Chapter 13 Quiz: Costs of Production

NAME: ______CHAPTER 13 QUIZ: COSTS OF PRODUCTION

1. Profit is defined as total revenue a. plus total cost. b. times total cost. c. minus total cost. d. divided by total cost.

2. Billy’s Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. The price for each of the 275 units sold was $95. Total profit for Billy’s Bean Bag Emporium would be a. -$3,875. b. $26,125. c. $28,500. d. $30,000.

3. The value of a business owner's time is an example of a. an opportunity cost. b. a fixed cost. c. an explicit cost. d. total revenue. Scenario 13-3 Gary is a senior majoring in computer network development at Smart State University. While he has been attending college, Gary started a computer consulting business to help senior citizens set up their network connections and teach them how to use e-mail. Gary charges $25 per hour for his consulting services. Gary also works 5 hours a week for the Economics Department to maintain that department's Web page. The Economics Department pays Gary $20 per hour. 4. Refer to Scenario 13-3. If Gary can work additional hours at either job, what is the opportunity cost if Gary spends one hour reading a novel? a. $20 b. $25 c. $100 d. $125 5. Refer to Scenario 13-3. Which of the following statements is correct? a. Gary should increase the number of hours he works for the Economics Department to make it comparable to his consulting business income. b. Gary is not maximizing his well-being if he continues to work for the Economics Department. c. If Gary chooses one hour at the beach with his friends rather than spend one more hour with a consulting client, the forgone income of $25 is considered a cost of the choice to go to the beach. d. Both b) and c) are correct

6. If a firm uses labor to produce output, the firm’s production function depicts the relationship between a. the number of workers and the quantity of output. b. marginal product and marginal cost. c. the maximum quantity that the firm can produce as it adds more capital to a fixed quantity of labor. d. fixed inputs and variable inputs in the short run. 7. The marginal product of labor can be defined as the change in a. profit divided by the change in labor. b. output divided by the change in labor. c. labor divided by the change in output. d. labor divided by the change in total cost.

8. Suppose a certain firm is able to produce 165 units of output per day when 15 workers are hired. The firm is able to produce 176 units of output per day when 16 workers are hired, holding other inputs fixed. The marginal product of the 16th worker is a. 10 units of output. b. 11 units of output. c. 16 units of output. d. 176 units of output.

9. When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, the firm is experiencing a. diminishing labor. b. diminishing output. c. diminishing marginal product. d. negative marginal product.

Figure 13-2 Output 100

1 2 3 4 5 6 7 8 Workers

10. Refer to Figure 13-2. The graph illustrates a typical a. total-cost curve. b. production function. c. production possibilities frontier. d. marginal product of labor curve. 11. Refer to Figure 13-2. As the number of workers increases, a. total output increases but at a decreasing rate. b. marginal product increases but at a decreasing rate. c. marginal product increases at an increasing rate. d. total output decreases.

12. Refer to Figure 13-2. If the figure represented production at a cookie factory, the factory would be experiencing a. diminishing marginal product of workers. b. diminishing marginal cost of cookie production. c. decreasing cost of cookie production. d. decreasing output of cookies.

13. Refer to Figure 13-2. The graph illustrates a typical production function. Based on its shape, what does the corresponding total cost curve look like? a. an upward-sloping curve that increases at an increasing rate b. an upward-sloping curve that increases at a decreasing rate c. a downward-sloping curve d. a horizontal straight line Table 13-5 Number of Output Workers 0 0 1 1,000 2 2,000 3 2,700 4 3,200 5 3,500 6 3,600 14. Refer to Table 13-5. The marginal product of the third worker is a. 1,000 units. b. 900 units. c. 700 units. d. 500 units. 15. Refer to Table 13-5. The marginal product of the fourth worker is a. 900 units. b. 800 units. c. 700 units. d. 500 units. 16. Refer to Table 13-5. Diminishing marginal product begins with the addition of the a. second worker. b. third worker. c. fourth worker. d. fifth worker. 17. Refer to Table 13-5. Assume that fixed costs are $500, and variable costs are $100 per worker. For this firm, what are the shapes of the production function and the total-cost curve? a. Both the production function and total-cost curve are increasing at an increasing rate. b. Both the production function and total-cost curve are increasing at a decreasing rate. c. The production function is increasing at a decreasing rate, whereas the total-cost function is increasing at an increasing rate. d. The production function is increasing at an increasing rate, whereas the total-cost function is increasing at a decreasing rate. Figure 13-3 Cost 100

2 4 6 8 10 12 14 16 Quantity

18. Refer to Figure 13-3. The graph illustrates a typical a. total-cost curve. b. production function. c. production possibilities frontier. d. fixed-cost curve.

19. Refer to Figure 13-3. The graph illustrates a typical total cost curve. Based on its shape, what does the corresponding production function look like? a. an upward-sloping curve that increases at an increasing rate b. an upward-sloping curve that increases at a decreasing rate c. a downward-sloping curve d. a horizontal straight line

20. Refer to Figure 13-3. Which of the following is true of the production function (not pictured) that underlies this total cost function? (i) Total output increases as the quantity of inputs increases but at a decreasing rate. (ii) Marginal product is diminishing for all levels of input usage. (iii) The slope of the production function decreases as the quantity of inputs increases. a. (i) only b. (ii) and (iii) only c. (i) and (iii) only d. (i), (ii), and (iii)

21. Refer to Figure 13-3. The changing slope of the total cost curve reflects a. decreasing average variable cost. b. decreasing average total cost. c. decreasing marginal product. d. increasing fixed cost.

