200 workers
c. when employing 80 workers
d. when employing between zero and 80 workers
e. at all levels of employment
Answer: C
38) The change in total output when one additional unit of labor is hired is known as the
a. capacity utilization rate
b. average product of labor
c. marginal product of labor
d. total product of labor
e. marginal output of labor
Answer: C
39) Sunk costs should be ignored in decision making because they
a. increase the cost of the transaction
b. lead to an increase in the opportunity cost of any decision
c. have already been paid
d. often exceed marginal and average costs
e. are usually negligible when compared with the explicit costs of decisions
Answer: C
40) Last month, Sally spent $3,000 in repairing her old car. Now her car requires an
additional $2,000 in repairs. She could get a comparable car for $2,500. She should
a. repair her car because the money she has already spent repairing the car ($3,000) exceeds
the price of the new car ($2,500)
b. buy a new car because sunk costs should be ignored in decision making
c. buy a new car because the price of the new car ($2,500) is less than the total amount she
would spend on her current car ($5,000)
d. repair her car since the cost of repairing it is lower than the cost of buying another car
e. repair the car or buy a comparable one because the opportunity costs are the same
Answer: D
41) A firm's total cost of production is the
a. employees' opportunity cost
b. owners' opportunity cost
c. owners' opportunity cost minus the employees' opportunity cost
d. owners' opportunity cost plus the employees' opportunity cost
e. employees' opportunity cost minus the owners' opportunity cost
Answer: B
42) Which of the following is irrelevant when deciding whether to undertake an action?
a. opportunity costs
b. implicit costs
c. sunk costs
d. implicit costs and explicit costs
e. fixed costs and implicit costs
Answer: C
43) A corporation has been steadily losing money on one of its product lines. The factory
used to produce that brand cost $20 million to build. The firm now is considering an offer to
buy that factory for $15 million. Which of the following statements about the decision to sell
or not is correct?
a. The firm should turn down the purchase offer because the factory cost more than $15
million to build.
b. The $20 million spent on the factory is a sunk cost that should not affect the decision.
c. The $20 million spent on the factory is an implicit cost that should be included in the
decision.
d. The firm should sell the factory only if it can reduce its costs elsewhere by $5 million.
e. The firm's opportunity cost would be $35 million if it decides to sell the factory.
Answer: B
44) A firm's total cost of production is
a. the owners' opportunity cost
b. labor costs plus the cost of materials
c. the payments for its inputs
d. depreciation plus payments for inputs
e. taxes plus depreciation plus payments for inputs
Answer: A
45) A sunk cost is one that
a. changes as the level of output changes in the short run
b. was paid in the past and will not change regardless of later decisions
c. should determine the rational course of action in the future
d. has the most impact on profit-maximizing decisions
e. influences rational decision makers
Answer: B
46) Bob gives up his factory job in order to open a bait-and-tackle shop. The earnings from
his factory job represent
a. the hourly wage paid by the shop
b. the marginal cost of running the shop
c. the average cost of running the shop
d. a fixed cost that can vary in the long run
e. an implicit cost of opening the shop
Answer: E
47) 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 start-up 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 total annual cost of production will equal
a. $55,200
b. $221,400
c. $91,000
d. $146,200
e. $145,200
Answer: D
48) 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 start-up 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 explicit costs will equal
a. $55,200
b. $221,400
c. $91,000
d. $146,200
e. $145,200
Answer: A
49) 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 start-up 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
e. $145,200
Answer: C
50) Which of the following is an implicit cost?
a. salaries paid to owners who work for their own firm
b. interest on money borrowed to finance equipment purchases
c. cash payments for raw materials
d. wages paid to hourly employees
e. foregone rent on office space owned and used by the firm
Answer: E
51) Which of the following is an implicit cost?
