Deck 13: The Costs of Production

Question 1

Accountants keep track of the money that flows into and out of firms.

Answer 1

True

Question 2

Implicit costs are costs that do not require an outlay of money by the firm.

Answer 2

True

Question 3

Economists and accountants both include forgone income as a cost to a small business owner.

Answer 3

False

Question 4

Although economists and accountants treat many costs differently, they both treat the cost of capital the same.

Question 5

Diminishing marginal product exists when the total cost curve becomes horizontal as outputs increases.

Question 6

When economists speak of a firm's costs, they are usually excluding the opportunity costs.

Question 7

Anna borrows $5,000 from a bank and withdraws $1,000 from her personal savings to start a coffee shop. The interest rate is 5 percent for both the bank loan and her personal savings. Her opportunity cost of capital is $250.

Question 8

Profit equals total revenue minus total cost.

Question 9

An example of an explicit cost for the owner of a tattoo parlor would be the wages that she could earn if she worked as a graphic artist for an advertising agency.

Question 10

The opportunity cost of capital is an implicit cost almost every business incurs.

Question 11

Economists and accountants usually disagree on the inclusion of implicit costs into the cost analysis of a firm.

Question 12

The field of industrial organization addresses how the number of firms affects prices in a market and the efficiency of the market outcome.

Question 13

A firm's total profit equals its marginal revenue minus its marginal cost.

Question 14

The economic field of industrial organization examines how firms' decisions about prices and quantities depend on the market conditions they face.

Question 15

Diminishing marginal productivity implies decreasing total product.

Question 16

Economic profit is greater than or equal to accounting profit.

Question 17

An example of an explicit cost would be the wages that a business owner pays her employees.

Question 18

Accounting profit is greater than or equal to economic profit.

Question 19

The difference between economic profit and accounting profit is that economic profit is calculated based on both implicit and explicit costs whereas accounting profit is calculated based on explicit costs only.

Question 20

Accountants often ignore implicit costs.

Question 21

Diminishing marginal product exists when the production function becomes flatter as inputs increase.

Question 22

Several related measures of cost can be derived from a firm's total cost.

Question 23

The average-fixed-cost curve is constant.

Question 24

Marginal costs are costs that do not vary with the quantity of output produced.

Question 25

In the short run, if a firm produces nothing, total costs are zero.

Question 26

The shape of the total-cost curve is inversely related to the shape of the production function.

Question 27

Variable costs usually change as the firm alters the quantity of output produced.

Question 28

If the marginal-cost curve is rising, then so is the average-total-cost curve.

Question 29

The average-total-cost curve reflects the shape of both the average-fixed-cost and average-variable-cost curves.

Question 30

Variable costs equal fixed costs when nothing is produced.

Question 31

For a typical firm, fixed costs increase in direct proportion to the increases in output.

Question 32

Suppose that a worker can produce 100 units of output in 7 hours. In the 8th hour, he can produce 12 units of output. The worker can produce 112 units of output in 8 hours.

Question 33

The average-total-cost curve is unaffected by diminishing marginal product.

Question 34

The cost of producing an additional unit of a good is not the same as the average cost of the good.

Question 35

Average variable cost is equal to total variable cost divided by quantity of output.

Question 36

A second or third worker may have a higher marginal product than the first worker in certain circumstances.

Question 37

The typical total-cost curve is U-shaped.

Question 38

The shape of the total-cost curve is unrelated to the shape of the production function.

Question 39

The graph of the production function plots total cost versus quantity of output.

Question 40

If a firm produces nothing, it still incurs its fixed costs.

Question 41

The marginal-cost curve intersects the average-fixed-cost curve at the minimum of marginal cost.

Question 42

In the long run, a factory is usually considered a fixed input.

Question 43

The marginal-cost curve intersects the average-total-cost curve at the output level where average fixed costs are zero.

Question 44

When average total cost rises if a producer either increases or decreases production, then the firm is said to be operating at efficient scale.

Question 45

As a firm moves along its long-run average cost curve, it is adjusting the size of its factory to the quantity of production.

Question 46

Average total cost reveals how much total cost will change as the firm alters its level of production.

Question 47

Fixed costs are those costs that remain fixed no matter how long the time horizon is.