22. Fixed costs can be defined as costs that a. vary inversely with production. b. vary in proportion with production. c. are incurred only when production is large enough. d. are incurred even if nothing is produced. 23. Harry's Hotdogs is a small street vendor business owned by Harry Huggins. Harry is trying to get a better understanding of his costs by categorizing them as fixed or variable. Which of the following costs are most likely to be considered fixed costs? a. the cost of mustard b. the cost of hotdog buns c. wages paid to workers who sell hot dogs d. the cost of bookkeeping services

24. Which of the following is the best example of a variable cost? a. monthly wage payments for hired labor b. annual property tax payments for a building c. monthly rent payments for a warehouse d. annual insurance payments for a warehouse

25. Average total cost is equal to a. output/total cost. b. total cost - total quantity of output. c. average variable cost + total fixed cost. d. total cost/output.

26. At Bert's Bootery, the total cost of producing twenty pairs of boots is $400. The marginal cost of producing the twenty-first pair of boots is $83. We can conclude that the a. average variable cost of 21 pairs of boots is $23. b. average total cost of 21 pairs of boots is $23. c. average total cost of 21 pairs of boots is $15.09. d. marginal cost of the 20th pair of boots is $20.

27. The Wacky Widget company has total fixed costs of $100,000 per year. The firm’s average variable cost is $10 for 10,000 widgets. At that level of output, the firm’s average total costs equal a. $10 b. $15 c. $20 d. $25

28. A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000, a. average fixed cost is 50 cents. b. average variable cost is $2. c. average total cost is $2.50. d. average total cost is 50 cents.

29. Consider the following information about baseball production at Bobby's Baseball Factory: Worker Marginal Product 1 3 2 5 3 8 4 10 5 7 6 4 7 2 Bobby pays all his workers the same wage, and labor is his only variable cost. From this information we can conclude that Bobby's average variable cost decreases a. as output rises from 0 to 10, but rises after that. b. as output rises from 0 to 26, but rises after that. c. as output rises from 0 to 33, but increases after that. d. continually as output rises. Table 13-8 Quantity Fixed Variable of Output Cost Cost 0 $20 $0 1 $20 $10 2 $20 $40 3 $20 $80 4 $20 $130 5 $20 $200 6 $20 $300 30. Refer to Table 13-8. What is the average fixed cost of producing 5 units of output? a. $4 b. $5 c. $40 d. $44 31. Refer to Table 13-8. What is the average variable cost of producing 5 units of output? a. $4 b. $5 c. $40 d. $44 32. Refer to Table 13-8. What is the marginal cost of producing the fifth unit of output? a. $4 b. $40 c. $50 d. $70 33. Refer to Table 13-8. What is the shape of the marginal cost curve for this firm? a. constant b. upward-sloping c. downward-sloping d. U-shaped

34. Marginal cost equals a. total cost divided by quantity of output produced. b. total output divided by the change in total cost. c. the slope of the total cost curve. d. the slope of the line drawn from the origin to the total cost curve.

35. A firm has a fixed cost of $500 in its first year of operation. When the firm produces 100 units of output, its total costs are $4,500. The marginal cost of producing the 101st unit of output is $300. What is the total cost of producing 101 units? a. $46.53 b. $800 c. $4,800 d. $5,300 Figure 13-5 Cost D 11 C 10 B 9

1 A

1 2 3 4 5 6 7 8 9 10 11 12 Quantity

36. Refer to Figure 13-5. Curve A represents which type of cost curve? a. marginal cost b. average total cost c. average variable cost d. average fixed cost

37. Refer to Figure 13-5. Which of the curves is most likely to represent average fixed cost? a. A b. B c. C d. D

38. Refer to Figure 13-5. Curve C represents which type of cost curve? a. marginal cost b. average total cost c. average variable cost d. average fixed cost

39. Refer to Figure 13-5. Which curve is most likely to represent average total cost? a. A b. B c. C d. D

40. Refer to Figure 13-5. Curve D represents which type of cost curve? a. marginal cost b. average total cost c. average variable cost d. average fixed cost

41. Refer to Figure 13-5. Which curve is most likely to represent marginal cost? a. A b. B c. C d. D 42. Refer to Figure 13-5. Curve D is increasing because a. of diminishing marginal product. b. of increasing marginal product. c. marginal product first increases, then decreases. d. marginal product first decreases, then increases.

43. Refer to Figure 13-5. Curve A is always declining because a. of diminishing marginal product. b. we are dividing fixed costs by higher and higher levels of output. c. marginal product first increases, then decreases. d. marginal product first decreases, then increases.

44. Refer to Figure 13-5. Curve D intersects curve C a. where the firm maximizes profit. b. at the minimum of average fixed cost. c. at the efficient scale. d. where fixed costs equal variable costs.

45. The marginal cost curve crosses the average total cost curve at a. the efficient scale. b. the minimum point on the average total cost curve. c. a point where the marginal cost curve is rising. d. All of the above are correct.

46. The efficient scale of the firm is the quantity of output that a. maximizes marginal product. b. maximizes profit. c. minimizes average total cost. d. minimizes average variable cost.