a. salaries paid to owners who work for their own firm
b. interest on money borrowed to finance equipment purchases
c. cash payments for raw materials
d. wages paid to hourly employees
e. foregone interest on money taken from bank accounts to buy equipment
Answer: E
52) A firm's explicit costs are
a. the opportunity costs of the owners
b. its depreciation costs
c. the money paid for use of inputs
d. the foregone rents on owner occupied office space
e. irrelevant to the determination of economic profit
Answer: C
53) A firm's implicit costs are
a. its maintenance costs
b. its paid-out costs of production
c. its main source of executive costs
d. irrelevant to the determination of economic profit
e. opportunity costs of production that do not involve money outlays
Answer: E
54) Total fixed costs decrease as output expands.
a. True
b. False
Answer: B
55) The spreading of fixed costs over more output explains why the long-run average cost
falls as output rises.
a. True
b. False
Answer: B
56) Which of the following, necessarily, equals zero when the firm's short-run output level is
zero?
a. sunk costs
b. fixed costs
c. implicit costs
d. variable costs
e. opportunity costs
Answer: D
57) Variable costs are
a. the same as sunk costs
b. irrelevant to decision making, because they are sunk
c. the costs of inputs that vary with the level of production
d. the costs of inputs that do not vary with the level of production
e. the additional total cost associated with producing an additional unit of output
Answer: C
58) Total cost is
a. fixed cost plus variable cost
b. irrelevant to decision making
c. marginal cost plus fixed cost
d. total product minus total input
e. the additional cost associated with producing an additional unit
Answer: A
59) Average fixed cost is
a. the sum of variable and fixed costs
b. total cost minus variable cost
c. variable cost plus marginal cost
d. total fixed cost per unit of output
e. constant as output changes
Answer: D
60) Average variable cost is
a. total cost minus fixed cost
b. total variable cost divided by the quantity of output
c. total cost plus marginal cost
d. total cost per unit of output
e. output divided by the quantity of inputs used
Answer: B
61) Average total cost is
a. the change in cost as output decreases
b. the change in cost as output increases
c. TC / quantity of output
d. MC - TC
e. AVC - AFC
Answer: C
62) Average variable cost is
a. the change in cost as output decreases
b. the change in cost as output increases
c. TC / quantity of output
d. TVC / quantity of output
e. AFC + AVC
Answer: D
63) Marginal cost is
a. the increase in total cost from producing one more unit of output
b. total variable cost per unit of output
c. fixed cost per marginal unit
d. average total cost divided by the quantity of inputs used
e. total cost per unit of output
Answer: A
64) In the short run, costs that arise from resources that cannot vary in quantity are known as
____________, whereas costs from inputs that can vary in quantity are known as
____________.
a. fixed costs; variable costs
b. explicit costs; implicit costs
c. opportunity costs; variable costs
d. fixed costs; opportunity costs
e. variable costs; fixed costs
Answer: A
65) Which of the following formulas is not correct?
a. ATC = AVC + (TFC/Q)
b. TVC = TC/Q
c. TC = TFC + TVC
d. AFC = TFC/Q
e. TVC = AVC ´ Q
Answer: B
66) The vertical distance between a firm's total cost curve and its total variable cost curve
a. is zero
b. is negative when the firm incurs fixed costs in the short run
c. represents total fixed costs
d. represents marginal costs
e. represents average fixed costs
Answer: C
67) A firm's cost of variable inputs per unit of output is known as
a. average total cost
b. average fixed cost
c. marginal cost
d. total variable cost
e. average variable cost
Answer: E
68) The change in cost resulting from producing one additional unit of output is
a. average total cost
b. total variable cost
c. average variable cost
d. marginal cost
e. total cost
Answer: D
69) Figure 7-6 shows the total cost for six different levels of output for a particular firm.
What is the average total cost (ATC) of producing four units of output?
a. $2,600
b. $200
c. $650
d. $50
e. $10,400
Answer: C
70) Figure 7-6 shows the total cost for six different levels of output for a particular firm.