Question 48

Because of the greater flexibility that firms have in the long run, all short-run cost curves lie on or above the long-run curve.

Question 49

If the marginal cost of producing the tenth unit of output is $3, and if the average total cost of producing the tenth unit of output is $2, then at ten units of output, average total cost is rising.

Question 50

When average total cost is above marginal cost, average total cost is rising.

Question 51

The marginal-cost curve intersects the average-total-cost curve at the minimum point of the marginal-cost curve.

Question 52

If the marginal cost of producing the fifth unit of output is higher than the marginal cost of producing the fourth unit of output, then at five units of output, average total cost must be rising.

Question 53

The fact that many inputs are fixed in the short run but variable in the long run has little impact on the firm's cost curves.

Question 54

The shape of the marginal cost curve tells a producer something about the marginal product of her workers.

Question 55

Economies of scale often arise because higher production levels allow specialization among workers.

Question 56

Assume Jack received all As in his classes last semester. If Jack gets all Bs in his classes this semester, his GPA may or may not fall.

Question 57

If the marginal cost of producing the tenth unit of output is $2.50, and if the average total cost of producing the tenth unit of output is $3, then at ten units of output, average total cost is rising.

Question 58

Average total cost and marginal cost express information that is already contained in a firm's total cost.

Question 59

There is general agreement among economists that the long-run time period exceeds one year.

Question 60

The marginal-cost curve intersects the average-total-cost curve at the minimum point of the average-total-cost curve.

Question 61

Table 13-20
Listed in the table are the long-run total costs for three different firms.
Refer to Table 13-20. Firm A is experiencing economies of scale.

Question 62

Table 13-20
Listed in the table are the long-run total costs for three different firms.
Refer to Table 13-20. Firm A is experiencing constant returns to scale.

Question 63

If long-run average total cost is rising, then the firm is experiencing economies of scale.

Question 64

Table 13-20
Listed in the table are the long-run total costs for three different firms.
Refer to Table 13-20. Firm C is experiencing diseconomies of scale.

Question 65

The use of specialization to achieve economies of scale is one reason modern societies are as prosperous as they are.

Question 66

Table 13-20
Listed in the table are the long-run total costs for three different firms.
Refer to Table 13-20. Firm C is experiencing economies of scale.

Question 67

If the production function exhibits diminishing marginal product, the total cost function gets steeper as the quantity of output increases.
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Question 68

If the average-total-cost curve is falling, then the marginal-cost curve must also be falling.

Question 69

The U-shaped average-total-cost curve reflects the U-shaped average-fixed-cost curve.

Question 70

Adam Smith's example of the pin factory demonstrates that economies of scale result from specialization.

Question 71

When a firm experiences economies of scale, long-run average total cost falls as the quantity of output increases.

Question 72

Adam Smith describes a visit to a car factory when discussing economies of scale in his book An Inquiry into the Nature and Causes of the Wealth of Nations.

Question 73

Table 13-20
Listed in the table are the long-run total costs for three different firms.
Refer to Table 13-20. Firm B is experiencing constant returns to scale.

Question 74

Jaxon borrows $10,000 from a bank and withdraws $20,000 from his personal savings to open a tattoo parlor. The interest rate is 3 percent for both the bank loan and his personal savings. Jaxon also quit his job as a waiter, which paid $20,000. According to an economist, Jaxon's opportunity cost of opening the tattoo parlor equals $20,900.

Question 75

Jaxon borrows $10,000 from a bank and withdraws $20,000 from his personal savings to open a tattoo parlor. The interest rate is 3 percent for both the bank loan and his personal savings. Jaxon's implicit costs are $900.
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Question 76

Table 13-20
Listed in the table are the long-run total costs for three different firms.
Refer to Table 13-20. Firm B is experiencing diseconomies of scale.

Question 77

A firm produces 60 units of output with 5 workers, 65 units with 6 workers, and 68 units with 7 workers. The firm's production function exhibits diminishing marginal productivity between 5 and 7 workers.
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Question 78

Diseconomies of scale often arise because higher production levels allow specialization among workers.

Question 79

Economists include both explicit and implicit costs while accountants include only implicit costs.
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Question 80

In some cases, specialization allows larger factories to produce goods at a lower average cost than smaller factories.