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Chapter 13


True/False
Indicate whether the statement is true or false.
 

 1. 
Total revenue equals the quantity of output the firm produces times the price at which it sells its output.
 

 2. 
Wages and salaries paid to workers are an example of implicit costs of production.
 

 3. 
If total revenue is €100, explicit costs are €50, and implicit costs are €30, then accounting profit equals €50.
 

 4. 
If there are implicit costs of production, accounting profits will exceed economic profits.
 

 5. 
When a production function gets flatter, the marginal product is increasing.
 

 6. 
If a firm continues to employ more workers within the same size factory, it will eventually experience diminishing marginal product
 

 7. 
If the production function for a firm exhibits diminishing marginal product, the corresponding total cost curve for the firm will become flatter as the quantity of output expands.
 

 8. 
Fixed costs plus variable costs equal total costs.
 

 9. 
Average total costs are total costs divided by marginal costs.
 

 10. 
When marginal costs are below average total costs, average total costs must be falling.
 

 11. 
If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal cost curve will be U-shaped.
 

 12. 
The average total cost curve crosses the marginal cost curve at the minimum of the marginal cost curve.
 

 13. 
The average total cost curve in the long run is flatter than the average total cost curve in the short run.
 

 14. 
The efficient scale for a firm is the quantity of output that minimizes marginal cost.
 

 15. 
In the long run, as a firm expands its production facilities, it generally first experiences diseconomies of scale, then constant returns to scale, and finally economies of scale.
 

Multiple Choice
Identify the choice that best completes the statement or answers the question.
 

 16. 
Accounting profit is equal to total revenue minus
a.
implicit costs.
b.
variable costs.
c.
the sum of implicit and explicit costs.
d.
explicit costs.
e.
marginal costs.
 

 17. 
Economic profit is equal to total revenue minus
a.
variable costs.
c.
explicit costs.
b.
implicit costs.
d.
marginal costs.
 

 18. 
Nicole owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for €100 each. It costs Nicole €20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested €100,000 in her factory and equipment: €50,000 from her savings and €50,000 borrowed at 10 per cent. (Assume that she could have loaned her money out at 10 per cent, too.) Nicole can work at a competing pottery factory for €40,000 per year. The accounting profit at Nicole's pottery factory is
a.
€30,000.
b.
€35,000.
c.
€70,000.
d.
€75,000.
e.
€80,000.
 

 19. 
Nicole owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for €100 each. It costs Nicole €20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested €100,000 in her factory and equipment: €50,000 from her savings and €50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10 percent, too). Nicole can work at a competing pottery factory for €40,000 per year. The economic profit at Nicole's pottery factory is
a.
€30,000.
b.
€35,000.
c.
€70,000.
d.
€75,000.
e.
€80,000.
 

 20. 
If there are implicit costs of production,
a.
accounting profit will exceed economic profit.
b.
economic profit will always be zero.
c.
economic profit will exceed accounting profit.
d.
accounting profit will always be zero.
e.
economic profit and accounting profit will be equal.
 

 21. 
If a production function exhibits diminishing marginal product, its slope
a.
is linear (a straight line).
b.
becomes steeper as the quantity of the input increases.
c.
could be any of these answers.
d.
becomes flatter as the quantity of the input increases.
 

 22. 
If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve
a.
is linear (a straight line).
b.
is negative throughout its length
c.
becomes steeper as the quantity of output increases.
d.
becomes flatter as the quantity of output increases.
 

 23. 
Refer to Figure 13-1. The marginal product of labour as production moves from employing one worker to employing two workers is

            Figure 13-1
                  Number of Workers      Output
                        0                  0
                        1                23
                        2                40
                        3                50
a.
0.
b.
10.
c.
17.
d.
23
e.
40.
 

 24. 
Refer to Figure 13-1. The production process described above exhibits

            Figure 13-1
                  Number of Workers      Output
                        0                  0
                        1                23
                        2                40
                        3                50
a.
constant marginal product of labour.
b.
diminishing marginal product of labour.
c.
increasing returns to scale.
d.
increasing marginal product of labour.
e.
decreasing returns to scale.
 

 25. 
Which of the following is a variable cost in the short run?
a.
rent on the factory
b.
wages paid to factory labour
c.
interest payments on borrowed financial capital
d.
payment on the lease for factory equipment
e.
salaries paid to upper management
 

 26. 
Refer to Figure 13-2. The average fixed cost of producing four units is

Figure 13-2
 
Quantity of Output
Fixed Costs
Variable Costs
Total Costs
Marginal Costs
0
€10
€0
  
     
1
10
5
  
     
2
10
11
  
     
3
10
18
  
     
4
10
26
  
     
5
10
36
  
a.
€2.50.
b.
€5.
c.
€9
d.
€26.
e.
€40.
 

 27. 
Refer to Figure 13-2. The average total cost of producing three units is


Figure 13-2

Quantity of Output
Fixed Costs
Variable Costs
Total Costs
Marginal Costs
0
€10
€0
  
     
1
10
5
  
     
2
10
11
  
     
3
10
18
  
     
4
10
26
  
     
5
10
36
  
a.
€6.
b.
€3.33.
c.
€9.33.
d.
€12.66
e.
€28.
 

 28. 
Refer to Figure 13-2. The marginal cost of changing production from three units to four units is


Figure 13-2
 
Quantity of Output
Fixed Costs
Variable Costs
Total Costs
Marginal Costs
0
€10
€0
  
     
1
10
5
  
     
2
10
11
  
     
3
10
18
  
     
4
10
26
  
     
5
10
36
  
a.
€5.
b.
€6.
c.
€7.
d.
€8.
e.
€9.
 

 29. 
Refer to Figure 13-2. The efficient scale of production is

Figure 13-2
 
Quantity of Output
Fixed Costs
Variable Costs
Total Costs
Marginal Costs
0
€10
€0
  
     
1
10
5
  
     
2
10
11
  
     
3
10
18
  
     
4
10
26
  
     
5
10
36
  
a.
one unit.
b.
two units.
c.
three units.
d.
four units.
e.
five units.
 

 30. 
When marginal costs are below average total costs,
a.
average fixed costs are rising.
c.
average total costs are rising.
b.
average total costs are falling.
d.
average total costs are minimized.
 

 31. 
If marginal costs equal average total costs,
a.
average total costs are falling.
c.
average total costs are maximized.
b.
average total costs are rising.
d.
average total costs are minimized.
 

 32. 
If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will
a.
be flat (horizontal).
c.
slope downward.
b.
slope upward.
d.
be U-shaped.
 

 33. 
In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience
a.
an increase in average total costs.
c.
economies of scale.
b.
diseconomies of scale.
d.
constant returns to scale.
 

 34. 
The efficient scale of production is the quantity of output that minimizes
a.
average fixed cost.
c.
average variable cost.
b.
average total cost.
d.
marginal cost.
 

 35. 
Which of the following statements is true?
a.
All costs are fixed in the short run.
c.
All costs are variable in the short run.
b.
All costs are variable in the long run.
d.
All costs are fixed in the long run.
 



 
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