What is the marginal cost (MC) of the last unit of output listed in the table (i.e., the fifth unit
of output)?
a. $2,700
b. $540
c. $100
d. $90
e. $500
Answer: C
71) Figure 7-6 shows the total cost for six different levels of output for a particular firm.
Total fixed cost (TFC) if five units of output are produced is
a. $1,700
b. $540
c. $1,000
d. $100
e. $2,700
Answer: C
72) If Babette's Bicycle shop can rebuild three bicycles for $200 and four bicycles for $240,
then the average variable cost of four bicycles
a. equals $40
b. cannot be determined without more information
c. equals $60
d. equals $240
e. equals $10
Answer: B
73) Which of the following always decreases as output increases?
a. ATC
b. MC
c. AFC
d. TC
e. TVC
Answer: C
74) If a firm increases its output level in the short run, then
a. variable cost rises but fixed cost remains unchanged
b. both variable cost and fixed cost rise
c. variable cost rises, but fixed cost fall
d. both variable cost and fixed cost fall
e. variable cost remains unchanged, but fixed cost rises
Answer: A
75) Which of the following is the best example of a variable cost?
a. property taxes
b. lease payments for equipment rental
c. rent on office space
d. wages for hourly workers
e. interest on outstanding loans
Answer: D
76) To produce a firm's current output level, total cost is $600, and the total variable cost is
$450. Therefore, the firm has
a. a marginal cost of $150
b. sunk costs of $150
c. a marginal cost of $1,450
d. total fixed cost of $1,450
e. total fixed cost of $150
Answer: E
77) 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?
a. Total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250.
b. Total variable cost is $6,000; total fixed cost is $1,250; total cost is $7,250.
c. Total variable cost is $1,250; total fixed cost is $6,000; total cost is $7,250.
d. Total variable cost is $2,250; total fixed cost is $500; total cost is $2,750.
e. Total variable cost is $1,500; total fixed cost is $1,250; total cost is $2,750.
Answer: B
78) As a firm increases its output in the short run, average fixed cost
a. rises steadily
b. falls and then rises
c. falls steadily
d. rises and then falls
e. remains unchanged
Answer: C
79) Figure 7-7 shows a firm's total variable cost for different daily output levels. In addition,
the firm has total fixed cost of $50 per day. If output increases from 20 to 30 units, average
total cost rises from
a. $17.50 to $19.17, and marginal cost is $225.00
b. $400 to $625, and marginal cost is $225.00
c. $15.00 to $22.50, and marginal cost is $22.50
d. $20.00 to $20.83, and marginal cost is $22.50
e. $20.00 to $20.83, and marginal cost is $225.00
Answer: D
80) Figure 7-7 shows a firm's total variable cost for different daily output levels. In addition,
the firm has total fixed cost of $50 per day. At an output level of 20 units, average variable
cost is
a. $75.00, and average fixed cost is $2.50
b. $17.50, and average fixed cost is $50.00
c. $150.00, and average fixed cost is $2.50
d. $7.50, and average fixed cost is $50.00
e. $17.50, and average fixed cost is $2.50
Answer: E
81) If the marginal product of labor rises, the marginal cost of output
a. rises
b. falls
c. remains constant
d. rises and then falls
e. dampens
Answer: B
82) If the marginal product of labor falls, the marginal cost of output
a. declines, then increases
b. becomes negative
c. rises
d. remains constant
e. falls
Answer: C
83) Figure 7-8 shows three different cost curves, labeled A, B, and
C. Which of these curves is most likely to represent marginal cost?
a. curve A
b. curve B
c. curve C
d. neither A, B, nor C
e. cannot be determined without more information
Answer: B
84) Figure 7-8 shows three different cost curves, labeled A, B, and C, for a firm. Which of
these curves could most likely represent average total cost?
a. curve A
b. curve B
c. curve C
d. curves A or B
e. none of the curves can represent total cost
Answer: E
85) Figure 7-8 shows three different cost curves, labeled A, B, and C for a firm. What does
curve C most likely represent?
