Question 1

When C > 1:&#10;A)average cost is falling.&#10;B)increasing returns to scale are implied.&#10;C)decreasing returns to scale are implied.&#10;D)constant returns to scale are implied.

Accepted Answer

When C > 1, it means that if all inputs are multiplied by a certain factor, the output will increase, but not proportionally. This implies that there are decreasing returns to scale, which indicates that the average cost will increase as production increases. When C > 1, it implies that increasing inputs lead to proportionally lower increases in output, indicating that the firm is experiencing decreasing returns to scale. This means that as the scale of production increases, the average cost of production increases as well, unlike in the case of constant or increasing returns to scale where the average cost decreases with increasing scale.

Question 2

Minimum efficient scale will decrease if:&#10;A)fixed costs increase.&#10;B)transportation costs increase in relation to production costs.&#10;C)transportation costs decrease in relation to production costs.&#10;D)variable costs decrease.

Accepted Answer

Transportation costs increasing in relation to production costs will decrease the minimum efficient scale.

Question 3

If the slope of a long-run total cost function increases as output increases, the firm's underlying production function exhibits:&#10;A)constant returns to scale.&#10;B)decreasing returns to scale.&#10;C)decreasing returns to a factor input.&#10;D)increasing returns to scale.

Accepted Answer

If the slope of the long-run total cost function increases as output increases, it means that the cost per unit of output is increasing. This happens when the underlying production function exhibits decreasing returns to scale, where the increase in input use leads to a relatively smaller increase in output. If the slope of the long-run total cost function is increasing as the output increases, it means that the cost of producing an additional unit of output is increasing at an increasing rate. This is only possible if the firm's production function exhibits decreasing returns to scale, where the marginal product of each input variable decreases as all input variables are increased in equal proportion. Therefore, the correct answer is B.

Question 4

The degree of operating leverage can be described as a:&#10;A)cost elasticity.&#10;B)return to scope economies.&#10;C)marginal profit.&#10;D)profit elasticity.

Accepted Answer

The degree of operating leverage (DOL) measures the percentage change in profit for a given percentage change in sales, and is calculated by dividing the percentage change in operating profit by the percentage change in sales. Therefore, DOL is a measure of profit elasticity, making option D the best choice. The degree of operating leverage measures the percentage change in profits due to a percentage change in sales. It is a measure of profit elasticity. Therefore, the best choice is D.

Question 5

The cost of duplicating productive capability using current technology is called:&#10;A)current cost.&#10;B)replacement cost.&#10;C)historical cost.&#10;D)opportunity cost.

Accepted Answer

The cost of duplicating productive capability using current technology is called replacement cost. This cost includes the cost of acquiring new machinery, equipment, and technology that would be needed to replicate the productive capability. Historical cost refers to the original cost of an asset when it was first acquired or constructed. Current cost refers to the present value of an asset, which may be different from its original cost due to factors such as inflation. Opportunity cost refers to the cost of making a choice, i.e. the cost of foregone alternatives. None of the other options accurately describe the cost of duplicating productive capability. The term used to refer to the cost of duplicating productive capability using current technology is replacement cost. This cost takes into account the current market value of the resources and technology required to duplicate the capability. It is usually higher than historical cost, which measures the original cost of acquiring the productive capability, because technology advances and resource prices change over time. Current cost refers to the cost of replacing an asset with a similar one in the current market, while opportunity cost refers to the cost of forgoing the next best alternative when making a choice. Therefore, the most appropriate option is B - replacement cost.

Question 6

If marginal cost is less than average cost at all output levels:&#10;A)marginal cost must be falling.&#10;B)average cost must be falling.&#10;C)average cost must be rising.&#10;D)none of these.

Accepted Answer

When marginal cost is less than average cost at all output levels, it pulls the average cost down, leading to a decrease in average cost.

Question 7

When knowledge gained from manufacturing experience is used to improve production methods, the resulting decline in average costs is reflected in:&#10;A)a downward movement along the LRAC curve.&#10;B)an upward movement along the LRAC curve.&#10;C)a rightward (outward) shift in the LRAC curve.&#10;D)a leftward (inward) shift in the LRAC curve.

Accepted Answer

When knowledge gained from manufacturing experience is used to improve production methods, the resulting decline in average costs is reflected in a leftward (inward) shift in the LRAC curve. This means that the same level of output can be produced at a lower average cost, which is represented by the new LRAC curve being situated to the left of the original one. Knowledge gained from manufacturing experience leads to improvements in production methods which can lower the average costs of production. This leads to a leftward (inward) shift in the long-run average cost (LRAC) curve.

Question 8

Cash expenses include:&#10;A)some explicit costs.&#10;B)all sunk costs.&#10;C)all incremental costs.&#10;D)some implicit costs.

Accepted Answer

Cash expenses refer to the actual outflow of funds from a company's treasury, which includes some explicit costs. Explicit costs are those that have a direct and visible impact on a company's financial statements, such as wages and rent. Therefore, choice A is the best answer. Sunk costs, incremental costs, and implicit costs are not necessarily cash expenses. Cash expenses refer to the actual payments made by a business or individual for goods and services. These expenses can include explicit costs which are obvious and directly related to the purchase of a good or service, such as wages or the cost of raw materials. Therefore, option A is the correct choice. Sunk costs are not relevant as they are costs that have already been incurred and cannot be recovered. Incremental costs refer to the additional costs incurred from a certain decision, and implicit costs are not cash expenses since they refer to foregone opportunities.

Question 9

In the long run, all costs are:&#10;A)fixed.&#10;B)variable.&#10;C)sunk.&#10;D)none of these.

Accepted Answer

In the long run, all costs are considered variable because firms have the flexibility to adjust all inputs and scale of operation. Fixed costs, such as rent or salaries, can also be altered in the long run through decisions like moving to a different location or restructuring the organization.

Question 10

Because dental customers must be willing to pay a price for dental gold that is competitive with the price paid by jewellery customers, the price of gold does not reflect the:&#10;A)current cost concept.&#10;B)replacement cost concept.&#10;C)historical cost concept.&#10;D)opportunity cost concept.

Accepted Answer

The price of gold reflects current market conditions and the opportunity cost of using gold for dental purposes instead of selling it to jewelry customers. It does not reflect the historical cost concept, which would be the price paid for the gold at the time it was originally purchased or acquired, since the market price and its use value can change over time.

Deck 8: Cost Analysis and Estimation