a. average total cost
b. marginal cost
c. total cost
d. average fixed cost
e. total fixed cost
Answer: D
86) Whenever marginal cost is below average cost, average cost must fall as output increases.
a. True
b. False
Answer: A
87) 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
e. the elasticity of demand is unitary
Answer: B
88) 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
e. average total cost is decreasing
Answer: D
89) Figure 7-9 shows three different cost curves, labeled A, B, and C, for a firm. Which of
these curves is most likely to represent average fixed cost?
a. curve A
b. curve B
c. curve C
d. neither A, B, nor C
e. cannot be determined without more information
Answer: C
90) Which of the following is true about the relationships among various cost curves?
a. When MC exceeds ATC, ATC must be rising.
b. When MC exceeds ATC, ATC could be rising or falling.
c. When ATC is falling, MC must exceed ATC.
d. When TC is rising, MC must exceed TC.
e. TC falls when AFC falls.
Answer: A
91) If Papagna's Pizza Parlor knows that the marginal cost of the 500th 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
e. average variable costs must be rising
Answer: B
92) The vertical distance between a firm's average total cost curve and its average variable
cost curve is its
a. marginal cost
b. sunk cost
c. total variable cost
d. total fixed cost
e. average fixed cost
Answer: E
93) The Marginal Cost curve will
a. cut ATC at the minimum of ATC but cut AVC at a point to the left of the minimum of
AVC.
b. cut ATC at the minimum of ATC but cut AVC at a point to the right of the minimum of
AVC.
c. cut AVC at the minimum of AVC but cut ATC at a point to the left of the minimum of
ATC.
d. cut AVC at the minimum of AVC but cut ATC at a point to the right of the minimum of
ATC.
e. cut both ATC and AVC at their respective minimums
Answer: E
94) Average Fixed Cost is the
a. horizontal distance (at any particular cost level) between ATC and AVC
b. vertical distance (at any particular quantity) between ATC and AVC
c. vertical distance (at any particular quantity) between ATC and the horizontal axis
d. vertical distance (at any particular quantity) between AVC and the horizontal axis
e. horizontal distance (at any particular cost level) between ATC and the vertical axis
Answer: B
95) The marginal cost curve crosses
a. both the average total cost and average variable cost curves at their respective minimum
points
b. the average total cost curve at its minimum point, and the average variable cost curve at its
maximum point
c. the average total cost curve and the average variable cost curves at the same output level
d. both the average total cost and average variable cost curves at their respective maximum
points
e. the average total cost curve at its maximum point, and the average variable cost curve at its
minimum point
Answer: A
96) The total cost to a 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 the long run, zero in the short run
d. its fixed cost in both the short run and the long run
e. its variable cost in both the short run and the long run
Answer: B
97) Along its long-run total cost curve, a firm is producing
a. at the output level for each plant size that has the lowest cost
b. at the minimum points of its various total cost curves
c. each level of output using the input mix that has the lowest cost
d. each level of output using the fewest possible inputs
e. at the output level for each plant size that uses the fewest possible inputs
Answer: C
98) The least-cost rule for firms states that in the long run, firms will
a. produce output at the point where ATC is minimized
b. produce output at the point where MC is minimized
c. minimize variable costs
d. choose the output level with the lowest TC
e. choose the lowest-cost input combination for any output level
Answer: E
99) Along its long-run average total cost curve, a firm employs
a. a different amount of fixed inputs at each point
b. the same amount of fixed inputs at each point
c. a declining amount of fixed inputs at each point as it moves to higher output levels
d. an increasing amount of fixed inputs at each point as it moves to higher output levels
e. no fixed inputs
Answer: E
100) For a given level of output, the short-run total cost of production
a. always falls below the long-run total cost of production
b. always exceeds the long-run total cost of production
c. always equals the long-run total cost of production
d. may exceed or equal the long-run total cost of production
e. may exceed or fall below the long-run total cost of production
Answer: D
101) Long-run average total cost must always be
a. rising
b. declining
c. greater than or equal to the marginal unit of variable cost
d. greater than or equal to the short run average total cost
e. less than or equal to short-run average total cost
Answer: E
102) In comparing long-run and short-run costs, which of the following statements is true at
each level of output?
a. long-run total cost is always less than short-run total costs
b. long-run total cost cannot exceed short-run total cost
c. long-run and short-run total costs are equal when fixed costs are large
d. firms usually make decisions about production levels based on long-run costs rather than
short-run costs
e. short-run total cost cannot exceed long-run total cost
Answer: B
103) The firm depicted in Figure 7-10 currently is producing 200 units of output per day. If it
decides to increase its output level to 375 units, then it will
a. adjust from point F to point G in the short run
b. be unable to adjust to point G in the short run because some inputs are fixed
c. be unable to adjust to point G in the long run because some are fixed
d. be unable to adjust to point H in the short run because some inputs are fixed
e. adjust from point F to point H in the long run
Answer: B
104) The firm's long-run average total cost curve
a. intersects each short-run average total cost curve at its minimum point
b. lies below its short-run average total cost curves at every output level
c. lies above its short-run average total cost curves at every output level
d. coincides with a small segment of its short-run average total cost
e. touches each of the firm's short-run average total cost curves at the lowest points
Answer: E
105) The firm depicted in Figure 7-11 has a larger plant size at point
a. H than at point F
b. F than at point H
c. F than at point G
d. G than at point H
e. H than at point G
Answer: D
106) A lumpy input is one that
a. is infinitely divisible
b. is not smooth
c. can only be adjusted in large amounts
d. can not be legally employed
e. can be easily adjusted in small amounts
Answer: C
107) Which of the following would be an excellent example of a lumpy input
a. pancake griddles
b. water
c. labor
d. corn
e. pancake batter
Answer: A
108) Which of the following explains why long-run average total cost at first decreases as
output increases?
a. diseconomies of scale
b. less efficient use of lumpy inputs
c. fixed costs become spread out over more units of output
d. gains from specialization of inputs
e. marginal costs rise at a slower rate than average costs in the short run
Answer: D
109) If a firm increases its output level by 50 percent and, as a result, long-run total cost rises
by 40 percent, the firm is experiencing
a. diseconomies of scale
b. constant returns to scale
c. economies of scale
d. increasing marginal returns
e. diminishing marginal returns
Answer: C
110) Assume that an industry requires a very specialized technology that involves high startup costs for new firms no matter what level of output they produce. In the long run, at low
levels of output, these firms will tend to exhibit
a. diminishing marginal returns
b. increasing marginal returns
c. diseconomies of scale
d. constant returns to scale
e. economies of scale
Answer: E
111) When long-run average total cost decreases as output increases, a firm experiences
a. increasing average fixed cost
b. decreasing total cost
c. economies of scale
d. diseconomies of scale
e. constant returns to scale
Answer: C
112) If a firm experiences economies of scale, then, as output increases,
a. short-run total costs decline
b. long-run total costs rises proportionately more than output
c. short-run marginal cost must decline
d. long-run total cost rises proportionately less than output
e. demand increases
Answer: D
113) When firms become so large that they have to add additional layers of management and
decision making becomes more cumbersome,
a. economies of scale are said to occur
b. marginal cost begins to fall in the short run
c. marginal cost begins to rise in the short run
d. the long-run average total cost curve is flat
e. the long-run average total cost curve slopes upward
Answer: E
114) Diseconomies of scale tend to occur in large firms because
a. the many layers of management are cumbersome and because it is difficult to monitor
employees
b. such firms are operating at inappropriate plant sizes for their output levels
c. such firms are operating at a point above their long-run average total cost curves
d. their ability to adjust their plant sizes is constrained by the existence of fixed inputs
e. they fail to garner all the possible gains from specialization
Answer: A
115) When long-run average total cost increases as output increases, a firm experiences
a. diseconomies of scale
b. economies of scale
c. constant returns to scale
d. decreasing marginal cost
e. greater total cost in the long run than in the short run
Answer: A
116) If a firm experiences constant returns to scale at all output levels, then its long-run
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
e. slope upward for low output levels and downward for high output levels
Answer: B
117) If a firm is experiencing constant returns to scale
a. long-run average total cost neither rises nor falls as production increases
b. average fixed cost is zero
c. the increase in average variable cost is exactly offset by a decrease in average fixed cost
d. the decrease in average variable cost is exactly offset by an increase in average fixed cost
e. long-run average total cost is zero.
Answer: A
118) A firm's minimum efficient scale is defined as
a. the output level at which LRATC first reaches its minimum level
b. any output level at which LRATC is minimized
c. the highest output level at which LRATC takes on its minimum value
d. the output level at which the firm charges its highest price
e. the lowest output level at which the firm can charge a positive price
Answer: A
119) If all firms in a market have the same LRATC curve,
a. only one of them can survive in the long run
b. the lowest possible long-run price is determined by LRATC at minimum efficient scale
c. the highest possible long-run price is determined by LRATC at minimum efficient scale
d. minimum efficient scale must be zero
e. there is no minimum efficient scale
Answer: B
120) If minimum efficient scale is small relative to the maximum potential market,
a. relatively large firms will have a cost advantage over relatively small firms
b. the market price will be low
c. relatively small firms will have a cost advantage over relatively large firms
d. the market price will be high
e. only one firm will survive in the long run.
Answer: C
121) In many markets for personal services (such as shoe repair or lawn care) with low startup costs,
a. production exhibits constant returns to scale
b. economies of scale are exhausted rapidly
c. economies of scale are exhausted slowly
d. economies of scale are never exhausted
e. there are only short-run costs, no long-run costs
Answer: B
122) If significant economies of scale continue as output increases,
a. then small firms enjoy a cost advantage over large firms
b. minimum efficient scale is small relative to market demand
c. we have the case of a natural monopoly
d. the market will disappear in the long run.
e. all firms will become large.
Answer: C
123) Suppose that minimum efficient scale is approximately 20 percent of maximum
potential market demand. In that case,
a. there will be approximately 20 firms in the market
b. we should expect to see a few large competitors
c. we should expect to see many small competitors
d. we should expect a natural monopoly to emerge
e. minimum efficient scale is too small for perfect competition to exist
Answer: B
124) If minimum average cost is the same over a large range of output,
a. the market will evolve into a natural monopoly
b. minimum efficient scale is large as well
c. only a few large firms will survive in the long run
d. smaller firms have a cost advantage over larger firms
e. firms of varying sizes can coexist
Answer: E
125) Suppose that (1) LRATC is minimized at $60 when 30,000 units are being produced, (2)
the quantity demanded at a price of $60 is 150,000 units, and (3) there are currently 10 firms
producing in the market. Then,
a. we should expect competition to result in a decrease in the number of firms
b. we should expect a natural monopoly to emerge
c. we should expect some existing firms to divide up into smaller firms.
d. the LRATC curve will shift upward in the long run
e. the LRATC curve will shift downward in the long run.
Answer: A
126) If firms in a market have been prohibited from reaching the minimum efficient scale,
a. the market is probably perfectly competitive.
b. the market is probably a monopoly.
c. mergers will result if the restrictions are eliminated.
d. the LRATC curve has been shifting upward.
e. the LRATC curve has been shifting downward.
Answer: C
127) A merger wave can be set off
a. by government restrictions that prevent firms from reaching their minimum efficient scale
b. if the federal government raises corporate income taxes.
c. if the federal government lowers corporate income taxes
d. if minimum efficient scale falls
e. by some change in a market, such as a shift in market demand.
Answer: E
Test Bank for Microeconomics: Principles and Applications
Robert E. Hall, Marc Lieberman
9781111822569, 9781478405238, 9781478498056
